The Vintage Aviator Ltd v DeMarco

[2021] NZHC 3096

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2017-485-001027

[2021] NZHC 3096

BETWEEN

THE VINTAGE AVIATOR LIMITED

First Plaintiff

PETER ROBERT JACKSON, FRANCES ROSEMARY WALSH and

PHILIPPA JANE BOYENS (as trustees of Film Property Trust)
Second Plaintiff

AND

EUGENE JOHN DEMARCO including as trustee of the Airtight Trust (a bankrupt) First Defendant

OLD STICK & RUDDER CO LIMITED

Second Defendant (in liquidation)

Hearing:

29–30 July 2021

Appearances:

B Scott, T Smith and J Henderson for the Plaintiffs

G Neil and R Hindriksen for the Official Assignee as assignee and liquidator of the First and Second Defendants)

Judgment:

18 November 2021

JUDGMENT OF GRICE J

This judgment was delivered by me on Thursday 18 November 2021 at 2.30 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date:…………………………

THE VINTAGE AVIATOR LTD v DEMARCO [2021] NZHC 3096 [18 November 2021]

Table of Contents

Introduction  [1]

Procedural background  [7]
The trial and convictions  [14]
Amendment to statement of claim  [15]
Position of the Official Assignee  [25]
Background to first to fourth causes of action  [28]
Repayment of the FPT loan  [43]

The Warbirds fraud  [54]

The evidence  [59]

The Warbirds sales  [64]

Transfer of funds and aircraft  [75]

Discovery of fraud  [79]

Breach of fiduciary duty and/or knowing receipt (first and second causes of action)     [82]
Did the relationship between Mr DeMarco and TVAL give rise to fiduciary duties?     [85]

Findings on fiduciary relationship  [95]

OSRC and TVAL  [108]

A trust over the proceeds of sale of the Corsair?  [124]

Tracing and subrogation  [126]
Third and fourth causes of action  [126]
Analysis: sale of the assets of the ATT to OSRC  [137]

Analysis: effect of sale of assets on the FPT security over the Corsair and

P-40  [145]

Tracing (third cause of action)  [152]

Subrogation to the security interests (fourth cause of action)  [171]

Subrogation: what is covered by the equitable charge?  [183]

Analysis  [197]

Quantum – causes of action one, two and four  [222] Claim for interest from 31 March 2021  [235] Summary and relief: first, second and fourth causes of action  [246]

Fifth cause of action: Claim by TVAL against Mr DeMarco – Hisso parts

buy-back arrangement  [247]

The buy-back agreement  [247]
The Employment Relations Act  [259]
The Limitation Act 2010  [263]

Sixth, ninth, and tenth causes of action: personal Cessna  [273]

Ninth cause of action – freight of personal Cessna  [297]

Tenth cause of action – packing of personal Cessna  [311]

Seventh cause of action: Buffalo Steam Roller trade  [319]

The value of the parts  [333]

Eleventh cause of action: Steam Roller trade commission (to Mr DeMarco’s mother)   [346]

Thirteenth cause of action: sale of TVAL items to Mr Saint-Andre               [353]
Fourteenth cause of action: unauthorised conduct in relation to WWI

Aviation Heritage Trust  [367]

Shipping costs  [382]

TVAL agreements  [388]

Wulff Oral Operating Agreement  [396]

Liability to Mr Wulff for crashed Albatros  [398]
The cause of the crash  [404]
The settlement with Mr Wulff  [409]
Loss caused by Mr DeMarco’s breach of instructions  [417]

Costs of freight  [418]
Cost of replacement Albatros  [426]

Additional cost of delivery to the UK  [432] Fifteenth and sixteenth causes of action: tours  [438] Fifteenth cause of action – Hood Aerodrome Tours  [439]

Tour administration  [443]

TVAL’s understanding with Mr DeMarco  [445]

Failure to account to TVAL  [453]

Sixteenth cause of action: secret tour of Kemp Street premises  [465] Eighteenth cause of action: TVAL petrol  [473] Fuel at Hood Aerodrome  [475]

Discrepancy in fuel usage  [476]

Mr DeMarco’s responsibility for the fuel use  [483]

Quantum claimed  [487]

Conclusion  [491]

Costs[494]

Leave  [497]

Attachment 1 – summary of claims: 5th to 7th, 9th to 18th causes of action     [498]

Introduction

[1]    Mr DeMarco, a United States citizen resident in New Zealand, has a passion for vintage aircraft. He was employed for many years as the production manager of The Vintage Aviator Ltd (TVAL), a company established by Sir Peter Jackson and Dame Fran Walsh to restore and to manufacture reproductions and replicas of World War I aircraft. Mr DeMarco was given a large degree of autonomy by his employer.

[2]    Mr DeMarco sold three of his employer’s aircraft, retaining the proceeds of sale. As a result of that Mr DeMarco was convicted on charges of theft by a person in a special relationship  following  a  jury  trial  in  the  High Court  at Wellington  on 5 December 2019.1

[3]    Mr DeMarco received a cumulative sentence of two years and five months’ imprisonment.2

[4]    The plaintiffs initially filed proceedings relying on the factual matters which had given rise to the convictions. Subsequently, having obtained the records of investigation from the Serious Fraud Office (SFO), further claims were lodged, and the pleadings amended. The further claims allege that Mr DeMarco had sold TVAL’s property, including aircraft parts and other items, and had failed to account to TVAL for the proceeds of sale. He also used his employer’s property for gain without its authority and exposed his employer to liability, again, without authority and against its express instructions.

[5]    Mr DeMarco was also charged in relation to his sale of an aircraft (P-40)3 to Mr Wulff. The dealings that Mr DeMarco had with Mr Wulff concerning the P-40 also involved a Corsair vintage aircraft. These aircraft were subject to security charges in favour of the Film Property Trust (the FPT). That is the second plaintiff. It is a trust also associated with Sir Peter Jackson and Dame Fran Walsh.

1      Mr DeMarco was, in the same trial, convicted on other charges of obtaining by deception involving a sale of an aircraft to Mr Wulff.

2      R v DeMarco [2019] NZHC 3209 [“Sentencing Decision”] at [51].

3      A Curtiss P-40E Kittyhawk aircraft with nationality and registration mark combination ZK-RMH and serial number 41-25158 (the P-40).

[6]    Mr Wulff also brought civil proceedings which were to be heard at the same time as the present claims. However, due to Mr DeMarco’s adjudication in bankruptcy and liquidation of the second defendant immediately before this trial was due to commence, the proceedings involving Mr Wulff have been dealt with separately.4

Procedural background

[7]    Both defendants were legally represented by Mr Fraser up until the adjudication and liquidation. There had been a number of interlocutory applications including a successful application striking out the defendants’ counterclaim and parts of the statement of defence,5 as well as a successful debarring application and unsuccessful application by the defendants for stay of the interlocutory determinations and leave to appeal.

[8]    Mr DeMarco was adjudicated bankrupt on 14 July 2021 on an unrelated matter.6 Mr DeMarco and the second defendant, of which Mr DeMarco was the sole shareholder, had earlier been debarred from defending these proceedings, in particular, by calling witnesses and cross-examining. This was due to their failure to provide adequate discovery and subsequent noncompliance with an “unless” order. On the day of Mr DeMarco’s adjudication, an application by the defendants to stay these proceedings pending appeals against the debarring order was heard and the decision reserved.7 In the course of that oral argument Mr DeMarco also sought a stay pending the determination of appeals against his convictions (filed substantially out of time) and against orders striking out Mr DeMarco’s counterclaim and parts of the statement of defence.8

[9]The applications for stay were dismissed.9

4      Wulff v DeMarco CIV-2018-485-417.

5      The Vintage Aviator Ltd v DeMarco [2021] NZHC 847 [“The Strike Out Judgment”].

6      Re DeMarco, ex parte Anderson [2021] NZHC 1757. This was unsuccessfully appealed: DeMarco v Anderson [2021] NZCA 476.

7      The Vintage Aviator Ltd v DeMarco [2021] NZHC 1476 [“The Debarring Judgment”].

8      The Strike Out Judgment, above n 5.

9      The Vintage Aviator Ltd v DeMarco [2021] NZHC 2467.

[10]   Leave to continue the proceedings following the bankruptcy of Mr DeMarco was granted.10 The second defendant was put into liquidation on 27 July 2021. The Official Assignee, as liquidator, agreed to the continuation of the causes of action against the company.11

[11]   The order debarring the defendants from defending the claim for their failure to comply with discovery obligations and the unless order meant the defendants were entitled to appear and make submissions but not to call evidence or cross-examine the plaintiffs’ witnesses.

[12]   The plaintiffs’ evidence was filed in affidavit form with the witnesses available by audio visual link if required for further questions. Counsel appointed by the Official Assignee appeared and made submissions on behalf of the first and second defendants.

[13]   The key issues in contention at the hearing were legal. They focused on whether there was validity of and/or extent of, a charge or a proprietary interest in favour of the plaintiffs over a Corsair vintage aircraft owned by one or other of the defendants. As events transpired, the effect of such a charge would be to take that property out of the defendants’ bankrupt estate or the liquidation and so diminish the amount available for distribution to creditors in the bankruptcy/liquidation.

The trial and convictions

[14]   Mr DeMarco  was   sentenced   on   the   theft   and   deception   charges   on 5 December 2019. Clark J’s sentencing notes summarised the relevant offending against TVAL as follows:12

Overview of offending

[4]        You are a United States citizen, resident in New Zealand. You have a passion for piloting vintage aircraft. For many years you were employed as the Production Manager of The Vintage Aviator Ltd, a company established by Sir Peter Jackson and Ms Fran Walsh to manufacture reproduction and

10     Insolvency Act 2006, s 76(2). The Vintage Aviator Ltd v DeMarco [2021] NZHC 1911 [“Judgment granting leave to continue proceedings”].

11     Pursuant to s 248(1)(c) of the Companies Act 1993.

12     Sentencing Decision, above n 2, at [4]–[10] (footnotes omitted).

replica World War I aircraft. You managed the production of aircraft, test flying and arranging sales. As a senior member of staff and trusted employee, you enjoyed a large degree of autonomy.

[5]        The first set of offending relates to the sale of three aircraft owned by Vintage Aviator. In April 2016, you were contacted at Vintage Aviator  by  Mr Reg Field who  was  inquiring  about  purchasing  two  aircraft  from  The Vintage Aviator to donate to New Zealand Warbirds Association (Warbirds).

[6]        As matters progressed, it was decided that Mr Field would instead donate the funds to Warbirds and Warbirds, using Mr Field’s funds along with other donations, would purchase three aircraft from The Vintage Aviator.

[7]The total price you quoted for the three aircraft was just over

$2.1 million. This was $622,000 more than the price The Vintage Aviator would have typically charged for these aircraft. For convenience, when I refer to the price that The Vintage Aviator would typically charge for its planes, I will use the term “list price”. Believing it was purchasing the three planes from The Vintage Aviator, Warbirds agreed to pay the $2.1 million for the aircraft.

[8]        You told Mr Corke, the CEO of The Vintage Aviator, that you were charging more than the list price, because Mr Field was a friend of yours and he wanted to pay extra to assist you financially and if he could not pay more than the list price he would not go through with the transaction.

[9]        None of this was true. Mr Field was not a friend. He had never met you prior to travelling to The Vintage Aviator to select the aircraft. And he believed he was paying The Vintage Aviator’s asking price. You invoiced Warbirds for the aircraft and directed it to pay the funds into the account of a company you controlled and owned, The Old Stick and Rudder.

[10]      Between 1 July 2016 and 21 July 2017, Warbirds and Mr Parker transferred $2.1 million into your company’s bank account. In November 2016, you arranged for the BE2 aircraft to be collected by Warbirds and taken to Auckland without the knowledge or consent of The Vintage Aviator. None of the funds transferred  into  your  company’s  account  was  on-paid  to  The Vintage Aviator.

…

Amendment to statement of claim

[15]   As a result of information obtained in the investigation by the SFO and further enquiries by the plaintiffs, they sought leave to amend their statement of claim by memorandum of 6 June 2021. On 2 July 2021 the amendment application was raised

at a pre-trial conference.13 The plaintiffs noted that the amendments fell into the following categories:

(a)Two minor technical changes to the first two causes of action to plead a knowing receipt claim against the Old Stick & Rudder Co Ltd, on the same factual basis as the existing pleading.

(b)An amendment to the seventh cause of action to align the aircraft parts that TVAL alleged were wrongfully put in a trade container with TVAL’s evidence.

(c)An amendment to the amounts claimed for the parts and aircraft materials subject to the seventh, 13th and 14th causes of action to align with the TVAL valuation evidence.

[16]   The application for amendment was to be determined at the commencement of the trial.14 The Official Assignee for the defendants indicated he did not oppose the amendments.

[17]   The considerations applying to an application for leave were summarised by the plaintiffs as follows:15

…

134.1the merits of the proposed amended pleading;

134.2whether irreparable damage would be suffered by the applicant;

134.3the timing of the application and magnitude of, and reasons for, delay;

13 The Vintage Aviator Ltd v DeMarco HC Te Whanganui-a-Tara | Wellington CIV-2017-485-001027 (re setting aside subpoenas and other matters), 2 July 2021.

14 At [4].

15 Referring to Monster Energy Co v Ox Group Global Pty Ltd [2016] NZHC 2124 at [28]; citing Elders Pastoral v Marr (1987) 2 PRNZ 383 (CA) at 385; Fordham v Xcentrix Communications Ltd (1996) 9 PRNZ 682 (HC); Tewsley Street Properties Ltd v Wright Stephenson Properties Ltd (1993) 7 PRNZ 58 (HC); Body Corporate 325261 v McDonough [2014] NZHC 1821 at [12]; and Clode v Sullivan [2016] NZHC 529 at [15]. See also Oraka Terchnologies Ltd v Geostel Vision Ltd [2015] NZHC 991 at [17]; and Lyttelton Port Co Ltd v AON New Zealand [2019] NZHC 726 at [23].

134.4the risk of significant prejudice to other parties;

134.5the effect on public resources reflected in the impact on case management and the timetable to trial;

134.6the importance of the principle that the parties should have every opportunity to ensure that the real controversy goes to trial so as to secure the just determination of the proceeding;16 and

134.7the overarching requirement is to exercise the discretion in the interests of justice.17

135 Overall, the requirement for leave reflects the purpose of the close of pleadings date: to ensure that pleadings and interlocutory matters are completed so that parties can concentrate on preparing for trial.18

[18]   In the proposed amendment to add a plea of knowing receipt to the second defendant’s claim,19 it is alleged that Mr DeMarco’s knowledge of the fraud is attributable to the second defendant as Mr DeMarco was its sole shareholder and director. The plaintiff says the second defendant is liable for knowing receipt of the funds for the Warbirds fraud if it is not liable as agent of TVAL. The amendment is sought in case the Court is not satisfied that the second defendant acted as TVAL’s agent in order to ensure that the conduit for Mr DeMarco’s fraudulent actions is held liable.

[19]   The further amendments sought were based on the facts upon which the criminal convictions had been entered. Those facts would establish the constituent elements of a claim for knowing receipt which are:

(a)the disposal of money or property in breach of fiduciary duty or breach of trust;

(b)the beneficial receipt of that money or property; and

(c)knowledge on the part of the recipient that payment to it was in consequence of a breach of fiduciary duty, or was in breach of trust.

16     Thornton Hall Manufacturing Ltd v Shanton Apparel Ltd [1989] 3 NZLR 304 (CA) at 309; and

Clode v Sullivan, above n 15, at [16].

17     Chilcott v Goss [1995] 1 NZLR 263 (CA); and Clode v Sullivan, above n 15, at [16].

18     RHH Ltd v Anderson (No 3) [2018] NZHC 2045 at [9].

19     See above at [15](a).

[20]   The amendments to the seventh, 13th and 14th causes of action were designed to reflect the details of the allegedly misappropriated parts and materials and their value. These are not significant changes.

[21]   The proposed amendments do not raise the need for any further evidence, nor did they affect the conduct of the hearing. The evidence had been served and the claims were argued on the basis of the amended pleading.

[22]   Notice of the amendments was given some months ago. The Official Assignee has raised no objection at the hearing. Nor did he seek to file an amended statement of defence as a consequence. There is no apparent prejudice caused by allowing the amendments. In my view it is in the interests of justice to grant leave for the proposed amendments.

[23]   Accordingly, leave is granted for the filing of the fifth amended statement of claim containing the proposed amendments.

[24]   The plaintiffs do not pursue the eighth, 12th and 17th causes of action. Leave to discontinue those causes of action is granted.

Position of the Official Assignee

[25]   The Official Assignee’s position,  as  administrator  in  the  bankruptcy  of Mr DeMarco and as liquidator of OSRC, was that while he accepted some of the claims made by TVAL in relation to the first, second and fourth causes of action, he contested the third cause of  action.  As  to  the  fourth  cause  of  action,  the  Official Assignee denied that any subrogated equitable charge sought by the plaintiffs could be for more than $720,000. He also disputed the terms said by the plaintiffs to be incorporated into that equitable charge.

[26]   The Official Assignee confined his submissions to the matters he contested in relation to the first to fourth causes of action. He abided the decision of the Court and took no part in the argument in relation to the fifth to 18th causes of action. The defendants had filed statements of defence and a written opening before the

involvement of the Official Assignee. I refer to matters raised in those, where relevant, in the course of my judgment.

[27]   I first deal with the contested first to fourth causes of action before moving onto the fifth to 18th causes of action (excluding the eighth, 12th and 17th causes of action).

Background to first to fourth causes of action

[28]   The current shareholders of TVAL are  Sir  Peter  Jackson,  his  partner  Dame Fran Walsh,  and  business  partner,  Philippa Boyens.   The   directors   are Sir Peter Jackson and Dame Fran Walsh.

[29]   Mr DeMarco was an experienced engineer and pilot of World War I aircraft. These aircraft were an interest of Sir Peter Jackson’s. This interest led to the establishment of TVAL and its decision to employ Mr DeMarco. He was one of TVAL’s first employees and assisted in the growth of the business. For all intents and purposes, he was in control of TVAL’s day-to-day operations. However, he was not employed as a Chief Executive apparently due to his having some earlier convictions in   the   United States.     Mr Corke   was   the   Chief Executive.     Nevertheless,  Sir Peter Jackson said Mr DeMarco had the trust and confidence of him and the directors of TVAL.

[30]   Mr DeMarco had met Sir Peter Jackson in 2001. Mr DeMarco had extensive contacts in the vintage aircraft business. As well as working in the construction and repair of vintage aircraft, he traded in vintage aircraft and parts, buying and selling them, including on behalf of TVAL.

[31]   The second plaintiff, the Film Property Trust (the FPT), is a trust of which  Sir Peter Jackson and Dame Fran Walsh are the current trustees. It is involved in this proceeding because it made a secured loan to a vintage aircraft owning trust, the Airtight Trust (ATT), which was in financial trouble in 2011. Mr DeMarco had brought it to Sir Peter Jackson’s attention. The security for that loan was a Corsair vintage aircraft and a P-40 vintage plane owned by the ATT. The P-40 was sold, while subject to the security charge, by Mr DeMarco to Mr Wulff without the consent of the

FPT. The Corsair was transferred to the second defendant in 2012 without the consent of the FPT.

[32]   The loan was finally repaid, and the security discharged in 2016. Subsequently TVAL discovered that part of the money to repay the FPT loan had been obtained by Mr DeMarco from funds wrongly appropriated from the payments he had received on the sale of TVAL’s aircraft to the Warbirds’ interests.20

[33]   Mr DeMarco’s interest in the ATT had come about because of his involvement with Mr James Slade. Mr Slade was a trustee of the ATT, which had been established by trust deed dated 30 March 2004. Mr Slade and three others were originally named as the four trustees. Mr Slade was the primary beneficiary. He also held the power of appointment and removal of trustees.

[34]   The ATT had a hangar at Hood Aerodrome in which TVAL stored a number of its vintage aircraft. When the ATT went into financial difficulties, to avoid the risk the hangar would not be available to store the aircraft, the FPT offered to purchase the hangar for $650,000 in 2011. This left a shortfall required in order for the ATT to pay its financier Pacific Dawn Ltd (PDL) of around $600,000. The FPT lent the ATT

$607,000 to cover the outstanding liability and to discharge the PDL loan together with a further US $9,000 to help ATT pay other outstanding liabilities such as insurance and Civil Aviation Association practicing fees. The security for the loan was the Corsair and P-40, then owned by the ATT.

[35]   Mr Corke was the Chief Executive of TVAL. At the time he was a partner in  a large accountancy firm. He was not on the TVAL premises on a full-time basis and largely left the day-to-day operations to Mr DeMarco.

[36]   Mr Corke said that the amount required for the ATT to settle the PDL loan as at 5 December 2011 was a total of $1,250,109.23. On 5 December 2011 the FPT (through its trustees) and the ATT entered into a term loan agreement and a specific security deed in respect of the loan for the balance owing after purchase by the FPT of

20 See above at [14].

the hangar. The security deed effected the security over the Corsair aircraft,21 and the P-40.

[37]   In addition to the security interest in the aircraft the ATT provided negative undertakings to the FPT, agreeing that, except with the prior written approval of the FPT it would not dispose of the secured property or allow it to be charged or to deteriorate. The terms were set out in the term loan agreement and specific security deed. The amount secured extended to interest, costs of recovery if incurred, and any amount that the secured creditor could not recover due to inability to recover secured money. The latter is referred to as the “irrecoverability” clause.

[38]   According to the loan terms, the ATT trustees, Messrs Slade and DeMarco had full and unlimited personal liability for the repayment of the monies owing to the FPT and for compliance with all obligations of the contract.

[39]   After the loan money was advanced, the ATT sold its assets. The relevant ATT trustee minute records that its assets were to be sold to the second defendant, Old Stick & Rudder Co Ltd (OSRC), for US $500,000. Mr DeMarco also signed an undated sale and purchase agreement for the sale by the ATT of the Corsair and the P-40.

[40]   An email discovered, which on its face is from the Inland Revenue Department to “Paul Dodd”, whose role is unclear, advises that the ATT “was ceased as at 31 March 2021”. There was no minute or resolution of the trustees produced or discovered recording the winding up of the trust, nor any evidence of final accounts or other documentation to confirm that the ATT was wound up.

[41]   Unbeknownst  to  the   FPT,   OSRC   entered   into   an   agreement   with  Mr Oliver Wulff. Mr Wulff claims to have acquired 500 of the 1,000 issued shares in OSRC from Mr DeMarco, as well as ownership of the P-40, for US $500,000. That transaction is the subject of proceedings brought by Mr Wulff scheduled to be heard

21     A Chance Vought Goodyear GF-1D Corsair aircraft with nationality and registration mark combination ZK-COR and serial number 32823 (the Corsair).

following this hearing.22 The US  $500,000  was  paid  by Mr Wulff  to  OSRC  on  20 March 2012. The plaintiffs make no claim on the P-40. Their view is that it is now owned by Mr Wulff. The plaintiffs have waived any rights to the P-40.23 The  Official Assignee considers that Mr Wulff now either has the legal and beneficial ownership of the P-40 or OSRC holds it on a bare trust for him.

[42]   The Official Assignee takes the view that Mr DeMarco now owns the Corsair. To the extent that OSRC  holds  legal  title  to  it,  it  does  so  on  a  bare  trust  for Mr DeMarco.

Repayment of the FPT loan

[43]   The FPT loan to the ATT was not repaid in September 2012 when it was due. The FPT then became entitled to the repayment of the principal sums, together with interest at the penalty rate of interest of 16 per cent per annum running from the interest commencement date of December 2011 (day unspecified).

[44]   By 2015 the FPT loan was still not repaid. The FPT was anxious it be repaid and Mr Corke and Mr Stephens,  the  FPT’s  lawyers,  were  attempting  to  assist  Mr DeMarco to obtain finance from the ANZ to  repay the FPT loan.   In the end   Mr DeMarco did not accept the ANZ loan. The ANZ had offered “tide over” refinancing  (involving  Mr DeMarco’s  existing  home  mortgage)  of  $560,000.  Mr DeMarco accepted a loan offer from the BNZ and used those funds to pay part of the FPT loan on 1 July 2016.

[45]   As it turned out, the other funds used by Mr DeMarco to repay the FPT loan amounted to $720,000 derived from the proceeds of sale of the three TVAL aircraft to Mr Field and the Warbirds’ interests in a transaction referred to by the plaintiffs as “the Warbirds fraud”. The TVAL aircraft that Mr DeMarco sold were:

22     Wulff v DeMarco CIV-2018-485-417.  The Wulff proceedings were to be heard at the same time as these proceedings, although the proceedings were not consolidated, they have been managed together. However, when the Official Assignee took over the conduct of the proceedings, negotiations with the separate plaintiffs were undertaken resulting in the matters being heard separately.

23 In a memorandum dated 11 August 2021.

(a)a BE2;

(b)a TVAL Albatros; and

(c)a Sopwith Pup.

[46]   Mr DeMarco had entered agreements to sell those three aircraft (two of which were yet to be built) on behalf of TVAL. TVAL had signed off on the prices to be charged for those types of aircraft. TVAL did not know that Mr DeMarco had inflated the sale price to be paid by the purchaser in the Warbirds fraud. In the end OSRC was paid a total of $2,105,879 by Warbirds toward the price of the planes. This was the full purchase  price  for  the  BE2,  85 per cent  of  the  purchase  price  of  the  TVAL Albatros, and $200,000 for the purchase price of the Sopwith Pup. None of that money was paid to TVAL as it should have been. After TVAL had discovered the transaction, Mr DeMarco/OSRC refunded the prospective purchaser (referred to as NZ Warbirds) the money it had paid toward the Albatros and Sopwith Pup between October 2017 and July 2018. The TVAL Albatros and Sopwith Pup were retained by TVAL. However, Mr DeMarco/OSRC retained the funds from the sale of the BE2, which remained with Warbirds.

[47]   The plaintiffs provided evidence from Mr David Osborn, a forensic accountant, who had reviewed the documents. He said that:

(a)On 1 July 2016, the FPT received $1,104,114.51 in repayment of the FPT Loan.

(b)On 1 July 2016, the day Mr DeMarco and/or OSRC received

$1,765,042.00 from NZ Warbirds for two of the three TVAL aircraft, Mr DeMarco paid $720,000 (via his lawyers) of that which was combined with other monies to repay his indebtedness to the FPT.

(c)The source of the $720,000 (the diverted funds) was the money that Mr DeMarco received for the sale of the TVAL aircraft: a BE2, an Albatros and a Sopwith Pup, in the Warbirds fraud.

(d)the balance of the sum of $1,104,114.51 required to repay the FPT Loan was funded through loans to Mr DeMarco from the BNZ, totalling some $390,000.

[48]   The payment  to  the  FPT  included  interest  that  had  been  calculated  at  12 per cent rather than the penalty rate to which the FPT was entitled, of 16 per cent per annum. The FPT nevertheless, accepted the repayment as full settlement of the loan.

[49]   The repayment of the FPT loan is evidenced by the trust account records of Mr Stephens. The records show the money was received into Mr Stephens’ trust account on behalf of the FPT and then paid out to it, or at its direction.

[50]   Sir Peter Jackson confirmed in his evidence that the funds received in the repayment of the FPT loan led to the FPT security over the two vintage aircraft being released.   He  says  that  on  1 July 2016  he   received  acknowledgement  from    Mr Stephens that the monies for the repayment of the FPT loan had been received into the FPT trust account in repayment of the FPT loan. The repayment monies were then paid into the FPT’s bank account.

[51]   The security over the Corsair and P-40 was released by the FPT on 4 July 2016. The plaintiffs acknowledged that the repayment of the FPT loan operated to discharge the “security interests” over the aircraft.

[52]   Two years later, as soon as TVAL became aware that some of the money that had been paid by Warbirds to the DeMarco interests to purchase TVAL’s planes had been used to repay a significant portion of the FPT loan, it “re-registered” security over the larger and more valuable of the two planes, the Corsair, in TVAL’s name as security holder. This was on 10 June 2018. The verification statements confirming the registration of the financing statements on the Personal Property Securities Register (PPSR) are in evidence.

[53]   Updated valuations in a letter of 27 November 2015, referred to in Mr Corke’s evidence, indicated that the P-40 was then valued at approximately US $1.75 million and the Corsair at approximately US $2 million.

The Warbirds fraud

[54]   The facts that I have recounted in relation to the Warbirds fraud and the repayment of the FPT loan give rise to the following causes of action:

(a)The first and second causes of action brought by TVAL, which relate to the receipt by Mr DeMarco/OSRC of the proceeds of the Warbirds fraud in breach of their respective fiduciary duties and, in the case of OSRC, knowing receipt of those funds in breach of Mr DeMarco’s breach of fiduciary duties. An account is sought from Mr DeMarco and OSRC in respect of the benefit they obtained from those funds.

(b)The third (tracing) and fourth (subrogation) causes of action are alternatives:

(i)The third cause of action brought by the FPT claims that as a result of the use of the proceeds of the Warbirds fraud, the FPT loan was not repaid as the funds received by the FPT are held in trust for TVAL. Therefore, the FPT is entitled to enforce the FPT loan (including interest accrued) and the security over the Corsair owned by OSRC which secured the FPT loan.

(ii)In the alternative, the fourth cause of action brought by TVAL claims that if the FPT loan was repaid using the proceeds of the Warbirds fraud, TVAL is entitled to an equitable charge by way of subrogation to the security over the FPT loan and to recover the amount by which Mr DeMarco has been enriched by his use of the Warbirds proceeds, including by avoiding having to pay interest accruing under the FPT loan.

[55]The Official Assignee indicated that he:

(a)accepts that Mr DeMarco/OSRC is liable for a breach of fiduciary duty or breach of trust to TVAL;

(b)accepts that TVAL is entitled to an account from Mr DeMarco/OSRC for the non-refunded portion of the monies that were misappropriated from it, being the inflated purchase price paid by NZ Warbirds for the BE2 aircraft of $937,500, including GST;24

(c)accepts that TVAL is entitled  to  an  account  for  the  interest  that  Mr DeMarco/OSRC received or would likely have received, on the refunded portion of the monies that were misappropriated from it, being the monies that were paid to the defendants in the Warbirds fraud for the Albatros aircraft and the Sopwith Pup aircraft from the date of receipt to the date of their repayment.

[56]   In relation to the third cause of action, the Official Assignee does not accept that the FPT is entitled to any of the relief it seeks which, in general terms, seeks to pay the part of repaid funds that was misappropriated from TVAL to TVAL and resurrect its charge over the Corsair for the principal amount of the diverted funds.

[57]As to the fourth cause of action the Official Assignee:

(a)accepts that TVAL has an equitable charge over the Corsair aircraft as a result of subrogation for up to the amount of $720,000, (the diverted funds);

(b)does not accept that the equitable charge in favour of TVAL can be for more than the sum of $720,000;

(c)does not accept that the equitable charge is on terms which mirror (or are substantially similar to) the discharged FPT Specific Security Deed/term loan agreement.

24   The  sum  exclusive  of  GST  is  $815,000.   For  some  unexplained  reason  NZ Warbirds  paid Mr DeMarco $937,500 when the price agreed was $937,250. Therefore, Mr DeMarco had use of the $937,500.

[58]The plaintiffs have waived any claim over the P-40.

The evidence

[59]   Evidence of Mr DeMarco’s convictions was adduced by way of a certificate of convictions. The plaintiffs relied on s 47 of the Evidence Act 2006 which provides:

(1) When the fact that a person has committed an offence is relevant to an issue in a civil proceeding, proof that the person has been convicted of that offence is conclusive proof that the person committed the offence.

[60]   In relation to s 49, being the use of convictions as evidence in criminal proceedings, the Supreme Court in Va’afuti v R noted that the section:25

[18]      …provides a convenient way of proving offences which have already been established to the criminal standard of proof. It prevents the criminal justice system being vexed by collateral challenges to concluded determinations of criminal responsibility, with potential inconsistent outcomes …

[19]      … there is no doubt that s 49 has the purpose and will have the effect in many cases of restricting a defence that might otherwise be available.

[61]   In this case the effect of s 47 is that Mr DeMarco is “not able to challenge in this proceeding the factual findings that are implicit in the jury’s verdicts”.26

[62]   Mr DeMarco’s amended statement of defence was struck out on 21 April 2021 because of its inconsistency with his convictions.27

[63] The certificate of conviction established that Mr DeMarco was convicted of the offences referred to above. The convictions were based on the facts set out in the summary by the sentencing Judge at [14] above. The certificate is conclusive proof that Mr DeMarco committed those offences. The jury’s factual findings are implicit in its verdicts and are illustrated by the question trail, which was produced. This provides proof of the factual basis for the first to fourth causes of action.

25     Va’afuti v R [2017] NZSC 142 at [18]–[19].

26     Commissioner of Police v Filer [2013] NZHC 3111 at [25].

27     The Strike Out Judgment, above n 5, at [23]–[29] in relation to striking out the paragraphs of the amended statement of defence that had contravened s 47.

The Warbirds sales

[64]   Evidence was given by Sir Peter Jackson, a director and trustee of the trust which owns TVAL’s shares, James Corke, an accountant and the Chief Executive of TVAL, and Mr Osborn, a forensic accountant, also gave evidence on the matters giving rise to these proceedings.

[65]   In April 2016, Mr DeMarco was contacted at TVAL by Mr Reg Field, who enquired about purchasing two aircraft from TVAL to donate to the New Zealand Warbirds Association.

[66]   Ultimately Mr Field decided he would donate the funds for the purchase to the Warbirds Association, which would use them to purchase two aircraft. Shortly afterwards, an arrangement to buy a third aircraft from TVAL was agreed to. This aircraft was to be purchased by the Kittyhawk Partnership, a partnership controlled by Frank Parker, President of Warbirds. I refer to the two purchasers as the Warbirds.

[67]   The sales to the Warbirds resulted in TVAL starting construction on the three WWI aircraft bought. These were:

(a)an RAF BE2e aircraft with the registration mark “ZK-PXA” (the BE2e);

(b)an Albatros D.Va aircraft with the registration mark “ZK-ALB” (the TVAL Albatros); and

(c)a Sopwith Pup with the registration mark “ZK-AFS” (the Sopwith Pup).

[68]   In April 2016 when the sales were proposed by Mr DeMarco, the aircraft all had existing internal list prices. These list prices were not made public but had been set previously when TVAL had been considering engaging a broker to sell TVAL aircraft.

[69]   Instead of providing the TVAL list prices, Mr DeMarco told Warbirds that TVAL’s prices for the aircraft were:

(a)$815,000 plus GST for the BE2e, as compared to the actual TVAL list price of $645,000 plus GST (an additional net mark-up over the list price of $170,000);

(b)$990,670 plus GST for the TVAL Albatros, as compared to the actual TVAL list price of $765,000 plus GST (an additional net mark-up of

$225,670); and

(c)$585,500 plus GST for the Sopwith Pup, as compared to the actual TVAL list price of $440,000 plus GST (an additional net mark-up of

$145,500).

[70]   The combined additional mark-up in excess of the set list prices on the three aircraft was $541,170 plus GST.

[71]Mr Corke’s evidence is that Mr DeMarco had represented to him that:

(a)the person funding the Warbirds’ purchase wanted to help Mr DeMarco financially by paying more money than TVAL’s usual list prices for the aircraft;

(b)it was a condition of the purchases that Mr DeMarco kept anything above TVAL’s list price; and

(c)the purchaser would not purchase the Warbirds aircraft without the purchaser paying the increased amount and Mr DeMarco getting all money the purchaser paid above TVAL’s list price.

[72]   Mr Corke sought Sir Peter Jackson’s approval for the proposed sale by emailing the latter’s personal assistant, Matt Dravitzki, on 13 May 2016. In that email Mr Corke explained:

(a)That Mr DeMarco had told him that he could sell a BE2 for $645,000 and a Sopwith Pup for $440,000, which were in line with the TVAL list prices and represented cost plus 20%.

(b)That the sale was to an individual who would be purchasing the planes for the purpose of donating them to Warbirds.

(c)That the “twist in the tail” was that the purchaser wanted to pay over

$1,600,000 for the aircraft as he wanted to help Mr DeMarco financially and the purchaser would not do the deal if he was not able to pay that amount above the TVAL list price to help DeMarco personally.

(d)That Mr DeMarco had shown Mr Corke a cheque from the purchaser.

(e)That Mr Corke would invoice OSRC  for  the  normal  amount  and Mr DeMarco could have any increased amount as that was the intent of his friend.

(f)That this “extra amount” would help Mr DeMarco repay the FPT Loan.

(g)That Mr Corke needed Sir Peter Jackson’s approval for this sale to occur.

[73]   Sir Peter Jackson responded (through Mr Dravitzki) by email the same day. He said that:

(a)If  it  helped  get  the  FPT  Loan  repaid,  TVAL  should  agree  to   Mr DeMarco’s proposed sale.

(b)TVAL should only deal with the TVAL list prices. The email also said that anything extra should pass through TVAL’s books, Mr Corke understood this to be a typo and that the message was that it should not pass through TVAL’s books.

(c)Sir Peter Jackson was not in favour of Mr DeMarco making a commission on sales but, if Mr DeMarco wanted to discuss an exception to this rule, Mr Corke should say that Mr DeMarco can keep

a 5 per cent commission if he got a sale that was 25 per cent over the TVAL list price, rather than a lump sum of money.

[74]   On the basis of this approval, and the understanding that had been conveyed by Mr DeMarco, Mr Corke authorised Mr DeMarco to proceed with the sale on behalf of TVAL. Mr Corke understood that no money would be paid for the planes until delivery of the aircraft. That would take some months, as the aircraft needed to be constructed.

Transfer of funds and aircraft

[75]   Mr DeMarco arranged with Warbirds for the deposits for the purchases to be paid to his company, OSRC. Warbirds had understood that Mr DeMarco and OSRC would then hand over all of those monies to TVAL. Mr DeMarco failed to do so.

[76]   Over the period July 2016 to July 2017 OSRC received a total of $2,105,879.50 for the TVAL aircraft, being:

(a)$968,379.50, or 85 per cent of the $1,139,270.50 inflated list price for the TVAL Albatros;

(b)$937,500, which was $250 above the $937,250 inflated list price for the BE2e. There is no explanation for the extra $250 payment; and

(c)$200,000, or 30 per cent of the $673,325 inflated list price for the Sopwith Pup.

[77]   Mr DeMarco did not disclose the receipt of these funds to TVAL nor did he or OSRC pay any money to TVAL in respect of the aircraft. Instead Mr DeMarco did the following:

(a)On 1 July 2016, he used $720,000 of those funds, along with refinance/loan funds from the BNZ, to repay the debt to the FPT on 1 July 2016.

(b)On 1 July 2016, he set up a $1 million term deposit account at the BNZ.

(c)He left $46,789.99 in the OSRC account. This was subsequently used for costs that appeared to relate to travel for Mr DeMarco, costs of immigration lawyers in the US, the purchase of a motorbike and associated equipment, and costs in relation to other vehicles.

[78]   Mr DeMarco arranged for TVAL to deliver the BE2e to Warbirds in November 2016.

Discovery of fraud

[79]   In around June 2017 Sir Peter Jackson saw a photograph on the internet showing the BE2 in Warbirds’ possession. He recognised the plane as a TVAL plane. He had not been advised of any payment and had not approved delivery of the plane.

[80]   Following  this  discovery   TVAL’s  then-Chief  Operating  Officer, Dominic Shaheen, contacted Warbirds. He discovered that Warbirds had paid the inflated purchase price directly to OSRC.

[81]   Sir Peter Jackson notified the Serious Fraud Office, which opened an investigation in August 2017. It subsequently laid charges in May 2018.

Breach of fiduciary duty and/or knowing receipt (first and second causes of action)

[82]TVAL pleads that:

(a)Mr DeMarco owed TVAL a fiduciary duty as a senior employee (the first cause of action);

(b)Mr DeMarco and OSRC owed TVAL a fiduciary duty as agents in arranging the sale of three TVAL aircraft to Warbirds (the second cause of action);

(c)Mr DeMarco and OSRC breached their respective fiduciary duties to TVAL by:

(i)failing to account to TVAL for the Warbirds’ payments in respect of the three TVAL aircraft; and

(ii)procuring a commission of $195,500 in respect of the BE2 and attempting to procure a commission of $259,520.50 in respect of the TVAL Albatros and $166,759 in  respect  of  the Sopwith Pup (all amounts inclusive of GST), without the informed consent of TVAL.

[83]   The plaintiffs plead in the alternative that, if OSRC did not itself owe a fiduciary duty as agent, OSRC is liable for knowing receipt of the relevant funds.

[84]   In each case, TVAL seeks an account of the benefits obtained by Mr DeMarco and/or OSRC as a result of the breach of fiduciary duty.

Did the relationship between Mr DeMarco and TVAL give rise to fiduciary duties?

[85]   In relation to the Warbirds sale, TVAL pleaded that Mr DeMarco and OSRC were TVAL’s agents and owed TVAL fiduciary duties in that capacity. The defendants did not plead to this allegation, on the basis that it was a matter of law.

[86]   There is no single formula or test in determining whether a relationship outside specific recognised categories, such as lawyer/client relationships, is such that the parties owe each other obligations of a fiduciary kind.28

[87]   The Supreme Court has used what has been termed the “legitimate entitlement” approach to determine the existence of a fiduciary relationship.29 The

28 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [75] per Tipping J.

29 At [80]. Prior and subsequent cases have referred to the “legitimate expectation” test. See: Liggett v Kensington [1993] 1 NZLR 257 (CA) at 281 per Gault J; MacLean v Arklow Investments Ltd [1998] 3 NZLR 680 (CA) at 691; and Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169 at [31].

“legitimate entitlement” approach looks at whether the circumstances give rise to a situation where one party is entitled to repose and does repose trust and confidence in the other.30

[88]   In this case Mr DeMarco was a senior employee of TVAL. It is apparent from the evidence at least Sir Peter Jackson reposed trust and confidence in him, but at the same time imposed express conditions on any dealings Mr DeMarco had with third parties on behalf of TVAL in relation to any substantial deals.

[89]   The Chief Executive of TVAL was not present on the premises on a day-to-day basis to oversee Mr DeMarco’s activities. However, he noted that Mr DeMarco was the primary liaison person with Sir Peter Jackson concerning the vintage aircraft.

[90]   It is well-recognised that “top management” owe a “larger, more exacting duty” similar to that owed to a corporate employer by its directors.31 Directors exercising authority on behalf of a company will generally be found to have “fiduciary obligations of loyalty and fidelity” to the company.32

[91]   TVAL says Mr DeMarco’s employment relationship with TVAL had the requisite characteristics to give rise to a fiduciary duty, including that:

(a)Sir Peter Jackson gave instructions to Mr DeMarco on TVAL’s operations, as well as potential aircraft or part purchases or trades, and trusted him to implement those directions.

(b)Mr DeMarco was permitted to communicate with potential buyers and sellers in the name of TVAL on matters on which Mr DeMarco had been instructed to act as TVAL’s agent.

(c)Within TVAL, staff were reliant on Mr DeMarco as the conduit for  Sir Peter Jackson’s directions, with the result that:

30     Chirnside v Fay, above n 28, at [80].

31     Canadian Aero Service Ltd v O’Malley [1974] SCR 592 at 606.

32     Pounamu Properties Ltd v Brons [2012] NZHC 590 at [32] and [47].

(i)TVAL’s own CEO, Mr Corke, was reliant on Mr DeMarco to give effect to Sir Peter Jackson’s instructions;

(ii)Mr DeMarco’s degree of authority meant that the accounts team would process invoices on the assumption that they had been approved by Sir Peter Jackson; and

(iii)Mr DeMarco largely controlled the overall operations of the company and directed spending on a day-to-day basis.

[92]   The important relationship here is the one between TVAL and Mr DeMarco. Sir Peter Jackson, while having interests in TVAL and the authority to act on its behalf in his dealings with Mr DeMarco, is not a party to this action in his personal capacity.

[93]   TVAL was aware of Mr DeMarco’s previous convictions, which was the reason he was not appointed Chief Executive. He was a senior employee but neither an officer nor a director of TVAL. In common with most employees, Mr DeMarco would have owed specific fiduciary obligations, such as loyalty, to an employer. However, in  this  case,  even  given  Mr DeMarco’s  relationship  with  Sir  Peter  Jackson,   Mr DeMarco was in the same position as any ordinary employee in terms of his obligations to his employer.

[94]   As I noted, TVAL put in place specific arrangements with Mr DeMarco when it came to allowing him to deal on its behalf in high value transactions. I am satisfied that Mr DeMarco owed specific fiduciary duties to TVAL arising from his agency for TVAL in particular matters. He was acting in such a capacity in relation to the sale of the TVAL aircraft to the Warbirds.

Findings on fiduciary relationship

[95]   The employee/employer relationship is not generally regarded in general terms as a fiduciary relationship except in some respects.33

33     Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thompson Reuters, Wellington 2009) at [17.1] and [17.3.7].

[96]   In this case Mr DeMarco was not a director, officer or Chief Executive of TVAL. He, presumably, reported to the Chief Executive who, by definition, was primarily responsible overall for the TVAL operations.

[97]   There are some types of fiduciary duties in general terms owed by an employee to an employer, including a duty of loyalty and confidentiality. However, a breach of a commercial contract will not result in a breach of fiduciary obligations even where the party involved is expected to “honestly and conscientiously do what it had by contract promised to do”.34

[98]   I do not consider a fiduciary relationship in general terms by virtue of the employment relationship between Mr DeMarco and TVAL has been established. That is not to say that for some purposes he did owe fiduciary obligations to TVAL.

[99]   The taking of a secret commission is regarded as a breach of fiduciary duty of an employee. A fiduciary relationship will exist where an employee is entrusted with employer’s property for the employer’s benefit or for purposes authorised by the employer, and not otherwise.35

[100]   In an agency relationship the principal is entitled to repose trust and confidence in the agent. Agency will normally attract fiduciary obligations including the maintenance of openness and fairness to the principal; undivided loyalty; and to keep the principal’s property separate.36

[101]   The duties will vary according to the terms of the agency contract.37 However, a secret commission received by an agent will be a violation of an agent’s fiduciary duty.38

[102]   In this case the Warbirds transactions, which included the sale of the vintage aircraft to Warbirds by Mr DeMarco and the keeping of the secret commission and the

34     Equity and Trusts in New Zealand, above n 33, at 562.

35     At 546; citing Reading v Attorney-General [1949] 2 KB 232 (CA) at pages 236–237 per Lord Asquith.

36     Equity and Trusts in New Zealand, above n 33, at 535.

37     At 535.

38     At 536.

funds from the sale of the aircraft, were breaches of his fiduciary obligations as agent to TVAL.

[103]   The relationship between a principal and an agent is inherently fiduciary.39 An agent owes fiduciary duties to a principal, subject to the express or implied terms of the contract controlling the parties’ relationship.40

[104]   The relationship of principal and agent may be created by the conferring of authority by the principal on the agent expressly, or impliedly from the conduct or situation of the parties.41 In this case from the question trail, the jury must be taken to have found in respect of charge three that:

(a)Warbirds agreed with Mr DeMarco to purchase the BE2 and the Albatros from TVAL; and

(b)“when Mr DeMarco agreed to sell the BE2 and the Albatross [sic] to New Zealand Warbirds, he knew  he  was  doing  so  on  behalf  of The Vintage Aviator Limited”.

[105]   Similarly, in relation to the delivery of the BE2 to Warbirds, the question trail indicates that the jury must be taken to have found that:

(a)Mr DeMarco had control over the BE2;

(b)there was a requirement by TVAL that Mr DeMarco would obtain approval from TVAL before delivering the BE2 to Warbirds;

(c)Mr DeMarco knew this; and

(d)Mr DeMarco arranged the delivery of the BE2 intentionally without obtaining approval from TVAL.

39     Chirnside v Fay, above n 28, at [73] per Tipping J.

40     Peter Watts and FMB Reynolds Bowstead and Reynolds on Agency (20th ed, Sweet & Maxwell, London, 2014) at [1-014]; and Kelly v Cooper [1993] AC 205 (PC) at 214.

41     Bowstead and Reynolds on Agency, above n 40, at [2-001].

[106]   I do not consider the employment relationship generally gave rise to higher fiduciary obligations to TVAL as might have been the case if Mr DeMarco was the Chief Executive Officer or director. TVAL had expressly not appointed him to such a position. He was a mere employee.

[107]   However, I am satisfied that Mr DeMarco acted as TVAL’s agent in relation to the Warbirds sale. Mr DeMarco was instructed to deal with TVAL’s property (the three aircraft) and purported to enter into a binding contract for TVAL with Warbirds for the sale and purchase of those aircraft. He also received, via OSRC, funds that Warbirds believed it was paying to TVAL via OSRC.

OSRC and TVAL

[108]I now turn to the obligations owed by OSRC to TVAL.

[109]   TVAL pleads that OSRC also acted as TVAL’s agent and owed TVAL fiduciary duties in relation to the Warbirds sale. OSRC was a vehicle for Mr DeMarco’s operations. He was, and remains, the sole  shareholder.  He  was  also,  until  his New Zealand criminal convictions, the sole director.

[110]   While purporting to engage with Warbirds on behalf of TVAL, OSRC acted as Mr DeMarco’s conduit for the funds received from Warbirds. It received the payments from Warbirds and made payments to third parties, including the FPT, as described above.

[111]Mr DeMarco held out OSRC’s transactions were as agent for TVAL as follows:

(a)On 11 May 2016, Mr DeMarco presented Mr Corke with a proposed commission agreement, appointing Mr DeMarco and another company controlled by him, Dairy Air Ltd, a “non-exclusive sales agent” for TVAL.

(b)On the same day, Mr DeMarco prepared an addendum agreement said to be in relation to the aircraft sales to Warbirds, in which the broker was listed as Mr DeMarco, Dairy Air Ltd or OSRC.

(c)On 2 June Mr DeMarco again requested that the agreements drafted by him be signed.  At a subsequent meeting with Mr Corke on 8 June   Mr Corke signed the agreements on behalf of TVAL. Mr Corke’s recollection is that Mr DeMarco did not sign the agreements at the meeting, although it appears that he subsequently did sign them.

(d)In July 2015, Mr DeMarco explained to his accountant that OSRC “will be acting as broker” for the sale of the aircraft, and thereby obtaining a commission on the sale.

[112]   Mr Corke says that he did not consider the broker arrangements involving OSRC had been agreed. Instead, he believed that he had agreed with Mr DeMarco that there would be a sale in which OSRC would act as an intermediary in relation to the Warbirds sale. OSRC would (in a simultaneous and back-to-back arrangement), purchase the aircraft at the TVAL list price and on sell the aircraft to Warbirds at the inflated price. Mr Corke said this was intended to:

(a)ensure that TVAL received only its list price for the aircraft; and

(b)provide for Mr DeMarco to receive the difference between the list prices and the inflated prices that Mr Corke understood Warbirds insisted on paying to Mr DeMarco, to assist his financial position.

[113]   Whatever the specific details were, the underlying substance of the arrangements was that:

(a)Mr DeMarco had been authorised to enter into a sale and purchase arrangement using OSRC;

(b)the transaction entered into by Mr DeMarco and OSRC on behalf of TVAL would cause TVAL property to be disposed of, ultimately to Warbirds; and

(c)OSRC on behalf of Mr DeMarco would take the benefit of the difference between the TVAL list price and the price that Mr DeMarco

represented to Mr Corke that Warbirds was prepared to pay in order to benefit Mr DeMarco.

[114]   The plaintiffs have submitted it is not necessary for this Court to resolve the difference between Mr Corke’s understanding and that of Mr DeMarco, or determine which particular mechanism gave effect to the transaction.

[115]   I accept that submission. The conduct of the parties in the circumstances was such that Mr DeMarco undertook a role as TVAL’s agent in respect of the Warbirds sale, effected through OSRC on the basis that OSRC also had the status of TVAL’s agent.

[116]   For completeness, I would have found the claim based on knowing receipt by OSRC was made out.

[117]The elements of a claim for knowing receipt are:42

(a)disposal of money or property in breach of fiduciary duty or breach of trust;

(b)beneficial receipt of that money or property; and

(c)knowledge on the part of the recipient that payment to it was in consequence of a breach of fiduciary duty or was in breach of trust.

[118]The pleaded (and admitted) facts established that:

(a)OSRC received a total of $2,105,879 for the TVAL aircraft on behalf of Mr DeMarco;

(b)Mr DeMarco was in breach of his fiduciary obligation of loyalty to TVAL by disposing of the sale proceeds for his own benefit;

42     Equiticorp Industries Group Ltd (In Statutory Management) v R [1998] 2 NZLR 481 (HC) at 540. See also Scott v ANZ Bank New Zealand Ltd [2020] NZHC 906, [2020] 3 NZLR 145 at [101].

(c)Mr DeMarco knew that the disposal of money was in breach of his fiduciary obligation; and

(d)Mr DeMarco’s actual knowledge is properly attributed to OSRC. This is because OSRC had knowledge that the payment to it was in breach of Mr DeMarco’s fiduciary duty by virtue of the knowledge of its director and shareholder, Mr DeMarco.

[119]   A company is a legal person and for a company to be liable for knowing receipt, knowledge of a person or group of people must be attributed to the company. The long-established rule of attribution is the “directing mind and will” test as stated by the House of Lords in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd.43

[120]   The modern view of attribution, described by the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission, is that the “directing mind and will” test of attribution is one example of a “special rule of attribution” rather than the general rule of attribution.44 According to Lord Hoffmann in Meridian, a special rule of attribution will need to be fashioned if, as here, the company’s constitution does not explicitly deal with attribution and the principles of agency do not apply. Fashioning the relevant special rule of attribution requires asking:45

Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company?

[121]   In Stone & Rolls v Moore Stephens, the House of Lords attributed the knowledge of a sole director/shareholder to the company, in the context of a third- party claim.46 The Court of Appeal had followed Meridian and fashioned a special rule of attribution, which the House of Lords noted when dismissing the appeal:47

[73] … The essence of the case is that it is one in which the sole directing mind and will of the company procured it to enter into fraudulent transactions with banks. It was the company that dealt with the banks and, so it seems to

43     Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 (HL) at 713.

44     Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 (PC).

45     At 507.

46     Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39, [2009] 1 AC 1391 (HL) at [56], [136] and [205].

47     At [169]–[174]; citing the Court of Appeal decision Moore Stephens v Stone & Rolls Ltd [2008] EWCA Civ644, [2009] AC 1391.

me, clear that, as between the company and the banks, the principles of attribution require the dishonesty of the company’s sole human agent to be imputed to the company. Mr Sumption’s submissions satisfied me that this is a case in which such an imputation should be made and that the company should therefore itself be liable for the frauds.

[122]   In that case the sole shareholder/director, who also took a management role in the company, was found to be the controlling mind and so the criminal offending was attributed to the company.48

[123]   In this case I am satisfied the actions of Mr DeMarco, who was the “directing mind and will of the company” can be attributed to OSRC. Mr DeMarco’s knowledge of the fraud is properly attributable to OSRC, as its sole shareholder and director. On the facts OSRC would be liable for knowing receipt of the funds from the Warbirds fraud.

A trust over the proceeds of sale of the Corsair?

[124]   Based on the breach of fiduciary obligations owed to TVAL by Mr DeMarco and OSRC as agents, the proceeds of the sale of the TVAL aircraft to Warbirds were subject to an institutional constructive trust. This is in accordance with accepted principles that a fiduciary is accountable for any benefit or gain acquired through breach of their duty. It will be, in most cases, appropriate for the Court to declare that the “ill-gotten gains are subject to an institutional constructive trust with the principal”.49 The Court merely confirms the trust which has come into being.

[125]   I now consider the effect of the existence of that trust over the proceeds of sale received by Mr DeMarco/OSRC.

Tracing and subrogation

Third and fourth causes of action

[126]The third and fourth cause of action are pleaded in the alternative.

48     A similar position was adopted in New Zealand by the Supreme Court in Cullen v R [2015] NZSC 73, [2015] 1 NZLR 715.

49     Intext Coatings (in liq) v Deo [2017] NZHC 2754, [2017] NZAR 47 at [53]; citing Shannon Agricultural Consulting (in liq) v Shannon [2015] NZHC 113 at [27].

[127]   The third cause of action is a claim by the FPT. It says it received the repayment money funds subject to the prior equitable interest of TVAL and so the loan to the FPT has not been repaid. TVAL can therefore recover those funds from the FPT. This would leave the FPT loan unpaid and allow it to have recourse to its Specific Security Deed and term loan to enforce the terms of those against Mr DeMarco/OSRC. It could therefore regain the security over the Corsair for all amounts outstanding under the terms of the loan.

[128]   In summary, the FPT’s argument is that $720,000 of the funds paid to the FPT are held by it subject to a constructive trust for TVAL. These funds can be traced by TVAL into the funds paid to the FPT and TVAL is entitled to recover those funds as it has a proprietary interest in those funds. That proprietary interest takes priority over the legal interest in the funds acquired by the FPT on the repayment of the loan.

[129]   The Official Assignee takes a different view. He says he accepts there was a constructive trust over the $720,000 in the hands of Mr DeMarco/OSRC. However, he says once that $720,000 was paid to the FPT and accepted by it in repayment of the loan, the security was discharged. The funds cannot be traced into a debt repayment. The Official Assignee points to the general rule that tracing a proprietary interest ends when the funds are used to pay a debt.

[130]   The plaintiff accepts that proposition as a general legal position but argues that it does not apply to the payment of funds to the FPT in this case. It says that in this case the tracing sought is into the property of a creditor, not into the assets of the wrongdoer or even an innocent debtor.

[131]   The plaintiff pointed to the judgment in Federal Republic of Brazil v Durant International Corp50 as authority for the proposition that a debt is an asset in the hands of a creditor and so can provide a basis for traditional tracing into the creditor’s assets.

50     Federal Republic of Brazil v Durant International Corp [2015] UKPC 35, [2016] AC 297 at [29].

[132]   The FPT also noted that a third-party receiving trust property may raise the defence of a bona fide purchaser for value.51 But, it says in this case that defence does not apply for the following reasons:

(a)The FPT is not a purchaser for value, having provided no consideration for the payment. The steps it took were in recognition of the pre-existing  contractual  commitments  and   were   dependent   on Mr DeMarco/OSRC providing funds that were not subject to pre-existing equitable interest of TVAL.

(b)The FPT does not raise the defence, in any event. Instead, it seeks a declaration that it holds the funds subject to the prior equity.

(c)As the FPT does not raise the affirmative defence of bona fide purchaser for value, the defendants as the wrongdoers cannot themselves raise or rely on the defence. As wrongdoers they cannot take advantage of their own wrongdoing.52

[133]   For the purposes of this analysis it must be borne in mind that TVAL is a separate entity from the FPT, which is a trust and the FPT plaintiffs are the trustees, despite some common involvement in that company and the trust by Sir Peter Jackson and Dame Fran Walsh.

[134]   TVAL is a corporate legal entity separate from its shareholders. Its shareholders  from  6   November   2015   were   Mr   Corke,   Mr   Stephens   and Sir Peter Jackson (jointly). Currently the shareholders are Sir Peter Jackson, Dame Frances Walsh and Philippa Boyens as trustees for the 1914-19 Aviation Heritage Trust. They hold the shares in TVAL beneficially for the beneficiaries of that trust.

[135]   The FPT received the repayment of the loan and held those monies beneficially for the beneficiaries of the 1914-19 Aviation Heritage Trust. The discretionary

51     Foskett v McKeown [2001] 1 AC 102 (HL) at [127]–[130].

52     Steele v Serepisos [2006] NZSC 67, [2007] 1 NZLR 1 at [133].

beneficiaries apparently include Sir Peter Jackson and Dame Frances Walsh. The trust deed was not produced in evidence.

[136]   The phrase adopted by counsel for the FPT that the diverted funds were used for “Peter to pay Peter”, meaning that the FPT and TVAL were the same with Sir Peter Jackson’s interest in those entities being the common denominator, does not properly describe the position at law.

Analysis: sale of the assets of the ATT to OSRC

[137]   Before moving to the tracing and subrogation claims in detail, the effect of the sale of the ATT’s assets including the secured Corsair and P-40 to Mr DeMarco/OSRC requires consideration.

[138]   The ATT sold its assets, including the Corsair and P-40, to OSRC in March 2012 for a total sum of US $500,000. This was recorded in the trustee minutes of the ATT dated 2012. The minutes record the sale for $500,000 of the Corsair, the Kittyhawk, a De Havilland Chipmunk and a 1952 Jaguar XK120. An undated sale and purchase agreement for the sale of those assets was executed. The possession date was recorded as 15 March 2012. A condition was that the purchaser be satisfied that the charge holder of the two aircraft would agree to the transfer of the existing debt to its name on terms and conditions to its satisfaction prior to settlement.

[139]   The Civil Aviation Authority change of possession of aircraft forms for the Corsair and P-40 are dated 14 March 2012. These were signed by Mr DeMarco as trustee for the ATT. They record the transfer of the aircraft to OSRC as legal owner.

[140]   The FPT did not approve the transfer of ownership of the Corsair and P-40 from the ATT  to OSRC as was required under the Specific Security Deed.   On     28 March 2012 after ownership  had  been  transferred  from  the  ATT  to  OSRC  Mr DeMarco had emailed a trustee of the FPT advising that he was in the process of transferring the assets from the ATT as a going concern to OSRC. Mr DeMarco told the trustee that effectively OSRC was buying the assets of the ATT. Mr DeMarco said he had negotiated with James Slade (the other ATT trustee) and reached agreement that Mr DeMarco would pay US $500,000 to buy Mr Slade out. OSRC would then

own the two aircraft that were secured under the FPT loan. Mr DeMarco said in the email that the security agreement and PPSRs would need to be changed from the ATT to OSRC. There was no further correspondence.

[141]   Mr DeMarco then entered into an agreement with Mr Oliver Wulff in which Mr DeMarco agreed to transfer 500 ordinary shares in OSRC to Mr Wulff. In addition, the agreement provided that Mr DeMarco would take ownership of the Corsair and Mr Wulff would take ownership of the P-40. A security interest was to be registered against the P-40 for US $500,000 to signify Mr Wulff’s interest. Mr Wulff said this was because there was no register of ownership for aircraft and so the security interest registration was to protect his ownership interest in the aircraft. Mr DeMarco and  Mr Wulff agreed that no further charges or loans were to be made against the assets of OSRC which had purchased the aircraft.

[142]   There was also a side agreement between Mr Wulff and Mr DeMarco that gave Mr DeMarco a right of first refusal if Mr Wulff sold the P-40. It also dealt with how the sale proceeds above US $500,000 would be divided. Mr DeMarco was to operate the P-40. Arrangements as to payment of operating expenses and division of income was set out in the side agreement.

[143]   In return for the shares and the P-40 Mr Wulff was to pay US $500,000. He did so by a payment at Mr DeMarco’s direction, to OSRC. The payment narrations record the money was “for the purchase of the P-40”. A claim by Mr Wulff for rectification of the share register (if it exists) to record that he owns 500 of the 1,000 issued shares in OSRC as well as effecting the transfer to him of the P-40 subject to the terms of the side agreement, are the subject of the proceedings brought by Mr Wulf to which I have referred earlier.53

[144]   The Official Assignee is of the view that Mr Wulff is entitled to a 50 per cent shareholding in OSRC and that he has full ownership (both legal and beneficial) of the P-40 subject to any security interests of TVAL and the FPT.

53     Wulff v DeMarco, CIV-2018-485-417.

Analysis: effect of sale of assets on the FPT security over the Corsair and P-40

[145]   The plaintiffs’ primary position is that the ATT obligations under the FPT loan were novated to OSRC when the ATT assets were sold to OSRC. Although the consent of all parties is necessary for a novation Mr Scott points out this may be inferred from conduct and need not be express.54 He cites Tszyu v Fightvision Pty Ltd,55 as support for the proposition that the terms of informal conversations “as well as the overwhelmingly consistent pattern of conduct of the parties” would be sufficient in this case to indicate consent to a novation.

[146]   The plaintiffs say there are a number of factors that support the proposition that OSRC assumed responsibility for the obligations under the FPT loan. These include an email to Mr Stephens’ law firm which was acting for the FPT reporting on a telephone conversation in which Mr DeMarco said that the loan to ATT was going to be transferred to OSRC. In addition,  Sir Peter Jackson  instructed  Mr  Corke and  Mr Stephens to demand repayment of the FPT loan when it was overdue, and they proceeded on the basis that Mr DeMarco and OSRC had responsibility for the loan and Mr DeMarco raised no objection to that assumption. In addition, the repayment of the FPT loan was received from OSRC’s/Mr DeMarco’s lawyers from a trust account in the name of OSRC held by the law firm.

[147]   The plaintiffs also point to comments by Mr DeMarco to Mr Corke at the time of the Warbirds sale to the effect that Mr DeMarco intended to use the interest that OSRC had accrued against it on the FPT loan as a loss to reduce the tax liability that OSRC had incurred as a result of the profit retained on the Warbirds sale. Similar representations were also made to Mr DeMarco’s accountant.

[148]   The plaintiffs say that Mr DeMarco, having repeatedly represented that OSRC was liable for the FPT loan, had acted consistently with that assumption, so cannot now resile from that position.

54 Hela Pharma AB v Hela Pharma Australasian Ltd CA165/03, 17 February 2005 at [63]; citing Chatsworth Investments Ltd v Cussins (Contractors) Ltd [1969] 1 WLR 1 (CA), and Tito v Waddell (No 2) [1877] Ch 106, [1977] 3 All ER 129 at 277–278

55 Tszyu v Fightvision Pty Ltd [1999] NSWCA 323, [1999] 47 NSWLR 473 at [83]–[86].

[149]   Novation requires the consent of all parties concerned. A new contract is substituted for the one that has already been made.56 An intention must be clearly shown that the original debt is to be extinguished otherwise the novation fails for want of consideration.57 In this case, while there was an indication that it was intended that OSRC would take responsibility for the contract, an agreement to that effect, or the meeting of minds, which is required to establish novation, is not apparent. At best there was advice to one trustee which was never acted upon. On the facts I think novation of the loan agreement is not established.

[150]   Nevertheless, Mr DeMarco is liable personally by virtue of his role as trustee of ATT. A trustee entering into a contract on behalf of a trust is personally liable unless there is a provision in the transaction limiting the trustee’s liability.58 The addition of the word “trustee” as a description does not by itself operate as limitation of liability of the “trustee”. The trustee enters transactions on behalf of the trust in their personal capacity and this liability continues after dissolution of the trust. A trust does not have a separate legal personality and cannot enter transactions in its own name for the purposes of dealing with trust property. It relies on the legal personality of the trustees and they are personally bound as they would be had they entered the contract on their own account.59

[151]   In my view Mr DeMarco remains personally liable for the obligations assumed under the FPT loan irrespective of the dissolution of ATT. Those obligations have not been discharged.

Tracing (third cause of action)

[152]   Tracing describes the rules by which to determine whether one form of property interest is property to be regarded as substituted for another.60

56 Lambly v Silk Pemberton Ltd (1976) 2 NZLR 427 (CA) at 434.

57 Liversidge v Broadbant (1859) 157 ER 978 cited in Jeremy Finn, Stephen Todd and Matthew Barber Burrows Finn and Todd on the Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at [17.1.9].

58 Octavo Investments Pty Ltd v Knight  [1979] HCA 61, [1979] 144 CLR 360 at 367, and Muir v  City of Glasgow Bank Liquidators (1879) 4 APP CAS 337 (HL).

59 Crummer Trustees Number 83 Ltd v Bank of New Zealand [2015] NZHC 2165, [2015] NZCC LR 23 at [45].

60 Federal Republic of Brazil v Durant International Corp, above n 50, at [17].

[153]I have found that Mr DeMarco/OSRC were constructive trustees holding the

$720,000 (diverted funds) for TVAL.61 The diverted funds were then used to pay part of the amount owing to the FPT.

[154]   In Intext Coatings (in liq), Fitzgerald J summarised the general approach to the effect of repayment of a debt on the ability to trace was as follows:62

Equitable tracing (traditionally) ends at repayment of debt

[70]      Equitable tracing has traditionally been viewed as coming to an end when a claimant’s money is traced into the repayment of a debt.63

[71]      The fact that repayments made under a mortgage are repayment of a debt rather than the acquisition of property (or a contribution to the purchase price of property) gives rise to the concept of “backward tracing”. This is tracing from repayment of the debt into the asset that was acquired (at some earlier point in time) with the original loan.

[72]      Whether there can ever be such “backward tracing”, and if so in what circumstances, has been the subject of consideration by academics. For example, Professor Chambers in “Tracing Unjust Enrichment” observes as follows:64

If it is also possible to trace value back through the payment of debts over much longer periods of time, then the payment of a mortgage could be traced into the purchase of the mortgage asset. However, established law does not permit this. In  Calverley  v  Green  the High Court of Australia said that it was ‘understandable but erroneous to regard the payment of mortgage instalments as payment of the purchase price of the home’.

[155]   The funds in that case had been wrongfully taken by a director from her company before liquidation. The High Court concluded that mortgage payments funded by the ill-gotten gains were merely payments of a debt. The fact that the equity in the mortgaged house was reducing did not give rise to an interest in the property over which the mortgage was secured.65

61 See above at [129].

62     Intext Coatings (in liq) v Deo, above n 49, at [70]–[72].

63     Re Diplock [1948] Ch 465 (CA) and Re Registered Securities Ltd (in liq) [1991] 1 NZLR 545 (CA).

64 Robert Chambers “Tracing and Unjust Enrichment” in Jason W Neyers, Mitchell McInnes and Stephen GA Pitel (eds) Understanding Unjust Enrichment (Hart Publishing, Oxford and Portland, Oregon, 2004) 263 at 297.

65 Intext Coatings, above n 49, at [100].

[156]   In reaching that conclusion the High Court noted that the concept of “backward tracing” had been recognised but only in reasonably limited circumstances.66 Fitzgerald J went on to say:67

[75]The Privy Council described the issue as follows:68

The doctrine of tracing involves rules by which to determine whether one form of property interest is properly to be regarded as substituted for another. It is therefore necessary to begin with the original property interest and study what has become of it. If it has ceased to exist, it cannot metamorphose into a later property interest.

[76]      Having reviewed academic debate on the issue of backward tracing, the Privy Council observed:69

More particularly the plaintiffs submit, as Professor Smith argues, that money used to pay a debt can in principle be traced into whatever was acquired in return for the debt. That is a very broad proposition and it would take the doctrine of tracing far beyond its limits in the case law to date. As a statement of general application, the Board would reject it. The courts should be very cautious before expanding equitable proprietary remedies in a way which may have an adverse effect on other innocent parties. If a trustee on the verge of bankruptcy uses trust funds to pay off an unsecured creditor to whom he is personally indebted, in the absence of special circumstances it is hard to see why the beneficiaries’ claim should take precedence over those of the general body of unsecured creditors. [Emphasis added.]

$99,000 (a rounded figure) as the figure for the wrecked plane returned to TVAL. This also, to some extent, recognises that the valuation evidence puts the value of the replacement Albatros in the vicinity of $2 million whereas I have allowed $990,670 which was the previous list price by TVAL of the aircraft.

Additional cost of delivery to the UK

[432]   Under the settlement agreement with Mr Wulff, TVAL was required to deliver a replacement aircraft to the United Kingdom and was responsible for all costs of delivery.

[433]   The evidence indicates that the following additional costs were incurred for delivery:

(a)the cost of customs charges and, in particular, the Value Added Tax (VAT) charged by the UK tax authority, Her Majesty’s Revenue and Customs (HMRC).

(b)WAHT’s VAT registration number was quoted to Customs when the Albatros arrived in the UK on 17 September 2018, because they were the operator of the aircraft. HMRC charged WAHT an import VAT in the amount of £94,998.18, which TVAL then paid on behalf of WAHT.

(c)a duty of £33,959.42 from United Kingdom Customs, and cartage and destination charges of NZD $532.65. TVAL paid these charges, together with the VAT, according to an invoice from Mainfreight dated 21 September 2018 in the amount of NZD $261,297.18.

[434]   TVAL says it has attempted to reach an agreement with WAHT whereby the latter would claim back the VAT and refund TVAL. Agreement has not been reached.

[435]In total, TVAL claims adjusted for the wreck as follows:

Shipping costs to UK

13,705.12

Costs to return aircraft to NZ

33,367.88

Shipping costs to NZ

12,545.55

Value of replacement Albatros less returned wreck

990,670.00

(99,000.00)

Import costs (VAT)

216,297.18

Total

$1,167,585.73

[436] I am satisfied on the evidence that Mr DeMarco breached the express term of his agency agreement with TVAL as to the term of the agreement to be negotiated with WAHT. Secondly, Mr DeMarco committed TVAL to liabilities and costs to Mr Wulff as set out above without authority and in breach of his duty of loyalty to TVAL. I am satisfied that the liability to Mr Wulff was reasonably settled in the circumstances. Accordingly, judgment will be entered for $1,167,585.73 in terms of the amount in the table at [435] above.

[437]   As to interest, I consider it should be awarded from 31 August 2018,166 on the same basis as I have indicated in relation to the earlier causes of action. Interest on the amount of judgment at the rate calculated in accordance with the Interest on Money Claims Act 2016 (but not exceeding five per cent) under s 87 of the Judicature Act for the reasons set out above.

Fifteenth and sixteenth causes of action: tours

[438]   These claims by TVAL against Mr DeMarco also arise from Mr DeMarco’s employment with TVAL and/or as agent of TVAL.

Fifteenth cause of action – Hood Aerodrome Tours

[439]TVAL’s evidence was that:

166   The date of delivery of the Albatros replacement to Mr Wulff under [1](a) of the Settlement Agreement dated 7 September 2018.

(a)TVAL’s collection of vintage aircraft was primarily housed at Hood Aerodrome, in Masterton. TVAL held flying weekends and offered tours of the collection housed at Hood Aerodrome.

(b)TVAL offered tours of its collections. These were previously run by a company called Lollapaloosa Ltd, run by Sara Randle, who was Mr DeMarco’s partner at the relevant time.

(c)The engagement with Lollapaloosa Ltd ended in 2015. Scott Thomson, a volunteer, subsequently offered to run the tours at no cost to TVAL.

(d)Mr  DeMarco  received  the  proceeds  of  the  tours  arranged  by    Mr Thomson.

[440]TVAL alleges that Mr DeMarco:

(a)failed to account to TVAL for all tours that occurred in the 2015/2016 flying season; and

(b)failed to account to TVAL for any tour proceeds from the 2016/2017 flying season.

[441]   Mr DeMarco had previously accounted for 50 per cent of the tour income in the 2015/2016 flying season. This was accepted by Mr Corke on behalf of TVAL.

[442]   TVAL seeks only an account of 50 per cent of tour revenue received by Mr DeMarco.

Tour administration

[443]   Mr Thomson’s evidence was that he volunteered to run the tours after 2015. In doing so he said he hoped, in part, to raise a sum towards the upkeep of the collection. He assumed that he was running the tours for, and on behalf of, TVAL, and that any proceeds obtained from the tour admissions would go to TVAL.

[444]Mr Thomson’s evidence was:

(a)the TVAL hangar was open at weekends during the summer season, and tours could happen outside of weekends by arrangement;

(b)tour admission prices varied but were typically $15 per adult and $5 for children. There was also a merchandise shop;

(c)people  would  pay  by  cash,  EFTPOS,  or  occasionally  cheque.   Mr Thomson collected the cash until a reasonable amount (around

$500) had accumulated, and then would hand the cash to Mr DeMarco;

(d)Mr Thomson would record any receipt of money on a form that was completed daily and provided to Mr DeMarco. He also kept his own records; and

(e)the  EFTPOS  machine  processed  payment  to   Dairy   Air   Ltd.   Mr Thomson assumed that they were receiving payment by arrangement with TVAL and always thought the proceeds were going back to TVAL.

TVAL’s understanding with Mr DeMarco

[445]   TVAL says there was no prior arrangement with Mr DeMarco that he could retain 50 per cent of the proceeds of Hood Aerodrome tours.

[446]   Mr Corke says that he approved an arrangement whereby Mr DeMarco’s partner, Ms Randle, would receive a 50 per cent commission for running a small number of tours in 2015 while Mr Thomson was away on holiday, but he believed this was only for a small number of tours.

[447]   In December 2016 Mr DeMarco provided a credit memo in relation to 50   per cent of the proceeds for the 2015/2015 flying season. Mr Corke did not challenge this but says he did not focus on the details of the tours as he did not view the proceeds as being significant.

[448]   TVAL accepts that as a result of this acquiescence there was an understanding in place from December 2016 onwards that TVAL property at Hood Aerodrome could continue to be used for tours on the condition that Mr DeMarco account to TVAL for 50 per cent of the proceeds.

[449]It pleads in [138] of the fourth amended statement of claim that:

From on or about December 2016, there was an express and/or implied agreement that Mr DeMarco could continue to operate tours of the Hood Aerodrome for subsequent flying seasons on the condition that he accounted to TVAL for 50 percent of the tour operation proceeds.

(Emphasis added)

[450]   This was admitted by Mr DeMarco in his statement of defence. He goes on to say this was pursuant to a contract between TVAL and Dairy Air Ltd. TVAL denies this was the case. It says the agreement was with Mr DeMarco.

[451]The TVAL employees who were aware of the arrangement say:

(a)Mr Corke: that he assumed that Mr DeMarco was using Dairy Air Ltd to issue the credit memo out of expediency; and

(b)Ms Kate Leppard, an accountant employed by TVAL: as far as she was aware, if TVAL were to enter any arrangement with Mr DeMarco relating to the tour proceeds it would be with Mr DeMarco personally.

[452]   There is no evidence of any prior agreement or contract with Mr DeMarco or any other party relating to the operation of the tours. Mr Thomson says the tours were operated by him with limited to no involvement from Mr DeMarco.

Failure to account to TVAL

[453]   TVAL alleges that contrary to Mr Thomson’s expectation or the implicit understanding with TVAL, Mr DeMarco failed to pass on either the records kept or to disclose the true nature of the tours that occurred.   It points to the evidence of      Ms Leppard, that:

(a)Mr DeMarco did not provide TVAL with any of the daily forms that had been completed by Mr Thomson, or other TVAL volunteers, nor has he provided those on discovery;

(b)Ms Leppard had to make several requests for information on the tours, in April, May, and December 2016; and

(c)On 8 December 2016, Mr DeMarco eventually provided a credit memo from Dairy Air Ltd to TVAL in the amount of $10,084 and provided monthly visitor sheets indicating that funds were due to TVAL on a 50/50 share.

[454]   Ms Leppard says following Mr DeMarco’s suspension, TVAL investigated the tours that took place and discovered that TVAL had not received complete payments for the funds received for tours in 2015/2016 flying season.

[455]   Mr Thomson says based on his records that 13 tours occurred that have not been accounted for to TVAL. He calculates that a total of $1,439 was obtained from these 13 tours.

[456]   Ms Leppard says Mr DeMarco provided no further information about tours carried out after April 2016 apart from one invoice raised for $240 to the Wairarapa Friendship Force. He provided TVAL with no funds in respect of tours from the 2016/2017 flying season.

[457]   Mr Thomson, however, emailed Mr DeMarco with an overview of the 2016/2017 flying season on 26 May 2017 in which he said:

We took over $24,700 in admission which strikes me as a healthy lump.

We took about $10,000 for merchandise…

[458]   This information was not passed on by Mr DeMarco to TVAL. Instead, he emailed Mr Thomson on the same day and asked that Mr Thomson keep the information in his reporting email confidential.

[459]   Mr Thomson gave evidence that he had cross-referenced booking dates and his list of occasional call-out fees to confirm that the tours did occur. His records show that expected proceeds totalled $24,763.90.

[460]   TVAL claims Mr DeMarco has breached his duties as employee by failing to account properly to TVAL. As a result, he is liable to account to TVAL for 50 per cent of:

(a)the tours that he did not disclose during the 2015/2016 flying season; and

(b)the proceeds from the 2016/2017 flying season.

[461]   On the basis of that calculation, TVAL claims a total of $13,101.45 for the two flying seasons based on the numbers provided by Mr Thomson as follows:

Flying season	Total	50% share
2015/2016 (year end 31/3/2016)	$1,439	$719.50
2016/2017 (year end 31/3/2017)167	$24,763.90	$12,381.95
Total	$13,101.45

[462]TVAL also claims interest under the Judicature Act on that sum.

[463]   I am satisfied that the claim has been made out and Mr DeMarco has breached his agreement with TVAL by failing to account properly for 50 per cent of the proceeds of the tours.

[464]   Interest on each of the figures listed above from the year end date listed at the rate calculated in accordance with the Interest on Money Claims Act 2016 (but not exceeding five per cent) under s 87 of the Judicature Act for the reasons set out above.

167   Ms Leppard’s evidence was that the financial year ended 31 March each year.

Sixteenth cause of action: secret tour of Kemp Street premises

[465]   This claim is based on secret tours conducted by Mr DeMarco of the TVAL Kemp Street workshop. TVAL was not aware of these tours and the fact Mr DeMarco had been conducting them and charging for them.

[466]   The evidence is that guests are rarely  allowed  access to Kemp Street.  On  16 December 2016 Mr DeMarco hosted a “secret tour” of the Kemp Street premises. This was unauthorised and Mr DeMarco charged for entry. The evidence is that:

(a)Mr DeMarco’s then partner, Sara Randle, placed an advertisement on a website called “eventsoja.com” for a tour of the “very private Wellington facility”; and

(b)a Facebook posting for the tour described it as a ‘Top Secret’ tour, reassuring readers that the exclusive location was “not a misprint! And yes! We do mean the TVAL Wellington workshop!”

[467]   The statement of defence admits that the tour took place and that Mr DeMarco retained the $1,375 paid by the attendees at $275 per ticket. It denies that the tour took place without the authorisation or knowledge of the TVAL directors or owners and denies any breach of fiduciary duty.

[468]The evidence suggests otherwise:

(a)The private nature of the Kemp Street workshop was promoted as a selling point in the advertisements.

(b)Mr Corke gave evidence that Mr DeMarco organised the tour without his knowledge or approval; and

(c)Sir Peter Jackson confirms that Mr DeMarco never had any authority to undertake such tours. He also confirms that the tour took place while he was overseas. Had he been aware, he would have refused permission.

[469]The allegation is that Mr DeMarco breached that duty both by:

(a)organising the tour without the knowledge or authorisation of TVAL directors or owners – which Sir Peter Jackson describes as an “egregious betrayal of the trust I had placed in him and the trusted access he had to TVAL assets and facilities”; and

(b)failing to account to TVAL for the money received from the Secret Tour attendees.

[470]   Mr DeMarco used TVAL property without its consent and further he failed to account for the monies earned as a result of that unauthorised use. This is a breach of the duty of loyalty owed by Mr DeMarco to TVAL that I have referred to earlier.

[471]   TVAL claims the total $1,375 paid by attendees, and interest under the Judicature Act, with the cause of action accrued on 16 December 2016, being the date of the unauthorised tour.

[472]   I am satisfied that Mr DeMarco was in breach of his duty to TVAL and he received money during that breach for which he has failed to account. TVAL is entitled to judgment for the sum of $1,375, together with Judicature Act interest calculated from 16 December 2016. That interest is to be calculated according to the Interest on Money Claims Act 2016 under s 87 of the Judicature Act (but not exceeding  five  per cent) for the same reasons as above.

Eighteenth cause of action: TVAL petrol

[473]   This claim in conversion is that Mr DeMarco used TVAL-owned aviation fuel kept at Hood Aerodrome for his own personal aircraft without authorisation from TVAL and without compensating TVAL for the value of the fuel used.

[474]   There are no precise records of the taking of this petrol or the amount of petrol that was actually taken. However, TVAL points to the following evidence:

Fuel at Hood Aerodrome

[475]   Dave Cretchley, TVAL’s Airworthiness Manager gave evidence about the fuel facilities at Hood Aerodrome. These comprised:

(a)A fuel pump operated by the oil company, BP, where fuel is paid for using fuel cards supplied by BP that are linked to an individual or company account. TVAL has a fuel card that employees can use for TVAL projects. Employees are required to write down the amount of fuel purchased and the relevant project in the TVAL logbook.

(b)A mobile tanker operated by TVAL. The tanker is fuelled using the BP fuel pump and then used to fuel the aircraft.

Discrepancy in fuel usage

[476]   Mr Cretchley has undertaken an analysis of TVAL fuel usage from 2012 to  30 April 2021 to identify whether there were any discrepancies in the expected usage of TVAL fuel and the actual consumption of TVAL fuel (to isolate the additional consumption of fuel by Mr DeMarco for personal use).

[477]In summary, that analysis shows:

(a)for the period between 2012 and 2016, when Mr DeMarco was employed by TVAL (the DeMarco period), the actual fuel usage exceeded the expected fuel usage by over 8,000 litres, at a value of approximately $18,700; and

(b)in the period after Mr DeMarco left TVAL (2018 to 2021) there was essentially no difference between the expected fuel usage and the actual fuel usage (the control period).

[478]Mr Cretchley explains the records upon which he based his analysis as follows:

(a)accurate records as to authorised flights taken by TVAL aircraft, in TVAL’s Flight Records;

(b)Operator Statements created for New Zealand Civil Aviation Authority compliance purposes, which capture the expected fuel consumption for each aircraft. Fuel consumption is calculated on a conservative basis for safety reasons, meaning that expected fuel usage will often exceed actual fuel usage; and

(c)TVAL’s Fuel Record Books, which record the consumption of fuel.

[479]Mr Cretchley says he used this information to:

(a)determine the total fuel expected to be used for flights in TVAL aircraft for each year; and

(b)the actual fuel used by TVAL from the start from 2012 to 30 April 2021.

[480]   Mr Cretchley says that because the Operator Statement contains a conservative figure for expected fuel usage to ensure planes do not run out of fuel, he went through a process to correct the expected fuel figure:

(a)That exercise showed that during the control period, expected fuel usage exceeded actual fuel usage (24,778.24 litres to 19,798.05 litres). Dividing this number gives a number of 1.2515, which provides a correction for the overestimation of the expected fuel use provided for by the Operator Statements.

(b)Mr Cretchley says that correction provides a more accurate expected fuel usage figure for each year.

[481]   Mr Cretchley then compared the expected fuel usage figures with the actual fuel usage figures each year. He excluded the year 2017 as Mr DeMarco only worked for TVAL for part of that year and spent a portion of that time overseas. Mr Cretchley used his personal knowledge of the approximate average value of fuel in each year to determine the expected monetary value for the difference in amount.

[482]   The differences between the control period and the DeMarco period are as follows:

Control period

Year	Corrected expected use (L)	Actual Use (L)	Difference (L)
2018	5,049.62	5,765.81	716.19
2019	6,825.28	6,905.54	80.26
2020	4,075.22	3,982.12	-93.10
2021 (until 30 April)	3,848.70	3,144.58	-704.12
Total	19,798.82	19,798.05	-0.77

DeMarco period

Year End (31 March in relevant year)	Corrected expected use (L)	Actual Use (L)	Difference (L)	Value
2012	6,999.52	10,203.04	3,203.52	@ $2.10 +GST = 7,736.50
2013	6,730.64	8,446.72	1,716.08	@ $2.10 +GST = 4,144.33
2014	8,338.55	9,749.96	1,411.41	@ $2.10 +GST = 3,408.55
2015	4,057.58	5,229.22	1,171.64	@ $1.70 +GST = 2,290.55
2016	2,751.57	3,293.23	541.66	@ $1.80 +GST = 1,121.23
Total	28,877.86	36,922.17	8,044.31	$18,701.16 (including GST)

Mr DeMarco’s responsibility for the fuel use

[483]   There is no direct evidence of Mr DeMarco using fuel for his own purposes at Hood Aerodrome. However, TVAL points to the fact that Mr DeMarco has not given discovery of any document evidencing his own fuel usage or the purchase of fuel for his own usage, save for certain historical purchases made from TVAL outside of the period claimed for. TVAL relies on the following evidence to establish an inference that the fuel was used by Mr DeMarco personally:

(a)Mr Cretchley says there were a number of incidents that caused him to suspect that Mr DeMarco was fuelling his planes at Hood Aerodrome using TVAL fuel:

(i)on one occasion TVAL’s fuel tanker was unexpectedly emptied over a weekend when:

1.   Mr DeMarco had his personal Corsair in the maintenance hangar; and

2.   nobody else from TVAL had reason to empty the fuel tanker at the time; and

(ii)there were a number of occasions when TVAL air show volunteers, who were under the direction of Mr DeMarco, used the TVAL tanker to fill aircraft including Mr DeMarco’s personal aircraft.

(b)Ms Leppard, the accountant, says that there were occasions on which Mr DeMarco did actually legitimately purchase fuel from TVAL. She says her search of TVAL’s records located eight invoices to companies controlled by Mr DeMarco for the use of fuel supplied by TVAL. She has searched for invoices in the period 2010 to 2017. However, the latest invoice was dated 13 February 2014. No payment was made to TVAL for any use of fuel between February 2014 and 2017.

(c)There was no indication in the discovery provided that Mr DeMarco made alternative arrangements for the supply of fuel from 2014 onwards.

[484]   Sir Peter Jackson’s evidence is that neither he nor the TVAL directors had knowledge that Mr DeMarco had been using TVAL fuel until after September 2017.

[485]   I consider that based on the above evidence an inference can be drawn that Mr DeMarco took the TVAL fuel for his own personal use without paying for it.

[486]   I am satisfied that the directors could not have reasonably known about this at an earlier date. Given the claim was filed on 28 August 2017, the claim is within the three-year period provided in the Limitation Act.

Quantum claimed

[487]   Mr Cretchley’s analysis values the additional fuel used at $18,701.16 (including GST).

[488]   In the absence of precise records provided by Mr DeMarco at the time or discovered in this proceeding, I am satisfied the Court can rely on this evidence to establish the value of TVAL’s claim.

[489]   Judgment is therefore granted for the sum of $18,701.16 (excluding GST). The yearend date in each of the years is the date from which interest accrues.

[490] Interest is awarded on each of the amounts owing in each year from the 31st March of the relevant year, as stated above at [482]. Interest is to be calculated in accordance with the Interest on Money Claims Act 2016 (but not exceeding fiver per cent) under s 87 of the Judicature Act for the reasons set out above.

Conclusion

[491]   I conclude that on the first to fourth causes of action, TVAL is entitled to judgment as follows:

(a)$937,500 is awarded against the defendants, jointly and severally.

(b)$19,520.05 is awarded to TVAL against the defendants, jointly and severally.

(c)Third cause of action dismissed.

(d)Fourth cause of action: an equitable charge by way of subrogation is ordered for the sum of $720,000 over the Corsair vintage aircraft.

[492]   In relation to the other causes of action, judgment is entered in the amounts concluded under each cause of action.

[493]   Interest is awarded as on the various judgment amounts at the rates and from the dates set out in the judgment relevant to each head of claim.

Costs

[494]   Counsel indicated they wished to be heard on the issue of costs. Memoranda should be filed and served by the plaintiffs within 10 days of the date of this judgment.

[495]   Memoranda in reply by the defendants should be filed and served within a further five days.

[496]Any reply by the defendants should be filed within a further three days.

Leave

[497]   In view of the number of calculations that were handed up during the hearing as the arguments developed, I reserve leave to the parties to file any submissions relating to the calculations in this judgment that may need adjustment within 10 days of the date of this judgment. To that extent this judgment is interim.

Grice J

Solicitors:

Chapman Tripp, Te Whanganui-a-Tara | Wellington for the first and second plaintiffs. Civil Aviation Authority, Te Whanganui-a-Tara | Wellington.

Meredith Connell, Tāmaki Makaurau Rohe | Auckland for the defendants.

Attachment 1 – summary of claims: 5th to 7th, 9th to 18th causes of action

Cause of Action	Description	Claim ($NZD)
5th	Hisso buy-back: claim under contractual arrangement for repayment for unsatisfactory purchases: repayment of TVAL money spent on poor quality Hisso engine.	37,471.71
6th	Cessna stripping and repainting: claim for use of TVAL resources used for work in DeMarco’s personal Cessna.	5,418.00
7th	Buffalo trade: claim for valuable aircraft parts included in a parts trade contrary to TVAL instructions. [same container as Cessna.]	411,191.00
9th	Cessna freight: claim for increased shipping costs solely incurred to ship Cessna for DeMarco’s personal benefit.	1,750.00
10th	Cessna packing: claim for TVAL resources used to pack DeMarco’s personal Cessna for shipping.	713.00
11th	Buffalo commission: secret commission earned by DeMarco in return for organising a trade on TVAL’s behalf.	dismissed
13th	Saint Andre: claim for TVAL owned parts that DeMarco sold to Mr Saint Andre and retained the proceeds of sale for himself.	17,755.00
14th	WAHT: claim arising from interactions with WWI Aviation Heritage Trust in the UK: DeMarco breached his instructions as agent and put TVAL to significant cost, including a claim for a replacement aircraft from Oliver Wulff which TVAL settled.	1,212,585.73
15th	Hood tours: Mr DeMarco received income collected from tours of TVAL’s aircraft collection at Hood Aerodrome and failed to account to TVAL for the funds received.	13,101.45
16th	Kemp St tour: DeMarco arranged a “secret tour” of TVAL’s Wellington facility without consent from the owners or directors and retained tour income for himself.	1,375.00
18th	TVAL petrol: claim for TVAL owned petrol used by DeMarco for the purpose of fuelling his personal aircraft.	18,701.16
Total	$1,720,062.05