Structured Finance (NZ) Limited v McKenna
[2012] NZHC 3093
•20 November 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-5855 [2012] NZHC 3093
UNDER Section 143 of the Land Transfer Act 1952
IN THE MATTER OF an application under s 143 that caveat No
9183403.1 registered against title... be removed
BETWEEN STRUCTURED FINANCE (NZ) LIMITED
Applicant
ANDMARY MCKENNA Respondent
Hearing: 31 October 2012
Counsel: S Grant and S Gilmour for Plaintiff
H Waalkens QC and P Davey for Defendant
Judgment: 20 November 2012
RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (caveat be removed)
This judgment was delivered by me on 20 November 2012 at 4.30 pm pursuant to
Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date ..........................
Solicitors:
Duncan Cotterill, PO Box 5326, Wellesley Street, Auckland 1141
Steindle Williams Legal Limited, PO Box 47858, Ponsonby, Auckland
STRUCTURED FINANCE (NZ) LIMITED V MCKENNA HC AK CIV-2012-404-5855 [20 November 2012]
[1] The applicant, Structured Finance (NZ) Limited, is the holder of a second mortgage registered against the title to a property known as unit 5A at 87 Halsey Street in Auckland’s Viaduct Basin. The registered proprietors of the unit are Mr Nigel McKenna (a former property developer) and Mr John Stringer who hold their interest on behalf of one of Mr McKenna’s trusts, the NA McKenna Trust.
[2] With the agreement of Bank of New Zealand, which is the first registered mortgagee, Structured Finance has become the mortgagee in possession and has entered into an agreement to sell the property pursuant to the power of sale in its second mortgage. There is however an impediment to settlement.
[3] Mrs McKenna, the respondent, has registered a caveat against the title to the property claiming an estate or interest by virtue of an equitable lien. The caveat describes the claimed lien and its basis as follows:
An equitable lien over the land ... as a result of monies due to [her] by the registered proprietors, the land having been appropriated towards the payment of those monies.
[4] Structured Finance wants the caveat removed so that it can proceed with the sale. Settlement was due on 1 October 2012 and it is incurring interest and costs on a daily basis. It seeks an order for removal of the caveat pursuant to s 143 of the Land Transfer Act 1952.1
[5] Mrs McKenna filed documents in opposition to Structured Finance’s application resisting an order removing the caveat. Her position currently is somewhat changed. Through counsel she now accepts that no purpose would be
served by delaying Structured Finance’s sale and accepts that settlement should be
1 Section 143 of the Land Transfer Act 1954 provides:
143 Procedure for removal of caveat
(1) Any such applicant or registered proprietor, or any other person having any registered estate or interest in the estate or interest protected by the caveat, may, if he thinks fit, apply to the [High Court] for an order that the caveat be removed.
(2) The Court, upon proof that notice of the application has been served on the caveator or the person on whose behalf the caveat has been lodged, may make such order in the premises, either ex parte or otherwise, as to the Court seems meet.
allowed to proceed. Nonetheless she holds to the argument that she has a caveatable interest. Counsel advises that in these circumstances she agrees to the removal of the caveat but he submits that an order for removal should be on terms that require monies to be held in trust from the proceeds of sale sufficient to satisfy Mrs McKenna’s money claim against the registered proprietors.
[6] Ms Grant, counsel for Structured Finance, makes no concession that Mrs McKenna has an interest in the property that is sufficient to support the caveat but she accepts that, if I find to the contrary, an order for removal should be made on such terms.
[7] The key issue that I am asked to determine therefore is whether Mrs McKenna has established an arguable case to an interest in the Halsey Street property sufficient to support her caveat. The answer to that issue will determine whether the caveat should be removed free of or subject to an order to hold sale proceeds in trust. For reasons I will come to I find Mrs McKenna has not established a case for such an interest.
Relevant Principles
[8] The principles to be applied in applications like this are well established through decisions of the Court of Appeal in cases such as Sims v Lowe2 and Pacific Homes Limited (In Receivership) v Consolidated Joineries Limited3.
[9] The following principles are apposite and I propose to apply them in reaching my decision:
a) The onus is on the respondent to demonstrate that she holds an
interest by way of an equitable lien in the trustees’ land that is
sufficient to support the caveat.4
2 [1988] 1 NZLR 656 (CA).
3 [1996] 2 NZLR 652 (CA).
b)The respondent must put forward a reasonably arguable case to support the interest that she claims in the caveat.
c) As a general rule an order for the removal of the caveat will only be made if it is clear that there was either no valid ground for lodging it in the first place or alternatively that such ground as then existed has now ceased to exist.
d)If the caveator establishes an arguable case for the interest in the land claimed, the Court retains a discretion to make an order removing the caveat with or without terms. The discretion will be exercised cautiously and will turn on whether the balance of convenience is for or against leaving the caveat in place.
e) The present proceeding is wholly unsuitable for the determination of disputed questions of fact.
[10] It is necessary to refer to the factual background before considering the issues
that Mrs McKenna’s application gives rise to.
Factual Background
Halsey Street Apartment
[11] Structured Finance has been operating as a finance company since September
2000. A moratorium was imposed on Structured Finance in May 2009 and since that time it has been under the control of Perpetual Trustees as trustee and Price
4 Section 137 relevantly states
137 Caveat against dealings with land under Act
(1) Any person may lodge with the Registrar a caveat [[in the prescribed form]] against dealings in any land or estate or interest under this Act if the person—
(a) claims to be entitled to, or to be beneficially interested in, the land or estate or interest by virtue of any unregistered agreement or other instrument or transmission, or of any trust expressed or implied, or otherwise; or
(b) is transferring the land or estate or interest to any other person to be held in trust.
Waterhouse Coopers as monitoring agent for the trustee. Mr Martin Reesby is (and has been throughout) the managing director of Structured Finance.
[12] On 20 May 2002 Structured Finance entered into a loan agreement with Melview Log Farm Limited to fund stage 1 of a multi stage apartment development in Halsey Street being undertaken by Mr McKenna on behalf of Melview. The loan was for the sum of $5.5 million and was subject to the usual arrangements as to security for the loan. The development was undertaken and completed between 2002 and 2004.
[13] In 2004 Mr McKenna transferred one of the apartments in the development to the NA McKenna Trust. Mr Reesby agreed to this transfer on these conditions:
(a) A second mortgage in favour of Structured Finance would be granted by the trustees of the trust to be registered against the title to the apartment to secure all indebtedness of Melview to Structured Finance.
(b)The trustees enter into a deed of guarantee and indemnity in respect of that indebtedness.
[14] On 28 September 2004 Mr McKenna and Mr Stringer purchased unit 5A from Melview and were registered as proprietors on the title to the property. On the same day, a mortgage to Bank of New Zealand was registered over the title to the Halsey Street property. On 21 October 2004, the trustees entered into a deed of indemnity and guarantee with Structured Finance as guarantors of the mortgage. On
28 October 2004, Bank of New Zealand, Structured Finance and the trustees entered into a deed of priority with Bank of New Zealand as first mortgagee and Structured Finance as second mortgagee. On 1 November 2004, a second mortgage to Structured Finance was registered against the title to the property.
[15] Mr McKenna is an adjudicated bankrupt but he and Mr Stringer remain the registered proprietors of the property on behalf of the NA McKenna Trust.
Manor Park House
[16] Mrs McKenna separated from Mr McKenna in 2002. It was agreed at the time that the family home in Whitford would be sold and that a cheaper house would be bought for Mrs McKenna and the children. The reason was to free up capital for Melview and its related group of companies known as the Melview group of companies. In early 2003 the trustees of the NA McKenna Trust acquired a property at 70 Manor Park, Farm Cove, Auckland and Mrs McKenna moved in with the children in January 2003.
[17] The trustees funded the acquisition by using part of the proceeds of sale from the Whitford property. Bank of New Zealand held the only registered mortgage over the Manor Park property.
[18] Mrs McKenna treated the property at Manor Park as her home. Her position is that she made it clear to Mr McKenna that it had to be kept separate from his business and was never to be used as security for debt owed on other assets. Mr McKenna endorses these claims, though perhaps disingenuously as the trustees did in fact permit use of the property as such a security. The mortgage was later to be called upon by the bank to meet the trustees’ obligations for the mortgage over Halsey Street.
[19] In the months preceding November 2009, it became apparent that the Melview group of companies was in serious financial difficulty. In November the McKenna Trust sold the Manor Park property in order to release further funds to the group. Bank of New Zealand required, pursuant to its mortgage security, that
$600,000 of the sale proceeds of the Manor Park property be applied to the Halsey Street indebtedness leaving the Melview group and its guarantors in default on loans to Structured Finance and Fidelity Limited (a finance company that Mr Reesby co- owns). It was as a result of such default that Mr McKenna looked for some financial accommodation and assistance and had discussions with Mr Reesby for that purpose.
[20] There is a dispute about the discussions that took place between Mr
McKenna and Mr Reesby before the sale of the Manor Park property in November.
Mr Reesby says he was not aware that the NA McKenna Trust owned the property until the time of the sale when Mr McKenna called him and told him that Bank of New Zealand had advised him that it intended to apply $600,000 of the proceeds from the sale of Manor Park to partially discharge the NA McKenna Trust’s indebtedness to it on the Halsey Street property. He was also told that Mrs McKenna was not happy about this turn of events. Mrs McKenna’s position is that Mr Reesby was aware that the NA McKenna Trust owned the Manor Park property. Further, as Mr McKenna’s merchant banker, Mr Reesby knew that the property was never to be used as collateral for debts on other assets. Mrs McKenna maintains that this had a material bearing on the discussions, which Mr Reesby does not accept.
The December 2009 Agreement
[21] It is not in dispute however that Mr Reesby negotiated an agreement with Mr McKenna in an attempt to maximise the return from the Melview group to Structured Finance and Fidelity and to incentivise Mr McKenna to maintain the value of the assets over which the group’s loans were secured. Accordingly, the
agreement provides for various incentive payments to Mr McKenna.5 The
agreement, signed on 15 December 2009, was made between Mr McKenna together with several companies in the Melview group and Structured Finance plus Fidelity (referred to in the agreement as the secured creditors) and Mr Reesby.
[22] Mrs McKenna is not a named party to the agreement and there is no suggestion that she played any part in its negotiation or had any discussions about it with Mr Reesby. Similarly Mr McKenna’s co-trustee, Mr Stringer, is not a party to the agreement and there is no evidence that he was involved.
[23] Relevantly, the agreement provides for the sale of the Halsey Street property. Clause 4(c) of the agreement records what the parties agree is to happen on the sale. It states that “Mr McKenna and the secured creditors agree the proceeds from the
sale of Halsey Street will be applied” to repayment of debt in the order set out in cl
5 The incentive payments are subject to terms that are potentially disentitling and provide that the parties’ obligations under the agreement terminate automatically if one of more of Melview’s companies known as the Hotel Management Companies is placed in liquidation.
4(d).6 The agreed order requires that Bank of New Zealand will be paid first which accords with its position as first mortgagee; Fidelity is to be paid second for the agreed amount of a loan called the Phoenix loan (such amount being $300,000); and Secured Finance and Fidelity are to be paid third for loans to the Melview group, subject to a qualification that provides for a fourth payment to be made out of this third ranking payment. Essentially cl 4 (d) stipulates that the fourth payment is to be paid to Mr McKenna and is to be:
(a) what remains (if anything) out of the sale proceeds of up to $2.1 million after deduction of the repayment to Bank of New Zealand and the repayment of the $300,000 amount for the Phoenix loan; and
(b)as a preferred part of what is due to Structured Finance in repayment of its mortgage.
Default/Property Law Act Notice
[24] By July 2010 the NA McKenna Trust was seriously in default on its Halsey
Street loan obligations. On 30 July 2010 Structured Finance served a notice under s
119 of the Property Law Act 1987 on the trust. At the time that the notice was issued the trust owed $6,541,722.65 to Structured Finance. The notice expired un-remedied on 6 September 2010. Mr McKenna, who is now an adjudicated bankrupt, was not in a position to remedy the situation. Structured Finance became mortgagee in possession on 6 September 2010.
Sale of Halsey Street
[25] With Bank of New Zealand’s agreement, Structured Finance rented the
Halsey Street property for almost 2 years from the date of entry into possession and tried to sell the property.
6 Clause 4(d) relevantly states:
The Secured Parties agree that if the aggregate of the amounts paid under clauses
4(c)(i) and (ii) ... is less than $2,100,000 ... McKenna shall be entitled to the difference between $2,100,000 and [such aggregate].
[26] On 16 July 2012, Structured Finance secured the sale of the Halsey Street property. The sale price is $2.43 million. Costs and interest on late settlement caused by Mrs McKenna’s caveat registered over the property on 18 September 2012 are continuing to accumulate.
[27] It is not in dispute that Bank of New Zealand and Fidelity will be paid but that there will be insufficient funds from the sale to repay the monies owing by the NA McKenna Trust and Melview to Structured Finance, leaving a large deficit.
[28] According to the evidence, the amount to be paid to the bank is $1,688,457. The agreed amount to be paid to Fidelity for the Phoenix loan is fixed by the agreement at $300,000. On these figures counsel agree that a potential sum will be available under the terms of the 2009 agreement to either Structured Finance or Mr McKenna (assuming his entitlement stands and has not been terminated under the agreement7) of a little less than $400,000.
[29] It is the entitlement to this money that lies at the heart of Mrs McKenna’s
application.
The Arguments
[30] Essentially, Mrs McKenna’s caveat claims that she has an entitlement in equity to a lien over the land described in the title to the Halsey Street property as a charge “towards” payment of monies that the registered proprietors are obliged to pay her. The caveat describes the basis on which the lien over the land is derived from the registered proprietors as an “appropriation” of the land towards the payment of those monies.
[31] At the hearing, counsel for Mrs McKenna expanded on the basis for the claimed interest in the land which, he submits, is sufficient to support the caveat:
7 On 14 July 2010, Lighter Quay Hotel Management Limited, one of the hotel management companies, went into liquidation. The liquidation of other hotel management companies followed. There is a dispute between Mr Reesby and Mr McKenna as to whether these liquidation events brought the agreement to an automatic end. It is not in dispute however that incentive payments were made after the liquidations occurred. Mr McKenna says this shows that the agreement’s provisions prescribing automatic termination were waived while Mr Reesby takes the contrary position. He argues there has been no waiver of the automatic termination provision. The dispute is not one that can be resolved in this summary proceeding.
(a) The monetary obligation claimed in the caveat arises from the terms of the 2009 agreement. The relevant terms of the agreement are those that require that certain proceeds of the sale of the Halsey Street property are to be paid to Mr McKenna.
(b)The contextual circumstances that give rise to Mr McKenna’s contractual entitlement show that Mr McKenna and Mr Reesby intended that the entitlement was meant for Mrs McKenna. Specifically:
(i)Mr McKenna promised these monies to Mrs McKenna in return for her agreement to permit the McKenna Trustees to sell the Manor Park house where she and the children had been living.
(ii)Mr Reesby always knew that Mrs McKenna was unwilling to ever allow the Manor Park house to be used as security for any of Mr McKenna’s business activities and would never have agreed to its sale unless $400,000 was earmarked for her from the proceeds to compensate her.
(iii)When Bank of New Zealand decided to apply all of the proceeds of the Manor Park house sale to pay down debt on Halsey Street, the effect was threefold: it reduced the debt to Bank of New Zealand that was secured by the Halsey Street property; it deprived Mrs McKenna of the monies she expected to get from the Manor Park property; and it increased the amount potentially available to Structured Finance on settlement of the sale of the Halsey Street property.
(iv)To compensate Mrs McKenna, Mr McKenna procured Mr Reesby’s agreement to earmark part of Structured Finance’s entitlement to the proceeds of sale for Mrs McKenna. The
agreed amount was to be determined by the formula in cl 4(d)
and anticipated to be approximately $400,000.
(c) These circumstances also give rise to the equitable charge or lien that
Mrs McKenna claims in the caveat.
[32] Counsel further submits that the unusual terms of cl 4(d) of the 2009 agreement can only be understood correctly by reference to this background. When seen in that light, counsel submits, the terms clearly point to an intention to pay Mr McKenna for the benefit of Mrs McKenna and show that Mrs McKenna is plainly entitled to part of the proceeds of sale. Were these not so, Structured Finance would indirectly derive a benefit from the sale proceeds of Manor Park that it was never intended to have.
[33] Structured Finance advances several contrary arguments in support of its contention that there is no basis to find that the interest Mrs McKenna claims is sufficient to support the caveat over the land at Halsey Street.
[34] I agree that there is merit in Structured Finance’s arguments and that there is
not a sufficient basis to support the caveat. My reasons can be stated briefly.
Decision
[35] The first reason is that Mrs McKenna does not claim, as the caveat does, to have an equitable lien in respect of an obligation due to her by the registered proprietors. As her evidence shows, the essential obligation that she points to is an obligation owed to her by Mr McKenna personally that arises by reason of his promise to pay her monies that he has contracted for under the 2009 agreement with Structured Finance.8 There is nothing in the evidence to spell out any basis for the suggestions that Mr Waalkens strived to demonstrate that the trustees as registered
proprietors:
8 The onus under s 143 of the Land Transfer Act 1952 lies on the caveator to show that they have a reasonably arguable case for the interest claimed in the caveat and not some other interest see Chen v ANZ National Bank Limited HC AK CIV-2012-404-1015, 17 May 2012 (per Associate Judge Faire) at [7](c).
(a) are the real beneficiaries of Mr McKenna’s ‘deal’ with Structured Finance and correspondingly the real obligors to Mrs McKenna (the evidence does not suggest that Mr McKenna acted in his capacity as trustee of the NA McKenna Trust, or that he had authority from his co-trustee); or
(b)have otherwise assumed or been fixed with responsibility for the performance of Mr McKenna’s promise to Mrs McKenna pursuant to some other form of trust or security.
[36] I am unable therefore to accept Mr Waalkens’ plea that Mr McKenna’s promise arguably binds his co-trustee, Mr Stringer. There is nothing in the evidence that shows how Mr McKenna’s promise can be attributed to Mr Stringer. Nor indeed is there anything to remotely suggest that Mr Stringer had any interest in the monies that might be payable to Mr McKenna under the 2009 agreement at the time the caveat was lodged. If Mrs McKenna was promised the interest that she claims, it must have been a promise that Mr McKenna made solely, in respect of the personal interest that he may receive from the 2009 agreement. The promise cannot relate to the estate in the land held by the trustees for the beneficiaries of the NA McKenna Trust.
[37] Mrs McKenna faces the added problem that she has not established any other basis on which the trustees could have had an obligation to her for “monies due” when the caveat was lodged. She was not a beneficiary of the NA McKenna Trust when the caveat was lodged and she has suggested no other basis. Her case rests on the obligation Structured Finance has to Mr McKenna personally under the 2009
agreement and his personal promise to her.9
[38] Secondly, as Mrs McKenna’s claim is not actually founded on an obligation by the registered proprietors for monies due to her, there cannot have been an appropriation of the registered proprietors’ land in equity “towards” payment. When
it is patently clear that the registered proprietors do not owe the relevant monies, Mrs
9 The interest claimed must exist when the caveat is lodged see Kilmartin v Monk (2005) 5 NZ ConvC 194,122 .
McKenna has no case sufficient to support an equitable lien over the estate in the land as claimed in the caveat. Any appropriation of the registered proprietors’ land “towards” Mr McKenna’s performance would have to be supported by clear evidence that the registered proprietors agreed to give security over the land for Mr McKenna’s obligation. There is no such evidence.
[39] The third reason is that if Mrs McKenna were somehow able to show that she has the interest claimed in the caveat, such interest would be subject to s 105 which entitles a mortgagee exercising the power of sale to pass title to its purchaser free of the interest. Section 105 undoubtedly poses a problem for Mrs McKenna as registration of Structured Finance’s mortgage is notice of the mortgage against every subsequent claim to the registered proprietor’s estate. Section 105 states:
105 Transfer by mortgagee
Upon the registration of any transfer executed by a mortgagee for the purpose of [exercising a power of sale over any land], the estate or interest of the mortgagor therein expressed to be transferred shall pass to and vest in the purchaser, freed and discharged from all liability on account of the mortgage, or of any estate or interest except an estate or interest created by any instrument which has priority over the mortgage or which by reason of the consent of the mortgagee is binding on him.
[40] I agree with Ms Grant that the two exceptions under s 105 would not be applicable even if Mrs McKenna could show that she has the interest claimed in the caveat. In the case of the first exception, if the registered proprietors did somehow “appropriate the land” as security for payment of a debt that is due by them, there is no instrument that has created the interest claimed in the caveat. The 2009 agreement does not constitute an instrument that binds the registered proprietors and there is no evidence of any other instrument that could be relevant.
[41] In the case of the second exception, counsel for Mrs McKenna submits that for the purpose of s 137, an interest in the nature of an equitable lien is a sufficient interest and that clause 4(d) of the 2009 agreement effectively contains Structured Finance’s consent to the lien. Despite Mr Waalken’s contrary submission, I am unable to see anything in the 2009 agreement by which Structured Finance consents to be bound by the interest claimed in the caveat. The agreement does record an obligation to pay Mr McKenna a money sum (provided the proceeds of sale that
Structured Finance receives as mortgagee are sufficient in terms of the agreed formula and there has been no disentitlement). However the agreement does not record any consent to that sum or other security being used to secure an obligation of the registered proprietors to Mrs McKenna.
[42] Fourthly, even if Mrs McKenna’s caveat had relied on Mr McKenna’s promise to pass on monies that he may receive from Structured Finance when it receives sale proceeds in repayment of its mortgage (if he does in fact receive any monies) with Structured Finance’s concurrence in land as such an obligation would not be sufficient to support a finding of an equitable lien as Mrs McKenna claims. Mr McKenna’s obligation, as with his corresponding right to payment, would only arise when the purchase of the property has been settled and the registered proprietors’ estate in the land transferred to the purchaser. Mr McKenna’s promise could not therefore confer on Mrs McKenna an entitlement to the interest in land as
she claims.10 His promise at best merely confers an interest in proceeds that may be
received from the sale of the land.
[43] Mr Waalkins correctly submitted that an interest in sale proceeds can, in some circumstances, be an interest in land. However Mr McKenna’s promise to on-pay proceeds of sale to Mrs McKenna is wholly distinguishable from those limited instances where an interest in sale proceeds supports a caveat.11
[44] If Mrs McKenna has some basis on which to recover monies from Mr McKenna personally or from Structured Finance, then she may seek to recover them by ordinary action. Such right of recovery (if any right exists) does not provide
support for her caveat.
10 A right to payment of a sum of money out of the proceeds of sale of land should not in principle give rise to a caveatable interest in that land. See Castle Hill Run Ltd v NZI Finance Ltd [1985] 2
NZLR 104 at 108 – 109 and Guardian Trust and Executors Co of New Zealand Ltd v Hall [1938] NZLR 1020.
11 The case Beeby v Official Assignee of Pickering and Pickering [1953] NZLR 832 (SC), relied on by Mrs McKenna, is distinguishable as any reliance upon s 3 Real Property Limitation Act 1833 does not arise here.
Result
[45] For the reasons I have discussed, I conclude that Mrs McKenna has not established an arguable case to the interest claimed in the caveat. She has not established any basis for the equitable lien or charge claimed in the caveat over the registered proprietors’ estate in the Halsey Street property. Structured Finance is entitled to have the caveat removed. There is no case for an order removing the caveat on terms that require sale proceeds to be held in trust.
[46] I make an order that the caveat be removed.
[47] As costs follow the event under the statutory costs regime there will be an order for costs on a 2B basis plus disbursements as fixed by the Registrar.
Associate Judge Sargisson
0
0