Waller v Davies
[2007] NZCA 51
•7 March 2007
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IN THE COURT OF APPEAL OF NEW ZEALAND
CA65/05
[2007] NZCA 51BETWEENJOHN ANTHONY WALLER AND RICHARD DALE AGNEW
Appellants
ANDSTEPHEN JOHN DAVIES
First RespondentANDDAVIES & CO SOLICITORS NOMINEE COMPANY LTD
Second RespondentANDGEOFFREY ANDREW HITCHINGS AND TERENCE RICHARD HITCHINGS
Third RespondentsANDDOUGLAS WALTER EDWARDS AND DENISE ANNE EDWARDS
Fourth RespondentsANDQING SHENG SHI
Fifth RespondentANDNICHOLAS LOUISE WADEY AND JEREMY ALAN MILTON
Sixth Respondents
Hearing:24-26 July 2006
Court:Hammond, Randerson and Panckhurst JJ
Counsel:M J Tingey and J C Caird for Appellants
A R Galbraith QC and A R B Barker for First Respondent
S R G Judd and J W Appleby for Second, Third, Fourth, Fifth and Sixth Respondents
Judgment:7 March 2007 at 11 am
JUDGMENT OF THE COURT
AIn the case of the two properties which were the subject of forgeries, and with the consent of the statutory managers, those two claims are struck out of the application for directions. Costs on those two claims are to be fixed by the High Court, if counsel cannot agree on them.
BWith respect to the other ten properties, we dismiss the appeal by the statutory managers. We allow the cross-appeal by the first respondent. We set aside the various orders made by the trial Judge. All the respondents will, in consequence, have judgment against the appellant statutory managers. The costs orders made in the High Court by Harrison J on 1 June 2005 are set aside. Costs are reserved, in the High Court, on these claims. If counsel cannot agree on such costs, they are to be fixed by that Court.
CIn this Court, costs are reserved on these ten claims. If counsel cannot agree on costs, they can file memoranda in this Court.
___________________________________________________________________
REASONS OF THE COURT
(Given by Hammond J)
Table of Contents
Para No
Introduction [1]
The background in more detail(i) The underlying scheme [6]
(ii) Mr Davies acts for all parties [8]
(iii) CH Finance collapses [9]
(iv) The essence of the legal problems created by the CH Finance
scheme[12](v) The outcome in the High Court[14]
Some collateral issues on the appeal [23]
An adverse interest?(i) The law [29]
(ii) The transactions[34]
(iii) The pleadings[40]
(iv) But fraudulent misrepresentation emerges in the judgment
as the basis of an adverse interest [52](v) Common law mortgage [69]
(vi) Option to purchase [75]
Should the case be remitted to the High Court and “reopened” [77]
The other issues in the case [96]
Conclusion [99]
Introduction
[1] We have before us two appeals and a cross-appeal from a substantive decision delivered by Harrison J at Auckland on 24 March 2005 (now reported at [2005] 3 NZLR 814 (HC)) and a costs ruling delivered on 1 June 2005 (now reported at (2005) 17 PRNZ 747 (HC)).
[2] The appellants are the statutory managers appointed under the Corporations (Investigation and Management) Act 1989 in respect of a group of companies we will call CH Finance. The statutory managers applied to the High Court under s 58 of that Act for directions relating to twelve properties registered in the name of CH Finance and mortgaged variously to the second to sixth respondents. These properties were representative of some 48 properties, the titles to which were transferred to CH Finance in 2002.
[3] CH Finance had become the registered proprietor of the properties under a scheme devised by CH Finance whereby the original homeowners transferred their homes to CH Finance under highly unusual conditions which we will elaborate upon later in this judgment.
[4] The essence of the Judge’s findings were that:
(a)CH Finance had made fraudulent misrepresentations to the homeowners and, in two cases, had forged their signatures to the transfers of the properties.
(b)The homeowners had an equitable interest arising from their right to set aside the transfers for fraud.
(c)The first respondent (Mr Davies) acted as solicitor for all relevant parties to the transactions including CH Finance, the original homeowners, and the mortgagees.
(d)Mr Davies had been guilty of fraud, through wilful blindness, under s 62 of the Land Transfer Act 1952 by registering instruments despite the extant equitable interests.
(e)Mr Davies’ fraud, committed while he was an agent for the mortgagees, was not to be imputed to his principals or attributed to the second respondent, a solicitor’s nominee company of which Mr Davies was the principal.
(f)The statutory managers were awarded costs of $141,731, and disbursements, to be paid by Mr Davies. He was also ordered to pay the costs of the mortgagees.
[5] In consequence:
(a)The statutory managers have appealed against the finding that Mr Davies’ knowledge of the fraud under the Land Transfer Act should not be imputed or attributed to the mortgagees.
(b)On his cross-appeal (expanded with leave), Mr Davies challenges the Judge’s finding that the original homeowners retained an equitable interest in the properties arising out of the fraud of CH Finance and the finding that Mr Davies was guilty of fraud under the Land Transfer Act. He also appeals against the costs judgment.
The background in more detail
(i) The underlying scheme
[6] Varying amounts of money were received by the homeowners mostly in discharge of existing mortgages or other liabilities. In all cases, the amounts received were substantially less than the sale price recorded in the transfer. The balance of the purchase price (which was not a negotiated price) remained unpaid, notwithstanding that memoranda of transfer declared that payment had occurred. Two homeowners had the relevant transfer of their home forged by a fraudster associated with CH Finance.
[7] Once the properties had been transferred to CH Finance, they were mortgaged by it in favour of certain mortgagees (who are now the third to sixth respondents). The mortgages of six of the properties were to a solicitor’s nominee company (Davies & Co Solicitors Nominee Company Limited). That nominee company was the second defendant in the High Court proceedings, and is now the second respondent. It was run by the first respondent Mr Davies, a solicitor in sole practice in Auckland. The other six mortgagees were direct clients of Mr Davies.
(ii) Mr Davies acts for all parties
[8] The Judge found that Mr Davies had acted for all parties in all these transactions. These were the homeowners and CH Finance on the sale transactions; and CH Finance and the mortgagees on the mortgage transactions.
(iii) CH Finance collapses
[9] As the Judge put it ([2005] 3 NZLR 814 at [5]): “In 2003 the inevitable happened. CH Finance failed”. As so often happens, the perpetrators of this unfortunate episode have decamped, or are not worth anything.
[10] The statutory managers were faced with an imbroglio. They had all the usual difficulties of trying to assemble a coherent picture of what had actually happened, on less than complete documentary evidence.
[11] Further, the statutory managers faced the very real difficulties of having to ascertain who had what interests in the various properties “of” the homeowners, registered or otherwise. We say “of” advisedly because just what interests they did have, in the circumstances which have arisen, is a major element in this litigation.
(iv) The essence of the legal problems created by the CH Finance scheme
[12] It is common ground that this case raised difficult legal issues under five heads:
· In the case of the ten homeowners who had themselves signed away their homes, was there any basis on which they somehow retained an interest in their home sufficient to raise what we will call, for shorthand purposes, “an adverse interest”, which might then enable them to avoid the consequences of what has occurred?
· In the cases of these ten homeowners, had Mr Davies committed land transfer fraud by registering mortgages against whatever adverse interests existed?
· If so, was the knowledge of Mr Davies to be imputed to the defendant mortgagees, whose interests had been converted into legal interests upon registration of the mortgages?
· In the cases of the two homeowners where transfers were “forged”, what were, and are, their rights? As a general proposition, “forgery” is an exception to the indefeasibility provisions of the Land Transfer Act. In the broadest terms, the forgery is not operative and the transfer is voidable at the suit of the rightful owner.
· Who was to bear the costs of this complicated legal proceeding, bearing in mind that the proceeding was being brought by the statutory managers, in essence as a proceeding for directions to try to ascertain where the homeowners stood in relation to their properties.
[13] That said, the statutory managers’ request for directions – as is usual in such cases – took the form of a statement of claim against Mr Davies, his nominee company and certain mortgagees, claiming a variety of directions, and relief.
(v) The outcome in the High Court
[14] Harrison J found that CH Finance had made fraudulent misrepresentations to the homeowners; and that they still had an equitable interest in their properties because of that factor.
[15] Mr Davies had committed land transfer fraud in a way which had defeated the homeowners’ rights to rescind the sale agreements and recover their properties on account of CH Finance’s fraudulent misrepresentations.
[16] The Judge found that Mr Davies’ fraud, committed while he was an agent for the mortgagees, was not to be imputed to his principals.
[17] Where we have just spoken of the “homeowners” in describing the outcome of the High Court judgment, we are not speaking of the position of the two cases of forgery. We will deal with that aspect of the case later in this judgment. As matters stood before him, the Judge appreciated that in the case of those two properties a different outcome ought to follow, at least as matters then stood: namely that those two properties should be transferred back to the “original” owners, but subject to two mortgages which had been registered in good faith to lenders. Effectively, the Judge reserved the position of those two homeowners, for a “tidy up” in due course.
[18] On the issue of costs, the statutory managers’ actual costs in this proceeding (up to the appeal) were $240,515. The statutory managers sought indemnity costs, or at least the highest award of costs that they could get. They sought those costs both against Mr Davies and the mortgagees.
[19] Particularly having regard to a concern that “this proceeding was largely generated by Mr Davies’ misconduct” ((2005) 17 PRNZ 747 at [13]), the Judge ordered Mr Davies to pay to the statutory managers costs of $141,731 and disbursements.
[20] This left the question of the lenders’ claim for costs against the statutory managers and/or Mr Davies, the lenders having escaped any judgment against them. They sought costs against the statutory managers, and Mr Davies, on a joint and several liability basis. The lenders’ actual costs were over $100,000.
[21] In the result, Mr Davies was ordered to pay the lenders’ costs calculated on a category 2B basis, plus disbursements, but the Judge was of the view that the lenders should have priority over the statutory managers for the purpose of enforcing their judgment on costs.
[22] The costs of Mr and Mrs Edwards, who instructed counsel, were dealt with separately. An award in their favour was declined.
Some collateral issues on the appeal
[23] It is convenient to note here that the notice of appeal in relation to the cross-appeal for Mr Davies was not well drawn. Prior to the appeal coming on for hearing, the presiding Judge, Hammond J, had certain conferences with counsel. The outcome of that process was that leave was given for Mr Davies to argue on the appeal that (leaving aside the two cases of forgery) no adverse interest had remained in the homeowners; and that he had not committed land transfer fraud.
[24] Once that step was taken, effectively all the liability issues which were before the High Court were again live before this Court. The argument in this Court proceeded accordingly.
[25] We should also record here that after this appeal was set down for hearing it became apparent to this Court that no judgments had been sealed either in relation to the substantive liability or the costs hearings. The theory of an appeal is that it is the judgment which is appealed, not the reasons, and Hammond J said that the appeal would not be heard until judgments had been sealed. Mr Tingey said this had been an oversight. Subsequently judgments were sealed, just before the hearing in this Court, as follows:
(a) In the substantive proceeding:
“1.The plaintiff’s application for an order directing the Registrar of Lands to cancel the mortgages is dismissed.
2.An amended application by the plaintiffs for relief will be considered by the Court.
3.Leave is reserved for all parties to apply for further orders.”
(b) On the costs application:
“1.The first defendant pay the plaintiff’s costs, including disbursements, totalling $141,737.00.
2.The first defendant pay the costs and disbursements of the second, third, fifth, and sixth defendants on a Category 2–B and B basis.
3.The plaintiffs are stayed from executing Order 1 above until 1 October 2005 with leave granted to seek a further period of stay.
4.The fourth defendants’ application for costs against the plaintiffs is declined.”
[26] With reference to point two in relation to the substantive judgment, the High Court has never formally determined the position with respect to registered ownership of the properties. The Judge indicated that it might be appropriate to restore the original owners to the titles, in lieu of CH Finance, but subject to the first mortgage securities. But he had made no order. In that sense, the appeal in respect of these properties was premature.
[27] As it transpires, there were further developments after the hearing before us which have contributed to the delay in delivering this judgment but which have had a welcome outcome for the parties. In brief, these are that the Registrar General of Lands accepted that there had been forgeries with respect to two properties at 6 Clensmore Place, Torbay; and 15 Walton’s Avenue, Masterton, and on 20 November 2006 he paid out those claims.
[28] In the case of those two properties, and with the consent of the statutory managers, those two claims are struck out of the application for directions. All questions of costs on those two claims are reserved for determination in the High Court, if the parties cannot agree on them.
An adverse interest?
(i) The law
[29] It is appropriate, before we deal more fully with the facts of the particular transactions in issue before us, to outline the relevant law as to the indefeasible nature of a Torrens title and the operation of the fraud exception to that concept.
[30] After registration, s 183 of the Land Transfer Act protects a bona fide purchaser or mortgagee for valuable consideration against most defects in the title of the vendor or mortgagor. Whatever doubts there were as to “deferred” or “immediate” indefeasibility as the appropriate concept were settled by the Judicial Committee of the Privy Council in Frazer v Walker [1967] 1 AC 569; [1961] NZLR 1069, in favour of the latter proposition. The present position was summarised by Barwick CJ in Breskvar v Wall (1971) 126 CLR 376 at 385 – 386:
The Torrens system of registered title … is not a system of registration of title but a system of title by registration … . The title … [which the certificate of title] certifies is not historical or derivative. It is the title which registration itself has vested in the proprietor. Consequently, a registration which results from a void instrument is effective according to the terms of the registration. It matters not what the cause or reason for which the instrument is void. The affirmation by the Privy Council in Frazer v Walker of the decision of the Supreme Court of New Zealand in Boyd v Mayor of Wellington now places that conclusion beyond question.
[31] There are certain exceptions to this powerful principle. One is that, under the provisions of the Land Transfer Act itself, “fraud” destroys the quality of indefeasibility in a registered title. “Fraud” is not defined in the Act, but it was explained by the Privy Council in Assets Co Ltd v Mere Roihi [1905] AC 176 at 210 in these terms:
[Sections 62, 63, 182 and 183 of the Land Transfer Act] appear to their Lordships to show that by fraud [in this Act] is meant actual fraud, ie, dishonesty of some sort, not what is called constructive or equitable fraud – an unfortunate expression and one very apt to mislead, but often used, for want of a better term, to denote transactions having consequences in equity similar to those which flow from fraud. Further, it appears to their Lordships that the fraud which must be proved in order to invalidate the title of a registered purchaser for value, whether he buys from a prior registered owner or from a person claiming under a title certified under the Native Land Acts, must be brought home to the person whose registered title is impeached or to his agents. Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents. The mere fact that he might have found out fraud if he had been more vigilant, and had made further inquiries which he omitted to make, does not of itself prove fraud on his part. But if it be shown that his suspicions were aroused, and that he abstained from making inquiries for fear of learning the truth, the case is very different, and fraud may be properly ascribed to him. A person who presents for registration a document which is forged or has been fraudulently or improperly obtained is not guilty of fraud if he honestly believes it to be a genuine document which can be properly acted upon.
[32] In Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd [1926] AC 101 (PC) Lord Buckmaster said at 106 – 107:
If the designed object of a transfer be to cheat a man of a known existing right, that is fraudulent, and so also fraud may be established by a deliberate and dishonest trick causing an interest not to be registered and thus fraudulently keeping the register clear. It is not, however, necessary or wise to give abstract illustrations of what may constitute fraud in hypothetical conditions, for each case must depend upon its own circumstances. The act must be dishonest, and dishonesty must not be assumed solely by reason of knowledge of an unregistered interest.
[33] It was common ground before us that Land Transfer fraud therefore has to operate against a prior identifiable interest of each of the homeowners: see the discussion in Hinde, McMorland & Sim Land Law in New Zealand (Looseleaf ed) at 9.007 and 9.020. The first question before us is therefore: what interest, if any, did each of these homeowners have in his or her property at the time Mr Davies’ law firm registered further dealings?
(ii) The transactions
[34] It is necessary at this juncture to introduce some further facts. Each of the original owners, except the two victims of forgery, signed four documents before registration, as follows:
1.An agreement for sale and purchase in the standard Auckland District Law Society form. The parties shown were the owner as vendor, and CH Finance or Nominee as purchaser. The purchase price in the agreement accorded with an assessment by a valuer engaged by CH Finance. The deposit was expressed to be “nil”, with the balance of the purchase price to be paid, “by way of cash or bank cheque in one lump sum on settlement date”. The possession date was stated, but without an interest liability for late settlement.
2.A memorandum of transfer. This document was in the standard land transfer form. The consideration followed the form of the agreement for sale and purchase. The relevant operative clause recited that the owner transferred his or her stated interest in the land to CH Finance “for the above consideration (receipt of which is acknowledged)”. The signatures of transferors were witnessed. A staff solicitor employed by Davies Law certified all memoranda as correct for the purposes of the Land Transfer Act.
3.A form of “acknowledgement”. This post-dated the agreement for sale and purchase and the transfer itself. The document was drafted by Davies Law. It provided that the owners acknowledged that they were not receiving the full proceeds of sale on the day of settlement, and were entitled to seek independent advice but elected not to do so. The acknowledgement provided:
We … acknowledge that we are transferring our property to [CH Finance]… We are not receiving any funds today from the sale. We are working direct with the company and will receive our entitlement in due course. We confirm that Davies Law is not acting for us in this transaction. We understand that Davies Law are the solicitors for ICMG Property Company Limited.
We understand that Davies Law have recommended we obtain independent legal advice and we have decided not to do this.
4.A disbursement authority. This was in the name of ICMG Holdings or ICMG Property Co Ltd, both companies associated with CH Finance. It was addressed, as a memorandum, to Davies Law. It materially provided:
Upon receipt of my proceeds, I/we authorise the disbursement of the following payments:
1.A management fee:
Of $… payable to:
ICMG HOLDINGS LTD, WestpacTrust, Napier
A/C no. …
2.Legal Fees:
Your costs for completing this sale.
3.Insurance Premium:
Of $… - re Policy
Performance Brokers F & G Ltd
ASB, Northharbour
A/C no. …
4.Surplus funds credited direct to/or directed by CH Finance Ltd officers:
CH FINANCE LTD
WestpacTrust, Napier
A/c no. …
5.Forward all settlement statements direct to the Management Group.
I/We further confirm that I/we have appointed ICMG Holdings Ltd to act on our behalf in the management of our properties.
[35] Subsequent to the registration of the transfers and mortgages, two further relevant documents were executed.
[36] The first was a deed of agreement which provided that upon execution of a transfer of the property the purchaser was to arrange finance on the property and to pay on behalf of the vendor (a) sufficient funds to discharge any existing encumbrances on the property; (b) any legal and associated costs; and (c) such further financial assistance to the vendor in accordance with a schedule. The balance of the purchase price then remaining was to be “secured by way of Deed of Acknowledgement of Debt”.
[37] In exchange for CH Finance’s assistance the selling homeowner was to commit the property to the purchaser for a period of not less than three years, and during that time was to have the use, occupation and enjoyment of the property in return for a nil rental. The homeowner was liable for maintenance and upkeep of the property and to keep it in a reasonable state of repair. The purchaser was responsible for all payments of land rates and fire insurance.
[38] The homeowner could “remove the property from the arrangement” by giving not less than three months notice at which time any financial adjustments were to be made, and at the expiration of the period the parties could by written agreement either terminate, extend, or vary the term of the agreement. Upon termination of the agreement the purchaser was to give the homeowner the first right “to purchase the property back at the original purchase price less any debt owed by the purchaser to the vendor”, together with any other financial adjustments. That deed provided “[the homeowner] acknowledges that they have been advised that they should obtain independent legal advice in relation to the transaction but have declined to do so”.
[39] Secondly, a deed of acknowledgement of debt recited that the parties were parties to an agreement for sale and purchase, and that pursuant to that agreement an advance would be made for an initial period of three years, which was to be repayable on the terms reflected in the deed to which we have referred.
(iii) The pleadings
[40] The pleadings are critical in this case, having regard to what was to transpire during the consideration of it in the High Court, and in this Court.
[41] There is no allegation of either fraud or forgery in the original statement of claim.
[42] An amended statement of claim was filed shortly before the trial. It added claims of forgery and non est factum. This pleading alleged that the transfers were “either” not signed by the original homeowners, or were signed by them “believing the documents had a fundamentally or radically different effect than the transfer of the legal ownership of their property to [CH Finance]”. It further pleaded that the homeowners had in some circumstances not received consideration. Those allegations were made in relation to the mortgage lending scheme.
[43] The same pleading was made in relation to the deeds of agreement, with the additional allegation “therefore, each of the original homeowners retained and continues to retain an equitable interest in their [CH Finance] properties”.
[44] Identical allegations were made with respect to the acknowledgement. In that case, again alternatively, each of the original homeowners is said to retain an equitable interest in their property pursuant to the acknowledgement “and in particular arising out of the outstanding funds owing to them from the sale of their properties”.
[45] In the amended statement of claim on which the case went to trial, there was no plea of misrepresentation (whether fraudulent or otherwise); no plea of undue influence or unconscionable bargain; no allegation of any trust of any kind; and the remedy of rectification of the written documents was not sought.
[46] By way of summary under this head, it was therefore the case at trial that the homeowner plaintiffs were alleging (only) three things:
· “I did not sign the documents” (which would be true in the case of the two forgeries as found).
· “Either I did not understand them or they did not have the effect I thought they did”.
· “I have not had my consideration”.
[47] No application was made to amend these pleadings during the trial, or before us. And it was common ground before us that, on the evidence, the plea of non est factum had to be abandoned, and it was, at trial.
[48] In his written submissions before the Judge, Mr Tingey endeavoured to advance, for the homeowners – bearing in mind that the statutory managers were, understandably, trying to assist the Court in what was in all but name a representative action – that each original owner retained an interest in their properties “either through the transfer of that property via a forged transfer document or through the agreements and arrangements made with CH Finance” ([2005] 3 NZLR 814 at [30](1)). He argued that “the parties must have agreed on important collateral oral terms” ([2005] 3 NZLR 814 at [30](2)). Alternatively, Mr Tingey argued ([2005] 3 NZLR 814 at [30](3)) that “each owner through his or her agreement with CH Finance, acquired an equitable interest in his or her property in the form of a common law mortgage”, or alternatively, “if the agreements did not constitute a common law mortgage, they created an option to repurchase in favour of the original owners” ([2005] 3 NZLR 814 at [30](4)).
[49] At [31] of his substantive judgment the Judge recorded Mr Galbraith QC as submitting:
[31] In opening Mr Galbraith submitted that the original owners did not retain an equity in their properties for the reasons that: (1) unpaid purchase money does not give rise to an equity where registration has taken place (Gordon v Treadwell Stacey Smith [1996] 3 NZLR 281 (CA)); (2) while an option to purchase may give rise to an equity, the option here arises under an agreement which expressly contemplates a mortgage and in any event an option would not prevent an owner registering a mortgage prior to the exercise of the option; and (3) the dealings here were very unlikely to have created a common law mortgage where most owners have denied an intention to create that charge and where it would secure the liability of the mortgagee, CH Finance, to the mortgagor, the owner, for the balance of the purchase price.
[50] The Judge recorded Mr Galbraith as submitting in closing:
[32] In closing Mr Galbraith modified part of this argument and expanded on others. He qualified his submission that registration of a forged transfer ends any interest, whether legal or equitable, subject to the possibility of the transfer being defeasible for statutory fraud, by acknowledging that the owner retains an equity which is parallel to that right of defeasibility. However, the vendor does not retain an equitable title as such. He also accepted that an equity exists prior to registration of the transfer. However, the relevant equity here is that which exists after registration of the transfer, because registration of the mortgage will follow it.
[33] Mr Galbraith submitted that cl 11 of the deed of agreement, which provided a first right of purchase rather than a right to redeem, is fatal to the existence of a common law mortgage. And, while accepting that an option to purchase creates a caveatable interest, it is doubtful whether it also creates an equity. Here, however, there is no agreement creating the option (which would have to be in writing to be enforceable) or, if it exists, it arose subsequent to registration of the mortgage (Willetts v Ryan [1968] NZLR 863 (CA)).
[51] The Judge also recorded Mr Tingey’s submissions on the issue of a prior equitable interest at [30] as covering forgery; an interest arising from the agreements and arrangements with CH Finance (the contractual argument); and the issues of common law mortgage and option to purchase. There is no mention of misrepresentation, let alone fraudulent misrepresentation.
(iv) But fraudulent misrepresentation emerges in the judgment as the basis of an adverse interest
[52] Notwithstanding the very limited scope of the pleadings, the trial Judge referred to a “concession” made by Mr Galbraith at trial that there had been fraudulent misrepresentation by CH Finance against all of the owners. We set out the two portions of the judgment under appeal in which this appears:
[11] I have been able to truncate my analysis of CH Finance’s scheme as a result of a concession responsibly made by Mr Alan Galbraith QC, Mr Davies’ counsel, in the context of a discussion of Lord Buckmaster’s judgment in Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd [1926] AC 101, 106-107. Mr Galbraith accepted that all original owners were cheated or tricked by CH Finance into parting with legal ownership to their properties. He did not, of course, accept that Mr Davies was a party to or knew of the company’s deception.
…
[39] I repeat Mr Galbraith’s concession that the owners were induced to part with title to their properties by CH Finance’s deception. It took the form of fraudulent misrepresentations practiced by its officers upon each owner that they were simply giving management of their properties to the company for a limited period of three years for the purpose of enabling it to raise bank finance. I am satisfied that all owners were persuaded to sign agreements for sale and purchase and memoranda of transfer on the common misunderstanding that they remained as registered proprietors. …
[53] Before us, Mr Galbraith felt obliged to submit that he had not made any such concession. He said he was startled, when the judgment was delivered, to find that the Judge had put the adverse interest on which the homeowners’ case must turn on the basis of “fraudulent misrepresentation” (by CH Finance) against each of the owners. Mr Galbraith said that he had assiduously tried to recall what he might have said which could have triggered the possibility of the Judge thinking there was such a concession when he had not in fact made one.
[54] We thereupon inquired of the other counsel in the case, “when had the proposition put by the Judge [of such a concession] first come to your knowledge?” They said that they were in the same position as Mr Galbraith – when they saw the judgment. Counsel (other than Mr Galbraith) all said they could not recollect any such concession.
[55] This appeared to be borne out by counsel’s own notes of their submissions (which were made available to us). This subject was not addressed in closing by Mr Tingey. One could have expected counsel in his position, if any such concession had been made, to have sharply attenuated his submissions under the head of an adverse interest. Indeed, if Mr Galbraith had accepted that there was an equitable interest arising by reason of fraudulent misrepresentation against each of the homeowners, the first issue would simply have fallen away. Instead, argument continued as to what interest, if any, Mr Tingey’s clients had arising out of the documents themselves, irrespective of any fraud of that character.
[56] Further, in the absence of any precise concession on the point, a finding of fraudulent misrepresentation in the case of each of the homeowners would surely have required a separate examination of their particular case, for fraud would have had to have been established in each individual case. A great deal more evidence would have been required, directed to specific allegations of misrepresentation in each case, and addressing the question of reliance.
[57] We asked Mr Barker, Mr Galbraith’s junior, to undertake the burden of preparing (during the hearing before us) a summary of the evidence which was given, to the extent it was given, by the homeowners on this issue. He helpfully did so. Mr Tingey and Mr Caird were given leave to respond to this summary, and did so.
[58] Although there are similarities in much of the evidence, there was no established pattern of something which would amount to fraudulent misrepresentation in relation to all of the homeowners, or indeed any of them. We recite only some of the responses to be found in the evidence, from the homeowners, by way of illustration.
[59] Mr Tapsell was asked:
Q. What did you think you were signing?
A.I have no idea. Honestly I have no idea. I know it sounds, I don’t know, I suppose you shouldn’t sign documents but I had no idea honestly what I was signing.
Q.Did I catch you to say you should have known what you were signing?
A.No I had no idea what I was signing.
[60] Mrs Hepi said of her discussions with Mr Rapata (who she dealt with at CH Finance):
Q. He says that he explained the document to you, do you accept that?
A.You know. You know he probably did explain it to me. I just can’t remember.
Q.So that suggests that the property is to be transferred, that’s right isn’t it?
A.I remember him reading this thing but I couldn’t really understand it. He just said it’s all right, I’ll just read it to you and if there’s any questions I’ll answer them when I read the document and I understood some of it but I didn’t really ask questions about it.
[61] Mr Kereopa was asked:
Q. That’s when you did sign a document or documents isn’t it?
A.Yeah at the time I didn’t know that I had signed it. I just signed the paper where Jeff Clayton said to sign and I just signed it but I didn’t read it.
Q.You knew you would have to sign something if they were going to raise money on your house and buy another house for you didn’t you?
A.I didn’t know how it worked aye. I just didn’t know how it worked.
[62] Ms Kereopa-Cowell (who was present at the time) was asked how her father signed:
Q.What did you think the documents were that your father was signing?
A.I didn’t have any idea, Jeff didn’t explain anything when he walked into the room so I didn’t have any idea what he was signing. I know he said to Dad just sign here, that’s the actions I got from him. We had no idea what Dad was signing.
Q.But you didn’t stop your father signing or suggest to him that he shouldn’t sign?
A.No, well Jeff hadn’t sat down to explain anything so I didn’t know what he was signing.
Q.The discussion at the meeting had been about getting you what you want?
A.Yes. You have to understand we were there because I didn’t understand the scheme properly so I wanted a one on one discussion with Jeff as to how it worked properly. There were questions that I wanted to ask him just so I could just get a better picture in my head. There was no meeting that took place. He didn’t come there to discuss the program with me properly because Dad and I didn’t understand it properly so we wanted to get a one on one because I was just too embarrassed to ask questions in the big meetings.
[63] The general pattern of the evidence was one of failure to understand the effect of the documents rather than a case of misrepresentation. We accept however that Ms Thompson said she was assured CH Finance would not be owning the property. On the other hand, Ms Harris clearly understood that CH Finance would take title to the property. The CH Finance representative Mr Rapata acknowledged in evidence that the homeowners were not told specifically at meetings that their titles would be transferred to CH Finance. But that was evidence of a general nature which could not give rise to a specific finding of fraudulent misrepresentation in individual cases and does not address, for example, issues of reliance by specific homeowners.
[64] Finally, it was not at all clear to us what species of fraudulent misrepresentation was being referred to. That is, at common law or under the Contractual Remedies Act 1979.
[65] At that point of our consideration of the case therefore, the adverse interest to trigger off the consequences on which the statutory managers relied could not rest (as the Judge put it) on fraudulent misrepresentations. It was not pleaded; and the requisite evidence to support such a claim had not been lead. We have no doubt the Judge genuinely believed a concession had been made but on the basis of all counsel’s recollections and the way in which the case proceeded, the Judge must have inadvertently taken more from what was said than was intended. Indeed Mr Tingey candidly and properly said before us that it had not been run, because his interests had not thought such an allegation could be sustained. Mr Galbraith said he had made no such concession. No counsel before us asserted that Mr Galbraith had made such a sweeping concession. And the possibility that one had been made was directly contradicted by the way counsel had conducted their respective cases, at the relevant times. Nor, as already indicated, was any application made to amend the pleadings which was essential if the case was to proceed on a radically different basis from the pleadings as they then stood.
[66] Given that there was therefore no dispute between counsel on the issue, there was no reason to call for a report from the trial Judge. It appeared to us that the case had simply miscarried on this point. We thought that possibly some chance remark by Mr Galbraith about “trickery by CH Finance” had triggered this line of thought by the Judge, but there was nothing approaching a “concession” in the terms which would be required in a case of this kind.
[67] Having reached this view, we were left with the problem of what remedy might be appropriate in the circumstances as they appeared to this Court. The Court therefore issued a Minute dated 23 August 2006, which indicated our conclusion that the concession was not made in the terms set out in the High Court judgment and that there was no basis to establish an adverse interest. We invited further submissions as to the final disposition of the case. We were concerned to ascertain whether a reference back for consideration of an amendment to the pleadings, followed perhaps by a rehearing in light of any amendment might be appropriate. We also sought the assistance of counsel with reference to the disposition of the appeal in relation to the two cases involving forgery.
[68] We will deal with the question of what should now be done about this aspect of this case later in this judgment (see below at [77]). However, it is not significant if there is some other adverse interest against which the doctrine of Land Transfer fraud might operate. We now turn, therefore, to the other two possibilities – common law mortgage and options to purchase.
(v) Common law mortgage
[69] On what was pleaded, the Judge did not accept the arguments for the statutory managers. He said:
[45] I can deal shortly with Mr Tingey’s remaining submissions on this subject. I do not accept that at the dates of registration CH Finance and the original owners were parties to common law mortgages or that the latter had acquired an option to repurchase. Both rights would be antithetical to the agreements reached orally between the parties or alternatively the contractual terms which must exclude the deed of acknowledgement of debt. All original owners asserted that they were borrowing money from, not lending to, CH Finance. Furthermore, while some provisions of the deeds of agreement accurately recorded what had been agreed between the parties, such as that CH Finance would provide financial assistance to the home- owners, most of the remaining terms, including an option to repurchase, were never discussed at all between the parties before registration of the memoranda of transfer and mortgage. For example, all the owners spoke of recovering control of their properties after three years of commitment to CH Finance, not of buying them back at a pre-agreed price. Also, as Mr Galbraith emphasised, an option to purchase is only enforceable if in writing (Willetts v Ryan). Except for Mrs Harris, all options were signed after registration.
[70] In this Court, the statutory managers appealed against the High Court Judge’s holdings under these heads. However, we think the High Court Judge was correct in his holdings, for the reasons he gave and for the following additional ones.
[71] The statutory managers contend that the agreements and arrangements between CH Finance and the original owners were, in substance, a common law mortgage. This is turn would give rise to an equity of redemption which could amount to an adverse interest.
[72] It is undoubtedly correct that in some circumstances what on the face of it appears to be an outright transfer of property can nevertheless operate as a common law mortgage. Ultimately that turns on the intention of the parties (see Hayes Securities Ltd v Bambury [1991] 1 NZLR 304 at 307 (CA)).
[73] The parties’ intention at the date of registration must principally be determined by reference to the documents. The statutory managers rely on the disbursement authority and the acknowledgement. But the statement and the acknowledgement that the original owners “will receive our entitlement in due course” is inconsistent with a common law mortgage in a context in which they said they were “working direct with the company”. In everyday terms, all that means is that “we are going to sort out how we receive our consideration”, in due course.
[74] The disbursement authority provides no greater support for the homeowners’ case. Fundamentally, the difficulties the non-forgery homeowners face – and we have cited only a portion of the evidence in this respect – is that most said they did not understand the effect of the documents. They had no appreciation at all that the property was being held as security for advances made. Neither did they have any appreciation that this was some form of “loan plus security”, as Mr Galbraith put it. We find it impossible to spell out a common intention to create a common law mortgage.
(vi) Option to purchase
[75] We turn to the alleged option to repurchase. Here there are the same evidential difficulties we have already mentioned with respect to the common law mortgage argument. Further, there was no sufficient memorandum for the purposes of the Contracts Enforcement Act 1956. It was said, in the alternative, that the homeowners’ rights were enforceable by operation of the doctrine of part-performance. However the proposition that one can part-perform an option to purchase was rejected by this Court in Barrett v IBC International Ltd [1995] 3 NZLR 170. Then there is the further point that the registration of the transfers would obviously be necessary to make the option effective (which itself assumes the validity of the registration). Whilst an option has been held to give rise to a caveatable interest in New Zealand law, it is difficult to see how registration of the mortgages can be said to defeat such an option. The option to purchase created by the Deed of Arrangement was not entered into until some time after registration of the instruments and was not defeated by registration.
[76] For completeness, we add that we agree with Mr Galbraith that the observations of Blanchard J in Gordon v Treadwell Stacey Smith [1996] 3 NZLR 281 at 289, lines 30-45 (CA) clearly preclude the notion that unpaid purchase monies may give rise to an equitable interest.
Should the case be remitted to the High Court and “reopened”
[77] The issue of whether the Judge’s holding of “fraudulent misrepresentation” is to stand is therefore critical to this case.
[78] Mr Tingey submitted that the Court should “reconsider its initial view in [our] Minute and determine [Mr Galbraith’s] concession was made” (see above at [67]). Mr Tingey's submission was based on material we have considered but which we do not find it necessary to traverse.
[79] He further submitted that the “ten other cases [i.e. the non-forgery cases] should be referred back to the Trial Judge for further directions to determine whether in respect of those ten properties the owners were induced to transfer their properties by fraudulent representation and for further orders as to costs”.
[80] Mr Tingey acknowledged that until trial “the statutory managers did not consider they had sufficient evidence to plead fraudulent misrepresentation … [which is a] serious allegation”. But he said the evidence of a solicitor “employed by CH Finance, Mr Henri Rapata” had opened up this possibility at trial, and that “it was primarily his evidence that was relied upon by Harrison J in determining that there was fraudulent misrepresentation [by CH Finance]”.
[81] Mr Tingey had made no application to amend the pleadings at trial, or on the appeal hearing, but he appended to his submissions of 2 October 2006 a proposed amended statement of claim alleging (for the first time), false and fraudulent representation in relation to the mortgage lending scheme qua each of the ten plaintiffs. Further misrepresentations are set out, which are said to have induced each of the plaintiffs to enter into the various agreements.
[82] Mr Barker prepared the submissions for Mr Davies on this occasion. He submitted it was wholly inappropriate to re-open the issue of the concession. More significantly, in his submission, the statutory managers had never pleaded, nor relied upon – even in closing – fraudulent representation and there was “nothing that could have been conceded without amendment to the pleadings”. And such an amendment would have been strenuously resisted.
[83] Mr Barker correctly said that there is authority for the proposition that in New Zealand a concession (if it was made) can be withdrawn where that is required in the interests of justice (Otter v Residual Health Management Unit (1999) 13 PRNZ 367 (CA)).
[84] Mr Barker rejected the proposition that Mr Rapata’s evidence was as helpful to the statutory managers as had been suggested. The gist of his submission was that the evidence only suggests a (faint) basis on which the statutory managers may be able to succeed, if given leave to amend their pleadings. Or more simply, the case has never (to date) been actively considered as a misrepresentation case.
[85] Finally, Mr Barker said that the proposed amendments simply demonstrate the difficulty of what is being proposed: this case would have to be reheard in its entirety.
[86] Mr Judd also argued that the cases of the ten homeowners should not be referred back to the High Court for a re-hearing. He said what is really being sought amounts to a direction for a new trial. He argued that such a course would give rise to real injustice to his mortgagee clients, when, even on the statutory managers’ case, these parties “are innocent of any wrongdoing”. He referred to the observation of Fair J in Foley and Another v Bank of New Zealand [1953] NZLR 303 at 307 (SC), that:
[I]t has long been a principle of our law, and a very sound one, that no person shall be twice vexed with proceedings in respect of the same matter … .
[87] Mr Judd added that even if a concession had been made on behalf of Mr Davies in the terms suggested, it could not bind the mortgagees.
[88] We have reached the view that we should decline to adopt the course urged upon us by counsel for the statutory managers.
[89] The case, right up until after the hearing of the appeal before us, was never run as a case of misrepresentation. As Mr Judd noted, even when, in March 2004, the statutory managers were asked for particulars of any fraud in relation to the original statement of claim, they expressly disavowed any such claim and said, “[t]he statement of claim does not allege that arrangements between CH Finance and the original homeowners amounted to fraud”. No possible amended pleading was ever raised thereafter, until Mr Tingey’s most recent memorandum.
[90] This case went awry at trial. If the Judge – or counsel – had reached the view that there was the possibility of an adverse interest based on misrepresentation qua the homeowners, that should have been explicitly dealt with, then, by the Court. As Lord Greene MR said in J Leavey & Co v Hirst & Co [1944] KB 24 at 27:
[W]here it is desired to make a substantial departure from the pleadings it is the duty of the judge and counsel on both sides to see that a proper application is made for leave to amend the pleadings. The proposed amendment should be put in writing, so that counsel on the other side can consider it and apply for an adjournment if the nature of the amendment is one which involves his calling further evidence with which he was not prepared. I hope I shall not be thought pedantic on the matter of pleading. It will be seen at once what grave possibilities of injustice there are if pleadings are brushed aside at the trial, new issues raised which have never been pleaded, and evidence called bearing on those issues with regard to which there has been no discovery and which the other side have no opportunity of meeting by other evidence.
[91] Plainly, on what was said by counsel in this Court, they were surprised with what came out in the judgment and had no inkling of the basis upon which the Judge was proposing to rest his judgment on the adverse interest issue.
[92] Assuming, for the purpose of argument, that what is termed a “concession” was made, it seems difficult to see, in the particular circumstances of this case, why Mr Galbraith’s interests would not be permitted to withdraw it. And, it is extremely difficult to see how any such concession could bind the discrete interests of Mr Judd’s clients.
[93] Presumably, the proposed pleading of “fraud” is based on s 7 of the Contractual Remedies Act 1979. Between the parties to the agreement at least (CH Finance and the homeowners), fraudulent misrepresentation at common law would be barred (see s 7(1)). Of course, it is possible to sue an agent at common law for fraudulent misrepresentation (see Tak & Co Inc v AEL Corporation Ltd (1995) 5 NZBLC 103,887 (HC)). And we accept “as a paradigm of fraud the case of a deception which induces the victim to act to his own detriment and to the deceiver’s profit” (Arlidge, Parry & Gatt Arlidge & Parry on Fraud (2ed 1996) at 35). But even so, patently all the relevant witnesses from CH Finance and the original homeowners would have to be called, and each of their cases considered on an individual basis, on a remission to the High Court. All in all, what is being sought, as Mr Barker and Mr Judd urged on us, is really a completely new trial from the ground up on this cause of action, with all that that entails.
[94] We note that the Supreme Court of New Zealand has very recently emphasised the “strong societal interest in the final determination of concluded litigation” and that “courts are required to function within prescribed limits framed to ensure there is an end to litigation” (Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 1 at [15] per McGrath J).
[95] We propose, accordingly, to dismiss the appeal by the statutory managers with respect to the non-forgery cases.
The other issues in the case
[96] Once there is no adverse interest in the original homeowners, that is the end of the case: Mr Davies could not commit a fraud against those interests, and there was nothing to be imputed to the mortgagees (although the Judge declined to do so, in any event).
[97] The Judge’s holding on the issue of imputation is the subject of an article by Professor Watts in “Imputed Knowledge in Agency Law: Knowledge Acquired Outside Mandate” [2005] NZ Law Review 307. Drawing on it, arguments were run by Mr Tingey in support of his claim that the mortgagees, as principals, should be burdened with Mr Davies’ knowledge. The Judge had declined to accept such a proposition, on the basis that such knowledge as existed was, in effect, knowledge acquired before the existence of the agency. In light of our conclusions above, we are not now required to address that issue, and we express no view on the conclusion reached by the Judge.
[98] As a matter of caution, we are, of course, giving judgment only in respect of the properties in the proceedings before us.
Conclusion
[99] What the Judge held by way of relief was:
[165] With respect, the relief as framed in the statement of claim does not appear appropriate to the issues as I have determined them. I repeat my conclusions that:
(1)At the time the memoranda of first mortgage were registered against titles held by the original owners and then transferred to CH Finance each owner held an equitable interest in the property, constituted by a right to set aside the relevant transaction of sale;
(2)Mr Davies acted fraudulently in registering the memoranda of mortgage and thereby defeating each owner’s right to set aside an interest in the properties;
(3)However, Mr Davies’ fraud cannot be imputed to the mortgagees or attributed to DSNC.
[166] It follows from this last finding that I dismiss the managers’ application for an order directing the Registrar of Lands to cancel the mortgages. However, I would be prepared to consider an amended application for relief to properly convey the first two findings. It may most appropriately be restricted to a direction to the Registrar to set aside all transfers to CH Finance, and restore the original owners to the titles but subject of course to the mortgagees’ first securities (Heron v Broadbent (1919) 20 SR (NSW) 101).
[167] I assume that as a consequence of my conclusions all original owners will have a right to claim compensation under s 172(b) [of the Land Transfer Act]. The Crown would, of course, be entitled to pursue a right of indemnity from Mr Davies. The limit of their claims would be the amounts required to discharge a particular mortgage, less any sums actually paid by CH Finance (excluding deductions for fees etc). I add also what may be obvious: the existence of the mortgagees’ estate bars the owners from bringing an action for recovery of their originally unencumbered interest. The terms of this judgment may enable the owners and the mortgagees to reach an accommodation in the event that the owners pursue compensation rights.
[100] We have already dealt with the position in respect of the two forgeries (above at [28]).
[101] As to the other ten claims, we think the appropriate course is to allow Mr Davies’ cross-appeal, and to set aside the Judge’s orders. We give judgment for all the respondents, against the appellants. The appeal by the statutory managers is dismissed. The practical result is that the validity of the mortgages in issue before us is maintained. As to costs, the orders made by Harrison J on 1 June 2005 are set aside. Costs are reserved in the High Court with respect to these claims. If counsel cannot agree on costs, they are to be fixed by the High Court.
[102] In this Court, costs are reserved on these ten claims. If counsel are unable to agree on this issue they can file memoranda in this Court, in the following order: Mr Galbraith; then Mr Judd; then Mr Tingey, with a right-of-reply to Mr Galbraith.
Solicitors:
Bell Gully, Auckland for Appellants
Paddy Orr & Co, Auckland for First Respondent
Ladbrooks Solicitors, Auckland for Second to Sixth Respondents
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