Sun Developments Limited (in liq) v Finlayson HC Wellington Civ-2007-485-032
[2007] NZHC 1671
•26 February 2007
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2007-485-032
BETWEEN SUN DEVELOPMENTS LIMITED (IN LIQUIDATION)
Plaintiff
ANDCORAL ANN FINLAYSON, ROGER HOLMES MILLER AND CHARLES ROBERT JACKSON
Defendants
Hearing: 23 February 2007
Appearances: R. Gordon for Plaintiff
G.J. Mowbray for Defendants
Judgment: 26 February 2007
In accordance with r540(4) I direct the Registrar to endorse this judgment with a delivery time of 3.45pm on the 26th day of February 2007.
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
Introduction
[1] This is an application by Sun Developments Limited (in liquidation) (“Sun”)
pursuant to s143 Land Transfer Act that a caveat should not lapse.
[2] The caveat claims an interest over a property at 70 Regent Drive, Paraparaumu, which according to the title for this property (CT112250 Wellington Registry) is owned as to a half share by the defendants Ms Finlayson and Mr Miller and as to the other half share by the defendant Mr Jackson. The interest claimed in
the caveat is specified in the following way:
SUN DEVELOPMENTS LIMITED (IN LIQUIDATION) V FINLAYSON AND OTHERS HC WN CIV-2007-
485-032 26 February 2007
The abovenamed caveator (Sun) claims the beneficial interest of the registered proprietor, Coral Ann Finlayson, in the same land as cestui que trust of which the said Coral Ann Finlayson is trustee.
[3] The application is opposed by the defendants.
Background Facts
[4] The firstnamed defendant Coral Ann Finlayson (“Ms Finlayson”) was a director and shareholder of Sun.
[5] In the District Court at Porirua in a reserved decision of Judge J.M. Kelly dated 15 December 2006 on an application for summary judgment by Sun against Ms Finlayson, the Court held that:
(a) During a period from February to November 2001 Ms Finlayson wrongly applied for her own purposes at least $176,061.13 from Sun.
(b) That of these monies, $129,565.49 was on 1 November 2001 applied by her to repay in full a mortgage debt that she owed personally to the National Bank of New Zealand on her then property at 16 Watson Drive, Paraparaumu.
(c) That a further $29,595.64 of the misapplied monies were on 1
November 2001 paid directly into a separate ANZ bank account held by the trustees of the Coral Finlayson Family Trust.
[6] Shortly after the events described above occurred, Ms Finlayson sold the
Watson Drive property and entered into a joint purchase of a new property at 19
Holcombe Drive, Paraparaumu. The purchase price for this property I understand was $269,000.00 and Ms Finlayson applied at least $159,161.13 from both her equity in the Watson Drive property and the further $29,595.64 mentioned in paragraph [5](c) above towards the purchase.
[7] Unlike the Watson Drive property, which was owned solely by Ms Finlayson, ownership of the Holcombe Drive property was registered in the names of the then trustees of the Coral Finlayson Family Trust as to a 60% share, and the third-named defendant Mr Jackson as to a 40% share. As I understand the position, Mr Jackson was at that time, and still is, the de facto partner of Ms Finlayson.
[8] From a property sharing agreement which was entered into with respect to the Holcombe Drive property at the time of the purchase, it appears that Ms Finlayson and Mr Jackson agreed that he would assume sole responsibility for payment of the first mortgage debt of $120,000.00 secured over the property for its purchase.
[9] Subsequently, in about May 2004 Ms Finlayson through her family trust together with Mr Jackson purchased in equal shares a property at 7 Datum Way, Paraparaumu. The purchase price for this property was $378,000.00. It was fully funded by a mortgage to TEA Custodians (Bluestone) Limited which took security by way of mortgages over 7 Datum Way and over the equity in 19 Holcombe Drive to support the loan.
[10] Subsequently, on 9 February 2005 7 Datum Way was sold for $485,000.00.
[11] Then in about July 2005 70 Regent Drive was purchased by the Trust and Mr Jackson for a price of $423,500.00 utilising the proceeds from the sale of Datum Way. As I understand it, the mortgage to TEA Custodians (Bluestone) Limited previously over Datum Way was simply transferred to 70 Regent Drive for this purchase.
[12] Subsequently, TEA Custodians (Bluestone) Limited’s interest as mortgagee in the mortgage over 70 Regent Drive was transferred to TEA Custodians (Pacific) Limited.
[13] The 70 Regent Drive property, which is owned as to a 50% share by the trustees of the Coral Finlayson Family Trust and as to a 50% share by Mr Jackson personally has apparently been sold for $495,000.00 under an agreement for sale and purchase, although because of the presence of Sun’s caveat on the title, settlement under this agreement has not occurred and is overdue.
[14] Counsel inform me that an overdue settlement penalty of about $165.00 per day is being incurred with regard to the defendants’ default as vendors under this sale agreement.
Counsel’s Arguments and My Decision
[15] The general approach to applications under s143 and s145 Land Transfer Act
1952 was settled in Sims v Lowe [1988] 1 NZLR 656 where Somers J at page 660 said:
The caveator seeks to clog or fetter the proprietary interest of another. As a matter of principle, it seems right that he must justify the continued existence of his caveat. He will do that if he can show he has a reasonably arguable case for the interest he claims.
[16] The applicants have the burden of establishing a “reasonably arguable case” that they have a caveatable interest in the properties in question, and that the caveats should be sustained – Hinde McMorland & Sim “Land Law of New Zealand” Vol.1. Para 10.020. An order for removal of a caveat is not to be made unless it is patently clear that the caveat cannot be maintained either because there was no valid ground for lodging it, or that no such ground may exist now – Re Graham (1912) 14 GLR
806; New Zealand Limousin Cattle Breeders Society Inc v Robertson [1984] 1
NZLR 41 (CA).
[17] In Hinde McMorland & Sim “Land Law in New Zealand” Vol.1 Para
10.020(a), the authors state:
It is clear that on an application under sections 143, 145 or 145A the Court ought not finally to determine the rights of the parties unless both parties consent or unless the facts are not in dispute and the law has been fully argued.
[18] Somers J in the Court of Appeal in New Zealand Limousin Cattle Breeders
Society Inc v Robertson at page 43 said:
The proceedings upon such an application (under s.145) are quite unsuitable to determine the rights of the parties.
[19] It has been argued that the test to be applied under s.145 provides the Court with a residual discretion whether to allow the caveat to lapse or not. The initial onus rests on the caveator to establish a reasonably arguable case, but a balance of convenience test has been held to be appropriate – see Pacific Homes Limited (in receivership) v Consolidated Joinery Limited [1996] 2 NZLR 652 (CA). In Pacific
Homes Limited Blanchard J in delivering the judgment of the Court of Appeal said at page 656:
…The Court retains a discretion to make an order removing the caveat, though it will be exercised cautiously. An order will be made for removal only where the Court is completely satisfied that the legitimate interests of the caveator will not thereby be prejudiced.
[20] Thus, there is a reasonable argument from Pacific Homes Limited that even if a caveator satisfies the Court that she/he has an arguable case, the Court retains a discretion to make an order removing the caveat.
[21] Before me, the case advanced for Sun was that it has an equitable proprietary interest in the property at 70 Regent Drive which properly traces through the equity previously held in 19 Holcombe Drive, and thereby this provides it with a caveatable interest in both properties.
[22] Counsel for the defendants noted that the decision of Her Honour Judge J.M. Kelly in the District Court at Porirua giving summary judgment to Sun against Ms Finlayson for $176,061.13, plus interest and costs, is effectively undisputed by Ms Finlayson. She has not appealed this decision.
[23] Further, it does appear from the affidavit of Ms Finlayson sworn on 9
February 2007 (paragraph 12) that she accepts the purchase of 19 Holcombe Drive was funded in part from the sale of 16 Watson Drive. Further, there seems little dispute that Ms Finlayson earlier applied $129,565.49 of the monies taken from Sun for repayment of her National Bank mortgage over 16 Watson Drive, and that this portion of the Watson Drive equity, together with the $29,595.64 funds also taken from Sun noted at paragraph [5](c) as I have noted above were applied to fund the purchase of 19 Holcombe Drive.
[24] For the purposes of the present caveat application, which to succeed the parties accept requires Sun simply to meet the reasonably low threshold of establishing a reasonably arguable case, Sun’s argument that its claim to an equitable proprietary interest in the nature of an institutional constructive trust in the 16
Watson Drive property could clearly be traced through to 19 Holcombe Drive and thence to 70 Regent Drive on the face of it meets this test.
[25] First, I am satisfied here that Sun’s reliance on an institutional constructive trust arising upon the misapplication of Sun’s moneys by Ms Finlayson and their use by her in the Watson Drive and subsequent properties to bring the trust into being, is reasonably arguable at the very least here – Fortex Group Ltd (in receivership and liquidation) v MacIntosh [1998] 3 NZLR 171 and Metalplas Engineering v Ellis & Coker (HC AK, 21 August 2002, M293/IM02, Master Lang).
[26] And secondly, the endeavour by Mr Mowbray for the defendants to argue that in any event, at best here Sun might be able to claim some possible remedy in unjust enrichment, but that this was not a case where tracing applied, in my view misses the mark. As I see it, this is a clear case where tracing is appropriate. What is to be traced is the equity in the 16 Watson Drive property created by the misapplication of funds wrongly taken by Ms Finlayson from Sun – see Equity and Trusts in New Zealand, A.S. Butler, para 32.1.2.
[27] In my view, the present case is a clear example of the tracing and apportionment of trust property of the type considered and ruled on by the House of Lords in Foskett v McKeown (2005) 3 AllER 97 in the following way:
Where a trustee wrongfully used trust money to provide part of the cost of acquiring an asset, the beneficiary was entitled at his option to either claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. In such case of mixed substitution, it does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset. In every case, the value formerly inherent in the trust property had become located within the value inherent in the new asset.
(emphasis added)
[28] As I see it, the Foskett-type situation clearly applies here. That said, I am satisfied that the Watson Drive equity of some $159,161.13 having been applied indisputedly to the purchase of 19 Holcombe Drive, was then effectively used for the purchase of 7 Datum Way. This occurred because the Holcombe Drive equity was
used as security for the mortgage to TEA Custodians (Bluestone) Limited which was taken over both 19 Holcombe Drive and 7 Datum Way to 100% fund the purchase of
7 Datum Way. And, as I have noted, that purchase was registered in the names of the trustees of the Coral Finlayson Trust as to 50% and Mr Jackson as to 50%.
[29] Once 7 Datum Way was purchased, some nine months later it was sold, and the sale proceeds were then used for the purchase of 70 Regent Drive. Effectively, it seems that the mortgagee over 7 Datum Way, TEA Custodians (Bluestone) Limited, accepted that the sale proceeds could be used for the purchase of 70 Regent Drive. It required its TEA mortgage over Datum Way simply to be transferred to Regent Drive, and this occurred.
[30] I am satisfied, therefore, that for the purposes of the present application, it is appropriate to trace the original equity from 16 Watson Drive which had passed to
19 Holcombe Drive and then 7 Datum Way onto this purchase at 70 Regent Drive.
[31] That said, I find that the interest of the Coral Finlayson Family Trust in 70
Regent Drive, being a 50% share, and also the interest of Mr Jackson to the other
50% share must be seen as subject to Sun’s equitable proprietary interest arising from the originally mis-applied funds.
[32] Given that, an issue does arise, however, over the current mortgage to TEA Custodians (Pacific) Limited which is registered against the title to the 70 Regent Drive property. As I have noted above, this mortgage was effectively transferred from 7 Datum Way (following the sale of that property). It is in turn collaterally secured against 19 Holcombe Drive. As I have noted above, it is the existence of Ms Finlayson’s or her Trust’s original equity in 19 Holcombe Drive which enabled not only Ms Finlayson and the trustees of her Trust, but also her de facto partner Mr Jackson to fund the purchase of 7 Datum Way and ultimately 70 Regent Drive. I am satisfied that throughout this aspect was well known to all parties, including Mr Jackson as Ms Finlayson’s de facto partner. There has certainly been no evidence placed before the Court to indicate in any way that Mr Jackson was unaware of this state of affairs.
[33] That said, I am satisfied that Sun here has done sufficient to establish a reasonably arguable case to the caveatable interest it has claimed in the property at
70 Regent Drive. As I have noted, this caveatable interest is claimed against the beneficial interest in the property of Ms Finlayson through the registered proprietors. In my view, Sun has an equitable proprietary interest in the whole equity in the Regent Drive property. That equitable interest was created by the proven application of monies misappropriated by Ms Finlayson through a chain of property purchases to the ultimate equity in Regent Drive. The full District Court summary judgment amount representing the funds applied to the properties plus interest and the Court costs awarded are effectively secured by or the subject of the caveat in question.
[34] And, as I see it, I am supported in this conclusion to some extent by the decision of the Court of Appeal in Zhong v Wang (5 September 2006, CA282/05) where in not entirely dissimilar circumstances, the Court of Appeal found that a constructive trust existed such as would justify the continuation of the caveat in question there.
[35] I turn now to consider a final issue raised in this matter. This relates to the residual discretion the Court has to allow a caveat to lapse, even if the Court accepts, as I do here, that the applicant has a reasonably arguable case for the interest claimed.
[36] To exercise this residual discretion and make an order for removal of a caveat, the Court is required to be completely satisfied that the legitimate interests of the caveator will not thereby be prejudiced – Pacific Homes (in receivership) v Consolidated Joinery Limited [1996] 2 NZLR 652. The discretion is also always to be exercised on a cautious basis – Stewart v Kaipara Consultants Limited [2003] NZLR 55 (CA) and Pacific Homes.
[37] In the present case, as I have noted, the parties accept that an arms length agreement for the sale of the property at 70 Regent Drive has been entered into and is overdue for settlement. Apparently a penalty for this delay of approximately
$165.00 per day is being incurred by the defendants as vendors. The presence of the caveat, of course, prevents settlement of the sale. That sale is at a price of
$495,000.00 and as I understand it, after repayment of the existing TEA Custodians mortgage would leave a total equity of over $240,000.00.
[38] Before me, counsel for Sun, Mr Gordon, noted that Sun’s concern here was simply to obtain payment of the amount awarded to it in the District Court summary judgment. This amount including interest and costs apparently totals $205,721.00.
[39] With this in mind, in the present case in my view, the appropriate course is for the discretion of the Court to be exercised to order removal of the caveat. In saying this, however, as I see the position, it is appropriate for the Court in exercising its residual discretion, to make that order subject to certain conditions – see Hinde McMorland & Sim Land Law in New Zealand, para 10.020(g) and BP Oil New Zealand Limited v Van Beers Motors Limited [1992] 1 NZLR 211.
[40] In the past, the Courts have often made orders to remove caveats subject to conditions. These have included conditions to the effect that a registered proprietor is to pay a sum of money sometimes into Court – Skyline Finance Ltd v Capitalcorp Properties (HC Christchurch, CP1/88, 3 February 1988, Tipping J), Turton v Carter Holt Harvey Ltd (HC Christchurch, 4 August 1997, M443/97, Master Venning), and Dixon v Laurie McGoverne Ltd (HC Christchurch, 6 October 2000, M254/00, Young J).
[41] For the reasons I have outlined above, I am satisfied that this is a case where, even though the plaintiff caveator has established an arguable case, the Court’s residual discretion should be exercised in favour of the defendant to remove the caveat upon the basis that the defendant pays to Sun that sum of money which, from a commercial viewpoint, the caveat effectively secures.
Decision
[42] Sun’s application which was in essence aimed at securing payment of the company’s misapplied moneys pursuant to the District Court judgment has effectively succeeded.
[43] That said, the following orders are now made:
a) Caveat no. 7029034.1 registered over the title to the property at 70
Regent Drive, Paraparaumu being Certificate of Title 112250 shall lapse consequent upon the contemporaneous payment into the Trust Account of Buddle Findlay, the solicitors to the plaintiff, of the sum of $205,721.00 for the benefit of the plaintiff.
b)If it shall be necessary to do so, upon such payment being made and confirmed (or upon appropriate written confirmation to the Court by counsel for the plaintiff being made in anticipation of this occurring), the Registrar of this Court shall certify accordingly to the District Land Registrar at Wellington and the said caveat shall thereupon lapse.
c) Leave is reserved to either the plaintiff or the defendants to apply further on 48 hours notice should there be any further step required to perfect this judgment or if further assistance of the Court is required.
d)As to costs, the plaintiff has effectively succeeded with this application and is entitled to an award of costs in the usual way. I am satisfied that scale costs are appropriate here. Costs are therefore awarded to the plaintiff on a 2B basis, together with disbursements as
approved by the Registrar.
Associate Judge D.I. Gendall
Solicitors:
Buddle Findlay, Wellington for Plaintiff
Maude & Miller, Porirua for Defendants
0
0
0