Somme Limited v Central House Movers Limited HC Wanganui CIV-2011-483-2

[2011] NZHC 1007

IN THE HIGH COURT OF NEW ZEALAND WANGANUI REGISTRY

CIV-2011-483-2

BETWEEN  SOMME LIMITED Plaintiff

ANDCENTRAL HOUSE MOVERS LIMITED Defendant

Hearing:         12 August 2011 (Heard at Wellington)

Counsel:         N W Hughes for Plaintiff

G J Toebes for Defendant

Judgment:      9 September 2011

JUDGMENT OF THE HON JUSTICE KÓS

Introduction

[1]      A delivers four relocatable houses to B‟s property.  But B only pays one-third of the sum due to A.  So A comes and takes three of the houses away again.  The problem is that by then B has already sold the land (and the houses) to C.  C sues A in conversion and trespass, and seeks summary judgment.  Does A have an arguable defence?

Facts

[2]      At Wanganui there is an imaginatively named road called No 3 Line.  It runs east from the city out into the countryside.  It was the property at No 141B, No 3

Line to which the four houses were delivered.  And from it, the three houses were

removed.

SOMME LIMITED v CENTRAL HOUSE MOVERS LIMITED HC WANG CIV-2011-483-2 9 September 2011

Dramatis personae

[3]      Now to flesh out parties A, B and C above.

[4]      A is Central House Movers Limited (CHML) – the supplier (and remover) of the houses, and defendant in this proceeding.  CHML is in the business of shifting and selling houses.   It operates from premises at Bulls.   One of its directors, a Mr Michael O‟Byrne, provided affidavit evidence.

[5]      B is a company called Vakamon Limited – the purchaser of the houses.  Prior to August 2009 it owned the property at No 141B, No 3  Line.   Vakamon was incorporated in August 2006 by a Mr Farid Herschend.  Mr Herschend is the sole shareholder of Vakamon.  He and his sister, a Ms Torkan May, are its directors.

[6]      C is Somme Limited, the plaintiff.  It now owns the property at No 141B, No

3 Line.  Somme was incorporated in July 2008.  At the time of incorporation its sole director and shareholder was the same Ms May who is a director of Vakamon.  The sole  shareholder  and  director  of  Somme  is  now  a  Mr  Robert  Stadniczenko. Mr Stadniczenko became the sole shareholder on 24 July 2009 – a few days before Somme acquired the property at No 141B, No 3 Line.  Mr Stadniczenko provided affidavit evidence.

[7]      It is alleged by CHML that Ms May and Mr Stadniczenko are in a business relationship regarding a number of properties.  Mr Stadniczenko does not deny this. He seeks somewhat to deflect the point by saying he is an “independent trustee of Natasha May‟s trust”.   I gather that Natasha May and Torkan May are the same person.  But no more detail is offered by Mr Stadniczenko.

[8]      The evidence suggests the relationship is rather deeper than one simply of independent trustee and beneficiary.  First, their association through Somme suggests it.  Secondly, the later dealings between Vakamon and Somme are unusual and call for enquiry.  Thirdly, there is evidence that Mr Stadniczenko had given a personal guarantee of Vakamon‟s indebtedness to its mortgage lender for No 141B, No 3

Line.      I   infer   that   a   substantial   connection   is   likely   to   exist   between

Mr Stadniczenko, Ms May, Somme and Vakamon.

The houses come

[9]      On various dates in late 2006 Vakamon contracted to purchase four dwelling houses from CHML.  The houses were older dwellings that had been removed from other sites.  They were to be shifted from CHML‟s premises in Bulls to the property at  No 141B,  No 3  Line.   The total  sum  payable under  the  four  contracts  was

$290,000.

[10]     The four contracts are drafted as if contracts for services.  But the reality is that these are contracts of sale.  Vakamon bought the houses from CHML.  So what was being bought by Vakamon was not so much a service (shifting the houses) as the houses themselves (as chattels), delivered onsite.

[11]     Vakamon had a scheme to create a small semi-rural subdivision at No 141B, No 3 line.  The land area was exactly 1 hectare (or 2.5 acres).  Reversing the normal order of things, it started with the houses, and then went about getting subdivision consent.  So the single title at No 141B became host to five dwellings.1

[12]     The houses were lowered by CHML on to piles.  They appear to have been fixed or anchored to the piles, although this may have been done after CHML left. Vakamon reattached the exterior skirtings, attached some exterior decks and planted gardens around the houses.

[13]     It  is  not  clear  whether  utilities  (power,  water  and  sewerage)  were  ever connected.  Mr O‟Byrne says they were not, which is what made removal so easy. Mr Stadniczenko, who ought to know, does not respond to Mr O‟Byrne‟s evidence. Mr Brett Watson, a valuer, provided an affidavit for Somme.   He inspected the houses in June 2009 on behalf of Vakamon‟s mortgage lender.  That was some six

months or so before removal.  His valuation report for the lender says that the houses

1      Including the one already there before CHML delivered the four houses sold to Vakamon.

were “equipped with full electrical and plumbing services”.  But that does not mean they were actually connected.  In fact his report suggests at least three of the houses were not connected.

[14]     For the purposes of a summary judgment application, given the uncertainty of Somme‟s  evidence  on  the  point,  I  will  accept  Mr  O‟Byrne‟s  evidence  that  the utilities were not connected.

Vakamon defaults, and enters a deed of acknowledgment of debt in favour of CHML

[15]     Payment for the houses was due in March 2007.   Vakamon paid CHML a little over $100,000 before defaulting.   That left a residual debt of $187,000 still owing.

[16]     In November 2008 a deed of acknowledgement of debt was entered into between CHML and Vakamon.   The deed was prepared by Vakamon‟s  solicitors. The solicitors‟ letter (written direct to CHML, which does not appear to have been legally represented at that stage) stated that the signed deed “will provide your company with security over the property concerned”.   The letter later refers to execution “creating the right to the security offered”, which is not quite the same thing at all.

[17]     The deed actually provided that, when the property was subdivided, CHML would be entitled to place caveats on each of the subdivided titles on which the four houses were located. The deed says:

The debtor [Vakamon] agrees that once the land at 141B No 3 Line, Wanganui, is subdivided into separate titles that the creditor [CHML] would then be entitled to register a caveat against the titles on which each of the four houses are located and the debtor agrees to enter into an agreement to mortgage so as to provide that security.

[18]     The deed then provides:

The parties acknowledge that no such caveat should be lodged until such time as the subdivision has been completed so as to avoid any delay or stopping of any such subdivision.

That was a logical and reasonable limitation.  As Mr Nigel Hughes, who appeared for Somme, noted, a caveat could prevent dealings required to give effect to subdivision consents, including the issue of new titles.2

[19]     As soon as the subdivision reached a stage where new titles could be ordered, Vakamon was bound to notify CHML:

...  and  therefore  the  agreement  to  mortgage  and  the  caveat  can  be commenced with a view to registration following the issue of those titles.

[20]     No further instrument was entered or executed.

Vakamon sells to Somme

[21]     Vakamon did not subdivide the property.  Instead, it sold it to Somme.  That happened in August 2009, just a few days after Vakamon‟s director Ms May had transferred her shareholding in Somme to Mr Stadniczenko.

[22]     The sale agreement between Vakamon and Somme is singular.   It is dated

6 August 2009.  Mr Stadniczenko deposes that Somme settled the property just four days later, on 10 August 2009.   In fact it appears to have happened on 12 August

2009.  Either way, it was a remarkably swift conveyance.

[23]     Vakamon‟s title to the property was subject to a mortgage to FM Custodians Limited, and two caveats (one in favour of Ms May).   All three were discharged when the property was transferred to Somme on 12 August 2009.

[24]     The sale price was $900,000.  But Mr Watson‟s valuation report, exhibited to his affidavit in support of Somme‟s application, and prepared for FM Custodians just a few weeks earlier in June 2009,3 valued the property at $1.3 million.  There are no special conditions, such as the assumption of any of Vakamon‟s debt liabilities.  So the  sale  appears  to  have  been  well  below  market  value  on  the  plaintiff‟s  own

evidence.

2      Although the caveator‟s consent could instead be secured, in advance.

3 See at [13].

[25]     Mr Stadniczenko deposes that the sale price was “full value” and has been paid.  I am not satisfied that I can reach that conclusion, in the absence of discovery and cross-examination, given the sudden sale and apparent disparity in value.

[26]     Similarly, Mr Stadniczenko deposes that he was only advised of Vakamon‟s debt to CHML “on the day prior to settlement”.   The circumstances of this transaction, and the connection between Somme, Vakamon, Mr Stadniczenko and Ms May, would require further inquiry into that assertion, if it is material.

[27]     Of  course  the  question  remains  what  difference  uncertainty  as  to  value, payment or knowledge actually makes in the present proceeding.   That falls for consideration later.

CHML pursues Vakamon

[28]     CHML‟s focus initially and rightly was on Vakamon.   It obtained a default judgment against Vakamon in the High Court at Wanganui, on 1 March 2010.  That was for the outstanding sum due, plus interest and costs.

[29]     I was told by Mr Justin Toebes, who appeared for CHML, that no steps have yet been taken to enforce the judgment.   I infer that Vakamon is no longer worth powder and shot.

The houses go

[30]     Unsurprisingly frustrated  with  what  had  occurred,  CHML‟s  Mr O‟Byrne, went to the property on 30 January 2010.  He took with him 25 workmen.  Over the course of the day they removed three of the houses.  The fourth was disconnected and prepared for removal.  Some of its fixtures and fittings were removed.

[31]     There is some dispute on the evidence as to what occurred during the removal process.

[32]     Mr O‟Byrne was present.  So were the 25 workmen.  Mr O‟Byrne‟s business

consultant, a Mr Finch, also attended.  It is not clear what use he was in shifting the

houses.  Helpfully, he has given an affidavit for CHML.  Unhelpfully, most of it is inadmissible.

[33]     On the other side, Mr Stadniczenko did not attend.  He seems to have been out on a boat in Cook Strait.  But his solicitor, a Mr Moore, had no fishing to do that day and so he attended instead.

[34]     Then two police constables attended.   They came at Mr Moore‟s  request. Mr Moore left the site and prepared 30 trespass notices.  On his return he handed out the notices to Mr O‟Byrne and his workmen.  The notices were not received with complete equanimity by those served. The words used are not stated in evidence, but with the due regard for precedent displayed in those parts, were probably “emphatic versions of „You be off‟”.4

[35]     Work  to  remove  the  houses  continued  notwithstanding  the  notices.    The police did not intervene further.  They saw it all as a civil dispute.  Far away on his boat, but informed of events by cellphone, Mr Stadniczenko saw it rather differently. He thought that his houses were being stolen.  But perhaps house stealing had not yet been recognised as a crime in the Wanganui police district.  Certainly it was fairly novel activity for any district.  In any case Mr Stadniczenko‟s theories on the state of the criminal law did not avail him. The police continued to stand by.

[36]     Each side continued to order the other off.   Probably in similar terms and tones as accompanied the trespass notices.  But no one went anywhere.

[37]     Mr Moore then arranged for 15 security guards – they are less charitably described by Mr O‟Byrne – to attend.   They parked their vehicles in front of the defendant‟s house removal transporters.  Soon after, they engaged the workmen in

conversation.

4      R v Barnsley Metropolitan Borough Council ex Parte Hook [1976] 1 WLR 1052 (CA) at 1055

[38]     Despite the security guards‟ presence, and their parking arrangements, three houses were still removed.  The fourth was left behind.  It had been much damaged in the course of preparing to remove it.

[39]     There  is  a  dispute  as  to  whether  an  agreement  was  reached  permitting removal of the three houses.  I will get to that issue in due course.5

Claim advanced by Somme

[40]     Somme‟s claim is in  conversion (as  regards the three houses  taken)  and trespass (as regards the fourth, damaged dwelling).  It claims $760,000 as the value of the four houses, and $100,000 for exemplary damages, due to the “high handed and contemptuous disregard for the ownership rights of the plaintiff” exhibited by CHML.

[41]     Mr  Hughes  disclaimed  any  intention  to  seek  summary  judgment  for exemplary damages.  But the written application clearly seeks them.  The fate of that claim remained unclear.  Presumably, something for trial.

Concerns about quantum

[42]     As I told Mr Hughes at the hearing, I am not prepared to grant summary judgment for the quantum claimed.

[43]     The compensatory damages claim is based on the valuation undertaken by Mr Watson, which I have discussed previously.6   The four houses are given a value in Mr Watson‟s report of $760,000 - within a total of $1.3 million for the entire property.   But as we have seen, on 12 August 2009 Somme paid Vakamon just

$900,000 for the entire property – including land and the principal dwelling which

Mr Watson had valued separately at $540,000.

[44]     I am not going to permit Somme to cherry-pick the valuation in this way. The sale to Somme was at a 31% discount to the valuation relied on to establish the value of $760,000 for the houses, which is claimed by way of damages.  Applying the same overall discount, the four houses would be worth no more than $525,000. But it may be they should be written down more heavily than the land and principal dwelling.  On one view they may have added just $360,000 to the $540,000 value given to the land and principal dwelling.   Furthermore, Mr Toebes suggests that given the failure of the subdivision proposal, they would have needed to be removed altogether.    So  their  true  value  may lie  anywhere  between  circa  $290,000  (the

original price)7 and the $760,000 claimed.

[45]     Mr Watson‟s evidence itself is equivocal:  he talks about “a sum in excess of

$700,000 for the four units”.   Notably he does not actually offer a value for the houses in his evidence, other than annexing his earlier valuation report.  He does not attempt to give a revised value for the three houses in light of the sale of the property for $400,000 less than the valuation given in his report.  In fact the main focus of his evidence is on whether the houses were fixed to the land.

[46]     Nor do we know what credit (if any) should be given for the fourth house, left behind.   Mr Stadnizenko says it was so damaged as to be worthless.   But Mr Watson does not say, and it is his evidence (or at least the valuation report annexed to it) that is used to justify the compensatory damages claimed.

[47]     So the value of the houses taken (and of the one left behind) is at large.  That issue will require to be tried.

[48]     The  question  now  is  whether  summary  judgment  should  be  granted  for liability only.

Defences advanced by CHML

[49]     CHML advanced four defences:

(a)       the three houses were removed with the express consent of Mr Moore,

Somme‟s solicitor;

(b)      the houses were not fixtures to the land;

(c)      that if they were fixtures, then they were subject to a security interest given by Vakamon in the November 2008 deed of acknowledgment of debt; and

(d)      the transfer of the property by Vakamon to Somme was a “device”,

and a prejudicial disposition under the Property Law Act 2007.

A.  Express consent to removal defence

[50]     Mr Toebes submits that an agreement to permit the removal of the houses was reached on the day they were taken.  He does not say it was negotiated directly. Rather he refers to Mr Finch‟s affidavit evidence that Constable Ushaw secured such an agreement with Mr Moore (Somme‟s solicitor) and told him of that outcome. Mr Moore denies having reached any such agreement.  He says he only discussed options for a compromise with Constable Ushaw, but at no point authorised him to actually compromise the issue. There is no evidence from Constable Ushaw.

[51]     Mr Finch‟s evidence as to an agreement being reached between Constable Ushaw and Mr Moore is inadmissible hearsay.   If there was virtue in the point, Constable Ushaw‟s evidence should have been obtained.

[52]     I have to say the suggested agreement seems to me unlikely as a matter of fact.  First, it is improbable that Mr Moore would have given consent on Somme‟s behalf in the manner alleged by Mr Finch, given the evident attitude of his client, Mr Stadniczenko.   Secondly, the suggested agreement makes little sense as against CHML‟s main argument that the transfer to Somme was a device to defeat CHML. If that were so, Somme and Mr Moore would have been unlikely to have capitulated as readily as Mr Finch suggests.  I accept, however, that there is a remote possibility that such consent was given.

[53]     Even supposing consent had been given, there must be real doubt whether it was not voidable for duress.8    It was extracted with 25 workmen on site, removing the houses, accompanied by the trucks needed to effect that purpose. As Tipping J has noted in Attorney-General for England & Wales v R, it is not necessary for illegitimate pressure to itself be unlawful.9   But in the present case, viewed with the limited  information  CHML would  have  had  in  January  2010,  CHML must  (or should) have had very real doubt as to whether it was lawfully entitled to enter what was now Somme‟s land and remove the houses.10   However, in the end this doubt is beside the point, for the reason I am about to give.

[54]     The  fundamental  problem  faced  by  CHML is  that,  even  if  consent  was initially given, and even if it was not the product of duress, there is no doubt that, before the houses were removed, Mr Moore had told CHML‟s Mr O‟Byrne  not to take the houses.  No consideration or prejudicial reliance is pointed to by CHML.  It had  simply  presented  Somme  with  a  fait  accompli.    There  is  no  suggestion, therefore, that the alleged consent was supported by consideration or such prejudicial reliance as to estop Somme from changing its mind.   No enforceable rights were gained by CHML as a result of any temporary act of consent, if indeed that occurred.

[55]     This suggested defence therefore fails.

B.  “Not fixtures” defence

[56]     CHML‟s second defence is that the houses were not affixed to the land.  The

consequences of that submission were not spelled out, and it appears to me in any event to be misconceived.

8      See R Bigwood Exploitative Contracts (Oxford University Press, Oxford, 2003) at 279-371.

The leading New Zealand authority remains Attorney-General for England & Wales v R [2002] 2

NZLR 91 (CA).

9      Attorney-General for England & Wales v R [2002] 2 NZLR 91 (CA) at [62] and [67].

10     See  B & S Contracts & Design Ltd v Victor Green Publications Ltd [1984] ICR 419 (CA) and Atlas Express Ltd v Kafco (Importers & Distributors) Ltd [1989] 1 QB 833 (QB) as examples of cases where stand over tactics were held to amount to economic duress.

[57]     First, regardless of whether the houses were fixed to the land or not, property in them passed on delivery.  As I find below, CHML had neither a purchase money security interest nor a vendor‟s equitable lien.11 Its best argument is that the deed of acknowledgment of debt creates a secured interest in the land (including the houses).

[58]     Secondly, as a matter of fact, by the time the houses were removed again by CHML they clearly had been attached to the piles, with their exterior skirting boards back in place.  The houses were on any objective view intended to remain fixed to the land in that location,12  so that the degree and objective purpose of annexation imply that they had become fixtures. These steps were clearly sufficient to constitute the houses fixtures.   As Blackburn J put it in Holland v Hodgson13  (in a passage Cooke P later said probably could not be improved upon):

Perhaps the true rule is, that articles not otherwise attached to land than by their own weight are not to be considered as part of the land, unless the circumstances are such as to shew that they were intended to be part of the land, the onus of shewing that they were so intended lying on those who assert that they have ceased to be chattels, and that, on the contrary, an article which is affixed to the land, even slightly is to be considered as part of the land, unless the circumstances are such as to shew that it was intended all along to continue a chattel, the onus lying on those who contend it is a chattel.

[59]     The houses were, therefore, fixtures in January 2010.  There is nothing in this suggested defence.

C. Transfer to Somme subject to CHML’s security interest defence

[60]     It is necessary to divide the analysis of CHML‟s  security position into two

parts.   That is because the November 2008 deed of acknowledgment of debt has altered the position.

11 See [61] – [63] below.

12     They had, for instance, begun to be marketed for sale.

13     Holland v Hodgson (1872) LR 7 CP 328 (approved and applied by the Court of Appeal in Lockwood Buildings Ltd  v Trustbank Canterbury Ltd  [1995] 1 NZLR 22 (CA) at 25 per Cooke P).

Before the deed of acknowledgment of debt

[61]     CHML does  not  seem  to  have  taken  even  the  most  elementary  security measures before delivering the houses.  While the houses remained chattels, CHML did not retain a purchase money security interest under the Personal Property Securities Act 1999.   And when they became fixtures, attached to the land at No

141B, No 3 Line, no caveatable proprietary rights were retained or reserved pending payment in full.

[62]     Property in the houses passed to Vakamon.   In their transitory form before delivery,  the  houses  were  goods  for  the  purposes  of  Sale  of  Goods Act  1908. Property in them would pass in accordance with s 19 of that Act.   The written contracts are silent as to the time property is to pass.  But the effect of s 2014 is that property would have passed to Vakamon no later than the point at which the houses were delivered and lowered on to their receiving foundations.

[63]     So instead of houses, CHML now owned a debt.  No vendor‟s equitable lien (for the unpaid purchase price) remained.  Delivery having been effected, s 44 of the Sale of Goods Act 1908 terminates the lien.15

After the deed of acknowledgment of debt

[64]     It is axiomatic that an agreement to grant a mortgage can itself confer a proprietary interest in the subject matter.   The conventional view is that if an agreement  to  mortgage  is  capable  of  being  the  subject  of  a  decree  of  specific

performance, it is capable of taking effect as an equitable mortgage.16

14     Rule 2 thereof.

15     Auckland Racing Club Inc v Pudney HC Auckland CP 1944/89, 4 December 1989.

16     Tebb v Hodge (1869) LR 5 CP 73 (Ex Ch); P Young Law of Mortgages of Land in New Zealand (Butterworths, Wellington, 1995) at 24-25; Hinde, McMorland & Sim Land Law in New Zealand (LexisNexis, Wellington, loose leaf ed) at [15.008].

[65]     But a mere security agreement in which a debtor agrees to grant a mortgage if requested may not suffice. In Philpott v NZI Bank Ltd17    the Court of Appeal was confronted with a banking agreement that provided the bank with a power to call for additional security in such form as the bank required.  Mr Philpott‟s affairs being in disarray, the bank (in purported exercise of the power) registered caveats against titles of various of his properties.  Cooke P said:

[U]ntil there has been a request and requirement by the bank pursuant to the terms of that clause ... the customer is free to deal with any of his or her properties without any obligation in respect of them to the bank and no charge by way of security, legal or equitable, nor any other interest in them is created in favour of the bank. That is to say, until there has been a request and requirement the bank has no interest in any specific property.

[66]   Philpott was distinguished in Cantab Management Limited v Greagh Investments Limited18  and Personal Finance Limited v Valu.19     In each case the creditor had the benefit of a clause that stated that, if called upon, the debtor was to grant a registrable mortgage over a property.  And in each case, unlike Philpott, the property in respect of which security was (or was to be) given was specifically identified.

[67]    In Cantab Management the agreement was said to be an “agreement to mortgage”. As in this case, a subdivision was in contemplation. And, as in this case, there was a prohibition on the lodging of a caveat securing the agreement to mortgage.20      Philpott  was  distinguishable  because  the  agreement  was  made  in respect of specific land, was described as an agreement to mortgage, and (in certain circumstances, one of which applied) acknowledged a right to lodge a caveat.21   The agreement was held to be an equitable mortgage capable of sustaining a caveat.

[68]     In Personal Finance the lodging of a caveat was expressly authorised in the security agreement.   The agreement  was  held  also  to  create  a  proprietary right

17     Philpott v NZI Bank Ltd (1989) 1 NZ ConvC 190,246 (CA).

18     Cantab Management Limited v Greagh Investments Ltd HC Hamilton M95/02 20 November

2002.

19     Personal Finance Limited v Valu HC Auckland CIV-2003-404-675 11 July 2003.

20     Although the creditor could lodge a caveat, inter alia, if the “development is stalled and the

moneys secured ... could reasonably be considered to be at risk”.

21     See at [41]-[45] per Faire AJ.

capable  of  sustaining  a  caveat.    That  case  is  clearly distinguishable  from  ours, because the right to caveat applied from the moment the agreement was entered.  No request was required; no condition required to be met.

[69]     Here,  Vakamon  did  not  wait  for  subdivision  consents  to  issue  (thereby triggering the condition).   Possibly under pressure from its other creditors, but certainly without reference to CHML, it simply sold the property to Somme.  In the view I take of the evidence before me there is reason to be concerned that Vakamon and Somme together may have set about avoiding Vakamon‟s obligations to CHML under the deed of acknowledgment of debt.   Somme‟s  evidence entirely fails to dispel that impression.

[70]     In my opinion it is arguable that the deed of acknowledgment of debt in this case had the effect of creating an equitable mortgage, at least at the point at which Vakamon repudiated its obligation to seek subdivision consents and instead opted to negotiate with Somme.

[71]     First, as in Cantab Management, it is clear that the deed related to specific land. The relevant property was clearly identified.

[72]     Secondly,  the  draftsman‟s  letter  accompanying  the  deed  told  CHML the document would “provide security over the property concerned”. A conditional right to caveat the land was conferred by the deed.  The deed referred on two occasions to the future entry into an “agreement to mortgage” (albeit it did not describe itself as having that effect presently, unlike in Cantab Management).

[73]     Neither of these two considerations alone would give rise to a right to seek specific performance.   So without more, I might not have held that the deed gave rise, ab initio, to an equitable mortgage.

[74]     However, thirdly and fundamentally, I do not think it consonant with Equity for the debtor to be able to simply defeat the conditional right to security, by sale. Equity‟s response in this respect will depend on the conduct of the debtor (and its transferee).  It is more likely to respond to a transfer that is deliberately contrived to

defeat an entitlement, even if merely contractual at that stage. A bona fide purchaser of the legal interest without notice of a mere equity will defeat that  proprietary interest, regardless of registration.  Where however the debtor contrives to defeat the nascent equitable interest by transfer, it does not seem to me right that the debtor can just thumb its nose at the creditor and say, “the condition for grant of a mortgage has not occurred”.  That would be to allow the debtor to rely on, and profit from, its own wrong. Action to defeat the condition should mature the condition.

[75]     Had CHML been aware of the turn of events (sale, not subdivision), it would have  been  entitled  to  call  for  the  mortgage  and  to  caveat  the  property  in  the meantime. This is no more than Equity deeming done that which ought to be done.22

A caveat lodged in these circumstances would likely have survived attack.  And at the very least CHML would likely have been entitled to injunctive relief.

[76]     Support for this approach is found in the Court of Appeal decision in Bevin v Smith.23    That case concerns the circumstances in which a conditional contract of sale (or option to purchase) could give rise to an equitable interest in land.  The point was of some general importance; in that event of course a caveat could be lodged. Prior to Bevin v Smith the general view had been that the passage of an equitable interest under a contract of sale depended on the availability of specific performance.24   As of course is the conventional view in relation to the existence of

an equitable mortgage.25     However, drawing on Australian authority the Court of

Appeal doubted that this remained the true position.  In Legione v Hateley26 Mason and Deane JJ suggested:

A competing view  –  one which has much  to commend  it  – is that the purchaser‟s equitable interest under a contract of sale is commensurate, not with her ability to obtain specific performance in the strict or primary sense, but with her ability to protect her interest under the contract by injunction or otherwise.27

22     See  e.g.  Attorney-General for  Hong  Kong  v  Reid  [1994] 1 NZLR 1 (PC) at 4 per Lord

Templeman.

23     Bevin v Smith [1994] 3 NZLR 648 (CA) (Richardson, Gault & Ellis JJ).

24     Bevin v Smith at 660, relying on Privy Council authority Howard v Miller [1915] AC 318 and

Central Trust and Safe Deposit Co v Snider [1916] 1 AC 266.

25 See at [64].

26     Legione v Hateley (1983) 152 CLR 406 (HCA).

27     Ibid at 446.

Likewise, in Stern v McArthur28 Deane and Dawson JJ said:

The extent of the purchaser‟s interest is to be measured by the protection which Equity will afford to the purchaser.  That is really what is meant when it is said that the purchaser‟s interest exists only so long as the contract is specifically enforceable by him.  Specific performance in this context does not mean specific performance in the strict or technical sense of requiring the contract to be performed in accordance with its terms.   Rather it encompasses all of those remedies available to the purchaser in equity to protect the interest which he has acquired under the contract.  In appropriate cases it will include other remedies, such as relief by way of injunction, as well as specific performance in its strict sense.29

Following that approach, the Court of Appeal in Bevin v Smith said:30

We agree with the recent Australian authorities to the effect that the equitable estate  passes  when  equity  will,  by  injunction  or  otherwise,  prevent  the vendor from dealing with the property inconsistently with the contract of sale, i.e. inconsistently with the purchaser‟s contingent ownership rights.

But the Court of Appeal also warned:31

There will be some conditional contracts, particularly those subject to true conditions precedent, where the parties cannot be regarded as intending that equitable title will pass to the purchaser until the condition is waived or fulfilled.  In the end it must be remembered that by saying the equitable title has passed, equity is doing no more than recognising that the purchaser must have acquired rights which should be protected in an appropriate manner.

[77]     In my view the same approach should be taken where the Court is dealing not with a conditional contract of sale (or option to purchase), but an agreement to grant a mortgage.  Hitherto in such a case the availability of specific performance has been seen to be the pre-condition for passage of an equitable interest.32     But the true talisman is surely, as Mason and Deane JJ said, the ability to secure protection by any equitable remedy, including injunction.  It is only if Equity would not provide

protection that the putative mortgagee should be regarded as bereft of an equitable

interest.

28     Stern v McArthur (1988) 165 CLR 489 (HCA).

29     Ibid at 522.

30     Bevin v Smith [1994] 3 NZLR 648 at 665.

31     Idem.

32     See at [64]

[78]     Of necessity, that will require a fine-grained factual assessment.   In most circumstances, a transfer calculated to defeat a condition precedent to the grant of security should  command  injunctive  relief.    But  perhaps  not  in  all  cases.    For instance, if the putative mortgagor is in extremis, and unable to fulfil the condition (here, effecting the subdivision).   Likewise, perhaps, if there is no prospect of the subdivision being consented, so that the condition is effectively frustrated.  In such circumstances  it  may  well  be  that  Equity  would  not  grant  relief.    But  these exceptions apart, a conditional agreement to grant a mortgage should activate an equitable mortgage of the land concerned at the point where the condition is met, or where the condition will be dispensed with by Equity.

[79]     I do not propose to say more on the topic at this stage.  I received little by way of submission on this question.  In my view there is a legitimate issue arising on the evidence as to whether CHML held an equitable mortgage in respect of its outstanding indebtedness, as a combined result of (1) the deed of acknowledgment of debt, (2) the subsequent actions of Vakamon, and (3) the absence of good reason why Equity should not protect CHML.   The latter two considerations will depend on evidence to be given at trial.

[80]     Two further matters require consideration, however:

(a)       How does any of this affect Somme?  It of course claims to be a bona fide purchaser for value without notice.

(b)Does the suggested security interest serve as a defence to a claim of conversion?

How does any of this affect Somme?

[81]     Somme (as subsequent purchaser of the land and houses) claims to be a bona fide purchaser for value without notice.   So it says it is entitled to the benefit of indefeasible title (as a result of s 62 of the Land Transfer Act 1952).

[82]     Somme is open to attack by CHML in two ways.

[83]     First, CHML might claim that the protection of indefeasibility should be set aside under the fraud exception.  As I noted at the hearing, “fraud” in this context does not connote criminality, but it does require a finding of dishonesty.33   No such finding can of course be made at this summary stage.  But the evidence does raise questions about the transaction between Vakamon and Somme, and whether the latter was on notice of CHML‟s interest.    These questions concern the circumstances in which it occurred, the speed with which it took place and the sum paid.   Similar considerations were at the heart of the Court of Appeal decision in Efstratiou v Glantschnig34 in which a transfer was set aside under the fraud exception.

[84]     Mr Stadniczenko deposes to having no knowledge of the Vakamon debt to CHML until the day before settlement.  But he says there was no registration of the interest on the title, and Somme by then was bound to settle.   That evidence will need  to  be  examined  further,  but  an  impending  obligation  to  settle  will  not necessarily avail a transferee on notice of a prior equitable interest:   New Zealand Meat Nominees Limited v Sim.35

[85]     Secondly, even if Somme‟s title remains indefeasible, Somme still potentially faces an in personam counterclaim in Equity, based on unconscionable conduct.36

An independent cause of action is required; unconscionable conduct alone is not sufficient.37   What those causes of action might be here was not indicated.  Perhaps inducement of breach of contract, or some form of knowing receipt or estoppel.

Does the suggested security interest serve as a defence to a claim of conversion?

[86]     Even assuming everything in CHML‟s favour, the premise for this defence seems to have been that no actionable conversion could occur where CHML held an equitable  interest  in  the  land,  via  the  claimed  equitable  mortgage  security.   As

Mr Toebes put it, CHML “was a secured creditor of the property; ... [it] ... cannot

33     Waimiha Sawmilling Co Ltd (in liq) v Waione Timber Co Ltd [1926] AC 101 (PC).

34     Efstratiou v Glantschnig [1972] NZLR 594 (CA).

35     New Zealand Meat Nominees Ltd v Sim (1990) 1 NZ ConvC 190,478 (HC).

36     For example; Duncan v McDonald [1997] 3 NZLR 669 (CA) at 683; C N & N A Davies Ltd v

Laughton [1997] 3 NZLR 705 (CA).

37     Duncan v McDonald at 683-684.

commit the tort of conversion”.  No authority was cited.  Mr Hughes did not address this argument closely.  However, as a matter of law Mr Toebes‟ argument cannot be correct.

[87]     First,  an  equitable  mortgage  does  not  give  rise  to  immediate  self-help remedies (other than the right to lodge a caveat).  Beyond that, the assistance of the Courts is needed.   A Court will, for instance, assist an equitable mortgagee by compelling the mortgagor to execute a mortgage in accordance with the underlying

agreement to mortgage.38   It will compel the mortgagor to allow that instrument then

to be registered.39    And it may also assist an equitable mortgagee by appointing a receiver.40    But  a  Court  order  will  be  required  by  an  unregistered  equitable mortgagee to effect anything in the nature of possession.

[88]     Secondly, at most an effective security interest gives certain possession (and eventual supervised sale) rights in the event of default.41    Such rights are carefully constrained, either within the security interest instrument or by the Property Law Act

2007.  And they are of a security nature only.  They do not effect a reconveyance of the original property right, as if egregious default by Vakamon reversed the passage of title in those chattels.   And they do not allow the secured party to enter the property and take parts of it (whether houses, crops or other removable property) away.   There is no suggestion on the evidence that CHML‟s exercise of self-help remedies here has been by way of security.  Rather, CHML has proceeded as if it is again owner of the houses.  But on any view it is not.

Conclusion

[89]     The argument that CHML may have had an equitable mortgage in respect of

No 141B, No 3 Line, and that such security arguably is effective against the subsequent purchaser, Somme, does not offer CHML a defence to Somme‟s action

38     Smith v Patterson (1910) 13 GLR 99 (HC).

39     Windella (NSW) Pty Ltd v Hughes (1999) 49 NSWLR 158 (SC), 161.

40     P Young Law of Mortgages (Butterworths, Wellington 1995) at 350; Vacuum Oil Co Ltd v Ellis

[1914] 1 KB 693 (CA) at 703.

41     See for example s 95 Property Law Act 2007, and cl 12 of Part 1 of Schedule 2.

for conversion.  At best CHML has a counterclaim against Somme in the respects identified in [83] and [85] above.

D.  Prejudicial disposition defence

[90]     I received very brief submissions on this topic.  CHML contends that even if it had no secured interest in the land as a result of the deed of acknowledgment of debt, the transfer by Vakamon to Somme is a prejudicial disposition for the purposes of s 346 of the Property Law Act 2007.

[91]     Such a submission would appear to depend on a finding that Vakamon was insolvent  at  the time42   and  was  entering the transaction  to  prejudice CHML as creditor or otherwise did not receive reasonably equivalent value for the land from Somme.  Compensation or vesting relief is available via s 348.  I do not propose to address  this  claimed  defence  further  at  this  stage.    It  adds  nothing  for  present purposes to the previous ground, and in certain respects repeats it.

[92]     Again, it does not give rise to a defence, but is at best another in personam

right of counterclaim against Somme.

Conclusions

[93]     For the foregoing reasons I conclude:

(a)      Property in the houses passed to Vakamon upon delivery and affixture to the land;

(b)      CHML retained no secured property interest in the houses;

(c)      It   is   however   distinctly   arguable   that   Vakamon‟s  actions   in subsequently (1) executing the deed of acknowledgment of debt in favour of CHML, and (2) negotiating to sell the property (including

the houses) to Somme instead of fulfilling its obligations under the

42     Section 346(2)(a); paras (b) and (c) do not seem to apply.

deed  to  pursue  subdivision  consents,  created  an  equitable  interest

(pursuant to equitable mortgage) in favour of CHML at that point;

(d)CHML has  arguable counterclaims available to  it against Somme, based on Somme‟s dealings with Vakamon, in the respects identified in [83], [85] and [91].   These depend on whether Somme is (as it claims to be) a bona fide purchaser for value without notice of CHML‟s rights, or not;

(e)      CHML does not however have an arguable defence to Somme‟s action for conversion.   In particular, (1) no enforceable consent to remove the houses was given (consent being withdrawn before removal, reliance or consideration) and (2) CHML‟s rights under the arguable equitable mortgage arising from Vakamon dealings in defiance of the deed  of  acknowledgment  of  debt,  did  not  entitle  it  to  enter  the property and remove the houses again.

Summary judgment?

[94]     I am therefore unable to find the deed of acknowledgment of debt, coupled with deliberate action to avoid Vakamon‟s obligations under that deed by Vakamon and  Somme,  could  give  rise  to  an  arguable  defence  to  Somme‟s  action  for conversion.

[95]     On the other hand CHML does have arguable counterclaim rights against

Somme, in the respects identified in [83], [85] and [91].

[96]     There are also real reasons to be concerned that Vakamon and Somme may together have set about avoiding Vakamon‟s obligations to CHML under the deed of acknowledgment of debt.  As I have said, Somme‟s evidence entirely fails to dispel that impression.

[97]     The quantum to which Somme might be entitled on its claim is not known. Furthermore, Somme seeks to argue (or reserve the right to argue) for exemplary damages at a substantive trial fixture.

[98]     This is, in my view, one of those rare cases where despite the absence of a direct defence, summary judgment is not appropriate.  Rule 12.12(2)(b) provides that in certain circumstances where no direct defence exists, the Court may nonetheless dismiss an application for summary judgment.43   The existence of strongly arguable counterclaims against Somme arising from its dealings with Vakamon, coupled with uncertainty as to what quantum Somme might be entitled to (and by what processes), means that it is more just that the whole matter be determined together at trial.  That in my view is a clearly preferable course to granting the application, but staying

execution.

Disposition

[99]     The application for summary judgment is dismissed.

[100]   The defendant will have costs calculated on a category 2 band B basis.

[101]   The proceeding is to be called before the Associate Judge in Wellington on

Tuesday 27 September at 10am for further timetabling orders to be made.

Stephen Kós J

Solicitors:

Hughes Robertson, Wellington for Plaintiff

JTLaw, Wellington for Defendant

43     See discussion of this rule in Roberts Family Investments Ltd v Total Fitness Centre (Wellington) Ltd [1995] 1 NZLR 15 (HC) at 20-21.