Waller v Davies HC Auckland Civ-2003-404-6843
[2005] NZHC 1236
•24 March 2005
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2003-404-006843
UNDERthe Corporations (Investigation and Management) Act 1989
BETWEENJOHN ANTHONY WALLER AND RICHARD DALE AGNEW
Plaintiff
AND STEPHEN JOHN DAVIES
First Defendant
ANDDAVIES & CO SOLICITORS NOMINEE COMPANY LTD
Second Defendant
(continued over page
)
Hearing: 29 and 30 November, 1, 2, 3, 17 and 20 December 2004
Appearances: Murray Tingey and James Caird for Plaintiffs
Alan Galbraith QC and John Moody for First Defendant Simon Judd for Second, Third, Fifth and Sixth Defendants Michael Black for Fourth Defendants
Michael Ring QC for Third Party Judgment: 24 March 2005
JUDGMENT OF HARRISON J
In accordance with R540(4) I direct that the Registrar endorse this judgment with the delivery time of 10 a.m. on 24 March 2005
SOLICITORS
Bell Gully (Auckland) for Plaintiffs
Paddy Orr & Co (Auckland) for First Defendant Timothy Carnachan (Auckland) for Fourth Defendants Ladbrookes (Auckland) for Second and Fifth Defendants
Kathryn Webber (Auckland) for Third and Sixth Defendants McElroys (Auckland) for Third Party
COUNSEL
AR Galbraith QC, M Ring QC, J Moody, SRG Judd, MC Black
JOHN ANTHONY WALLER AND RICHARD DALE AGNEW V STEPHEN JOHN DAVIES And Ors HC AK CIV-2003-404-006843 [24 March 2005]
ANDGEOFFREY ANDREW HITCHINGS AND TERENCE RICHARD HITCHINGS
Third Defendant
ANDDOUGLAS WALTER EDWARDS AND DENISE ANNE EDWARDS
Fourth Defendant
AND QING SHENG SHI
Fifth Defendant
ANDNICHOLAS LOUISE WADEY AND JEREMY ALAN MILTON
Sixth Defendant
ANDQBE INSURANCE (INTERNATIONAL) LTD
Third Party
Table of Contents
Paragraph No.
Introduction [1] – [7]
Issues [8] – [10]
Scheme [11] – [28]
(1)Equitable Interest
(a)Submissions [29] – [33]
(b)Decision
(i) Existence of Equitable Interests [34] – [42]
(ii) Extinguishment of Equitable Interest [43] – [46]
(2)Fraud
(a)Submissions [47] – [50]
(b)Decision
(i) Legal Principles [51] – [55]
(ii) Davies Law and CH Finance
relationship [56] – [59]
(iii) Mr Davies’ knowledge on
29 May 2002 [60] – [74]
(iv) Mr Davies’ knowledge at
14 June 2002 [75] – [89]
Conclusion [90] – [96]
(3)Agency
(a) Facts [97] – [108]
(b)Submissions [109] – [115]
(c)Decision
(i) Introduction [116] – [121]
(ii) Imputing Knowledge to Mortgagees [122] – [151]
(iii) Attributing Knowledge to DSNC [152] – [163] Summary [164] – [170]
Introduction
[1] This case raises questions about the indefeasibility provisions of the Land Transfer Act 1952. It presents a novel combination of features. First, it is based upon allegations of defeasible fraud committed by a solicitor when registering consecutive memoranda of transfer and mortgage on a number of separate transactions. Second, with two exceptions for forgery, the vendors who allege fraud signed apparently valid and binding agreements for sale and purchase with and memoranda of transfer to the purchaser. Third, the solicitor acted for the purchaser, the mortgagees and, allegedly, for the vendors on each transaction. Fourth, the solicitor’s alleged fraud was in the nature of wilful blindness towards an identical equitable interest held by each vendor, arising from a right to set aside the agreements consequent upon the purchaser’s earlier and discrete fraud. And, fifth, the vendors claim the mortgagees are liable for the solicitor’s fraud.
[2] CH Finance Ltd and related companies including the Independent Creative Management Group Ltd (ICMG) were incorporated in 2001. CH Finance’s owner and managing director was Mr John Daniels, an undischarged bankrupt. Others subsequently associated with its management or promotion included Messrs Geoffrey Clayton, a former church pastor, and Hemi-Rua Rapata, a sometime Whangarei lawyer. CH Finance devised a money lending scheme targeted at unsophisticated owners of modest residential properties who did not enjoy access to conventional funding sources even though they had little or no secured debt. The company would offer to arrange bank financing for owners (“the original owner” or “the owner”) sufficient to provide a modest loan after discharging any mortgages. In exchange owners would be required to agree to ‘give’ their properties to CH Finance for a minimum period of three years.
[3] The legal reality of the scheme was strikingly different. CH Finance required all owners to sign agreements for sale and purchase of their properties, memoranda of transfer, disbursement authorities and so-called acknowledgements that they would not be receiving the full proceeds upon settlement. It persuaded the two of the
12 involved in this case whose properties were unencumbered to deliver up
certificates of title; it obtained the titles to the other 10 properties from existing mortgagees. CH Finance then successively registered the transfer to itself and a memorandum of first mortgage to secure a loan from a third party. Later it advanced the owner a modest amount, equal to a small portion of the agreed purchase price. He or she was then relegated to the status of an unsecured creditor for the unpaid balance. All owners now allege that CH Finance defrauded them into selling their homes, giving rise to a common equitable right to set aside the transfers.
[4] A common feature of all transactions was Mr Stephen Davies’ participation. He is a lawyer practising in New Lynn under the name of Davies Law. He acted for CH Finance on settlement of all agreements for sale and purchase and also for all mortgagees, either Davies & Co Solicitors Nominee Company Ltd (DSNC) or individuals. Mr Davies purported to act also for the 12 original owners on the sales, although whether in law he represented them was a contentious issue at trial. All accuse him of statutory fraud, of a different nature from that practised by CH Finance, in defeating their equitable interests by dishonestly registering the mortgages.
[5] In 2003 the inevitable happened. CH Finance failed. Messrs John Waller and Richard Agnew were appointed statutory managers pursuant to the Corporations (Investigations and Management) Act 2003. Currently CH Finance is registered as owner of the 12 properties. This case is essentially a contest between two innocent groups about which one should assume losses caused by the company’s failure. The core facts are not in dispute. It is more the state of Mr Davies’ knowledge at various times, and to whom it can be imputed or is attributable, that is in question.
[6] The statutory managers seek a range of directions granting direct relief against Mr Davies, DSNC, and four individual lenders. The latter two groups have issued cross-claims for indemnity or contribution against Mr Davies. By agreement, they are adjourned for further determination pending delivery of this judgment. Mr Davies separately joined his professional indemnity underwriter, QBE Insurance Ltd. However, he discontinued his claim at trial following cross-examination by the insurer’s counsel, Mr Michael Ring QC, of Mr Rapata. Accordingly, at this stage I am only required to determine questions of primary liability.
[7] All 12 original owners swore affidavits. Most were cross-examined. The mortgagees also swore affidavits and called Mr Rapata. Mr Davies and a former employee gave evidence, as did a financial consultant who advised DSNC.
Issues
[8] Three discrete legal questions arise for determination as follows: (1) whether the original owners retained an equitable interest in their properties at the time of registration of the mortgages; (2) if so, whether those interests were defeated by fraud on Mr Davies’ part; and (3) if so, whether the mortgagees are liable for Mr Davies’ fraud.
[9] A separate question raised by the statutory managers is whether or not title to seven of the 12 properties was fraudulently transferred to CH Finance through forged memoranda of transfers, although its resolution will not have a direct effect upon the terms of any substantive relief claimed against the mortgagees. I shall deal with the seven individual claims of forgery in an appendix to this judgment.
[10]I shall first discuss the nature of the scheme in more detail.
Scheme
[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.
[12] As neither the statutory managers nor the other two principal parties had a direct interest in advancing opposing argument about the scheme itself, there was no serious challenge to the owners’ accounts. All gave detailed evidence of
CH Finance’s modus operandi. They recounted a constant and compelling theme of deception at the company’s hands, through Messrs Daniels and Clayton and, to a lesser extent, Mr Rapata. I accept that all were truthful witnesses, although some were mistaken, and inevitably their accounts differed.
[13] I could see for myself why CH Finance targeted each original owner and why each eventually succumbed to the company’s aggressive promotional campaign. I agree with the assessment offered by Mr Murray Tingey, counsel for the statutory managers. All owners were honest, trusting, financially naïve people who were struggling to borrow modest sums to meet immediate cash needs. Whether by reason of age, poor states of health or adverse employment or credit records, they were unattractive to reputable lending institutions, leaving them particularly vulnerable to the predations of Mr Daniels and his associates.
[14] The scheme was actively promoted at meetings through New Zealand in terms promising unique financial returns. The owners spoke frequently of ‘joining’ something, much like membership of a club, that would bring tangible cash benefits spread over three years. CH Finance worked on expanding its appeal through whanau, marae and church networks. The 12 original owners attended meetings, either public or private, addressed by any one of Messrs Clayton, Daniels or Rapata. An elderly home owner, Mrs Elsma Matthews, whose property is at 1/17 Lodge Avenue, Tauranga, described a meeting convened by Mr Clayton as having “a real evangelical feel about it, and a prayer was said before the meeting began… As I am a Christian … I trusted Geoffrey”.
[15] An articulate and representative account of attendances at these meetings was given by Ms Robyn Kereopa-Cowell. Her father is an original owner. His property is at 28A Wallis Street, Raglan. Ms Kereopa-Cowell attended what she understood was a “seminar” being run by an entity called Toi Te Atatu, a generic name for CH Finance, at a marae in Otara. About 40 or 50 others were there. Mr Daniels was the presenter. He left her with this understanding of the scheme’s operation:
A homeowner would transfer their home over to Toi Te Atatu, but wouldn’t lose possession or ownership of the home. At that time I did not appreciate that transferring the home meant that Dad would no longer be an owner of the property. Then they would use the homeowner’s home and one
other home (I never got an answer to where the other home came from) as collateral and go to the banks to get a loan for 80% of the value of both the homes combined.
Toi Te Atatu would take an up front fee of $10,000.00 for arranging everything through the banks, and the remaining money would be passed on to the original homeowner to do with as they pleased. They would find people who wanted to rent to buy a home and put them into the second home. The original homeowner would then become the landlord to the tenants in the rent to buy home. Toi Te Atatu would manage the second property on the original homeowner’s behalf and collect the rent (this would provide the tenants with a paper trail for future reference). The tenants would be charged $295.00 per week. $45.00 would be taken by Toi Te Atatu as their fee for collecting the rent and $250.00 would be passed on to the original homeowner to go towards the mortgage that they now have for the two properties.
Toi Te Atatu would manage the second property for three years and then they would do the same process for the renters so that the renters may get a loan from the banks to pay off the mortgage owing on the second property to the original homeowner. The renters would then become the homeowners and they would now become landlords to tenants renting to buy their second home, for a $10,000.00 up front fee.
[My emphasis]
[16] Ms Kereopa-Cowell recounted her attendance with her father at two more meetings, three or four months apart. Mr Clayton was the presenter at both. She said this about it:
Each time we attended a seminar we filled in an attendance sheet with our names, addresses and phone numbers. I had approached one of the ladies who was working there to see how I could get to understand the scheme properly because I wasn’t able to get satisfactory answers to questions that I had about the scheme. Two of the questions I had were about the ownership of the original property, also how would the second property be purchased. I asked these questions at one of the seminars. The presenters would not answer these questions in a straightforward way. I was left with the impression that they would be an agent for the original owners. There was no suggestion that ownership of the property would be lost. In response to the questions, the presenters would give answers that would make me feel small for even asking them. They never answered directly, and used big words in their answers which confused me. I felt too embarrassed to ask another question.
[17] Ms Kereopa-Cowell described her father’s current medical condition in these terms:
Dad suffered a head injury many years ago. As a result of his injury, his speech is slow and slurred. He is not able to think quickly and it takes a long time for him to be able to process information. He uses a magnifying glass
to help him read. He has been slowing down even more in the last few years. I went to the seminars to try and help him understand the scheme. I am also inexperienced in these matters, and had difficulty understanding what was involved.
[18] To some original owners such as Mrs Thelma Harris, whose property is at 14 Ascot Avenue, Mt Maunganui, Mr Clayton touched an altruistic vein. He assured his audience that the scheme would help people who could not otherwise finance themselves into home ownership over an extended period. Mrs Harris understood that Toi Te Atatu would take possession of her title “to get a bank facility, that is, to use the bank’s money” and that Toi Te Atatu would assume liability to pay the rates, the tenant would be liable for the water bill, and the property would be fixed.
[19] Mr Rapata was the only associate or officer of CH Finance to give evidence. Its promotional literature described him as a regional manager. He is a lawyer of at least 20 years experience. He had left legal practice in the late 1990s but decided to return in about 2001 and as a result became associated with CH Finance. Mr Rapata is fluent in Te Reo. He delivered his evidence with gravitas. He is a charismatic figure who would have provided less worldly and educated Maori with comfort and confidence about the scheme where neither was remotely justified. I accept the evidence of a number of original owners who described him as a persuasive advocate for the scheme. One, Susan Hepi, said that at a meeting in Whangarei Mr Rapata:
… gave a big speech about the company… He must have given a spiel for about an hour. He made us put up our hand if we had a mortgage on our house and then he went around each person asking how much was left on it. He talked about the benefits the company could offer us. He said that we could get money, cars, we could pay this off and pay that off and all we had to do was let them hold our house for three years. After three years, we could either stay in the scheme or pull out. He used a lot of long words and technical words like most lawyers do, which I did not really understand. But Hemi was really likeable and seemed very genuine about everything he said.
[20] Mr Rapata sought to portray himself as a loser in CH Finance’s failure. It is not insignificant that, while he borrowed money from the company, Mr Rapata did not transfer legal title to his property but instead executed a mortgage in CH Finance’s favour. He was apparently the beneficiary of an orthodox lending arrangement.
[21] I do not accept Mr Rapata’s evidence that the presenters explained CH Finance’s modus operandi in clear and simple terms. To the contrary, at trial he volunteered that audiences at meetings were told that:
If they were willing to give the house to CH Finance for three years then CH Finance would go to the bank and would be able to give the client the financial help that the client needed. The client could get their house back at the end of three years or decide whether to carry on with the arrangement. It was made very clear during the presentation that in order to take advantage of the opportunity, the client had to give the house to CH Finance.
[Emphasis added]
Mr Rapata admitted that the audiences were not told that freehold title to their properties would be transferred to CH Finance. He acknowledged that he supported the scheme; I am satisfied that he was one of its most active proponents. He conceded that he never warned owners about the risks even though he must have known them. In my assessment Mr Rapata had no idea of his professional responsibilities, and Mr Ring’s cross-examination exposed his legal and commercial incompetence.
[22] In summary, I agree with Messrs Tingey and James Caird that the evidence of all original owners, Ms Kereopa-Cowell and Mr Rapata establishes that CH Finance’s representatives promoted and sold its scheme in these terms:
(1)The original owners would ‘give’ their properties to the company for a period of three years for the purpose of enabling it to arrange bank finance. As Mr Rapata volunteered in confirming Ms Kereopa- Cowell’s account, ‘we go to the bank to get the money’ and ‘utilise the equity in their homes for that [three year] period’. Sometimes this would require the owners to give CH Finance their properties’ ‘deeds’ for insurance or safety. Critically, though, the owners were to retain ultimate control and ownership of the properties;
(2)In exchange for ‘giving’ their properties to CH Finance the original owners would receive benefits in the form of repayment of existing debt obligations and funds to pay for cars and renovations. At the conclusion of the three year period CH Finance would either
automatically return management of the property to the owners or they would be able to exercise an option to remain in the scheme. They were also entitled to have the properties returned on three months notice if they repaid what they had been advanced;
(3)The owners did not know that CH Finance was able or entitled to mortgage their properties to third parties. Some spoke of ignorance of any risk of losing their properties, apparently because they understood that CH Finance would ‘use’ the properties either by renting them out, buying a second house and renting it out, or helping first time owners into a house;
(4)The owners did not understand the legal significance or import of the documents which they signed. While the statutory managers’ eleventh hour amended plea of non est factum was abandoned in closing, the owners plainly relied upon what CH Finance’s representatives advised them was the meaning of the core documents rather than on any independent or informed appreciation of their actual and contradictory effect. I accept that Mr Rapata and others actively discouraged owners from seeking independent legal advice, knowing that they would not enter into the transactions upon the terms as documented following receipt of competent legal advice.
[23] Mr Tingey submitted that CH Finance obtained registered title to seven of the 12 properties by employing forged memoranda of transfer. Counsel for the other parties did not have an interest in opposing this submission. However, because it may bear upon rights of claim for compensation under s 172, for example, and I am being asked to make declarations to that effect, I must be satisfied that signatures were forged. I have carefully reviewed the evidence relating to all seven transactions for that purpose, and my conclusions are set out in an appendix to this judgment. In the event I am satisfied that only two of the memoranda of transfer were forged.
[24] Each original owner, except the victims of forgery, signed four relevant documents as follows:
(1)An agreement for sale and purchase in standard Auckland District Law Society form. The parties were the owner as vendor and CH Finance or nominee as purchaser. The purchase price was not struck by the traditional process of bargaining between willing parties but according to an assessment by a valuer engaged by CH Finance. I am satisfied that the company never discussed a price with any original owner. 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. Only CH Finance’s solicitor, Davies Law, was nominated as representing a party;
(2)A memorandum of transfer. This document was in standard form. The consideration was generally the same as that provided by the agreement for sale and purchase. The operative clause recited that the owner transferred his or her estate and interest in the land to CH Finance ‘… for the above consideration (receipt of which is acknowledged) …’. The signatures of transferors were mostly witnessed by Mr Clayton and less frequently by Mr Rapata. A staff solicitor employed by Davies Law, whom I shall describe as Z, certified all memoranda as correct for the purposes of the Land Transfer Act;
(3)A form of acknowledgement which post-dated the agreement for sale and purchase and transfer. The document was drafted by Davies Law following a discussion between Mr Davies and Z about the owners’ omission to nominate their own solicitors in the agreements in circumstances where the firm was expected to obtain a discharge of mortgage, if any, settle the transaction and account for the balance of the mortgage advance. Mr Davies advised Z that it was appropriate for the firm to act provided the owners signed an acknowledgement that they (a) were not receiving the full proceeds of sale on the day of
settlement and (b) were entitled to seek independent advice but had elected not to do so. The acknowledgement provided:
We … acknowledge that we are transferring our property to
… 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.
[Emphasis added]
(4)A disbursement authority which was not drafted by Davies Law. It was in the name of ICMG Holdings Ltd or ICMG Property Co Ltd and 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.
[25] ICMG followed a standard practice of instructing Davies Law on all 12 transactions. It sent a letter enclosing signed copies of the agreement, memorandum of transfer, acknowledgement, and disbursement authority and, on two occasions, the certificate of title. Upon receipt, Davies Law arranged to discharge the existing mortgage, produce the title and register the memoranda of transfer and mortgage in favour of DSNC or individuals. The original owners were debited with various charges on settlement including a management fee to ICMG of between $10,000 and
$15,000, Davies Law’s legal fees, and an insurance premium. Some then received a small cash amount to be applied towards buying a motor vehicle or paying for airfares or modest home renovations; typically the payment was a fraction of the agreed sale price, at maximum 20%. Others received nothing.
[26] To complete the narrative, some time after registration of the memoranda of the transfer and mortgage at least six of the 12 original owners signed what were described as deeds of agreement (a seventh, Mrs Harris, signed her deed before registration). The nominated purchaser was either CH Finance or an associated company, Opol Ltd. The deed opened with a recital of CH Finance’s agreement to “provide financial assistance” to the owner, followed by three prospective obligations: (1) by the owner to execute a memorandum of transfer in accordance with the agreement for sale and purchase (even though this event had already occurred); (2) by CH Finance to “arrange finance on the property” and pay on the owner’s behalf “sufficient funds to discharge any existing encumbrances on the property, any legal and associated costs and such further assistance to the [owner] in accordance with …” an attached schedule; and (3) “the balance of the purchase price then remaining” was to be secured by a deed of acknowledgement of debt. In exchange for CH Finance’s “assistance” the owner agreed (1) to “commit the property” to the company for a period of not less than three years; (2) to retain “the use, occupation and enjoyment of the property”; and (3) to assume liability for all maintenance and upkeep. For its part, CH Finance assumed responsibility to pay land rates, fire insurance and “all payments due under the mortgage secured over the property” (at that time, unknown to the owners, the “mortgage secured” was executed by CH Finance in favour of DSNC or individuals).
[27] The deed vested in the original owner a right to “remove the property from the arrangement” on three months notice “at which time any financial adjustments will be made as agreed between the parties”. The document concluded in these terms:
11.Upon termination the purchaser shall give to the vendor 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 as agreed upon between the parties.
12.The vendor acknowledges that they (sic) have been advised that they should obtain independent legal advice in relation to the transaction but have declined to do so.
[28]I shall now consider each of the three discrete issues.
(1) Equitable Interest
(a)Submissions
[29] The first issue is whether the original owners retained an equitable interest in their properties at the time of registration of the memoranda of mortgages.
[30]Mr Tingey submitted that:
(1)Each original owner has 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. Those in the former category lost legal title to CH Finance as a result of the fraudulent act of registration under the Land Transfer Act 1952. But they retained equitable title for the reason that the Torrens system is concerned only with the passing of legal title, and does not have regard to or purport to transfer equitable interests. Thus the original registered proprietors have a right under the Act to have the properties re-conveyed to him or her;
(2)Alternatively, the documents signed prior to registration evidenced the original owners retention of an equitable interest in the properties.
Despite the terms of the agreements for sale and purchase, the transactions were not intended to be outright sales. The acknowledgements signed by the original owners provided that:
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.
And the disbursement request stated that:
We further confirm that we have appointed ICMG Holdings Ltd to act on our behalf in the management of our properties.
In other words, the parties must have agreed on important collateral oral terms. Furthermore, at the date of signature and registration of the transfers, the owners and CH Finance (except for Mrs Harris) had not entered into deeds of agreement. Those deeds have the effect of confirming the pre-existing oral agreements or arrangements between the parties;
(3)Alternatively 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. Statutory mortgages do not effect a transfer of title of the property itself (s 100). However, a common law mortgage involves the transfer of the mortgagor’s legal interest in the property to the mortgagee subject to an equity of redemption, compelling the mortgagee to re-convey the property to the mortgagor upon repayment of the debt. The current system does not exclude the existence of a common law mortgage which can only be determined by reviewing the nature and substance of an agreement by considering all contractual arrangements; parole evidence is admissible to show that a conveyance or a transfer absolute on its face was intended by the parties to be a security only (Hayes Securities Ltd v Bambury [1991] 1 NZLR 304 (CA); Castle Hill Run Ltd v NZI Finance Ltd [1985] 2 NZLR 104 (CA)). An equity of redemption gives the mortgagor an equitable interest in the property (Casbourne v Scarfe (1737) 26 ER 377). Here the original owners clearly intended to
transfer their properties in exchange for promised financial benefits (normally renovations, cars and cash loans), with a right to have the property returned when, on three months notice, that benefit was repaid or at the end of three years. In substance this was a common law mortgage;
(4)Alternatively, if the agreements did not constitute a common law mortgage, they created an option to repurchase in favour of the original owners. Again this issue must be determined by the substance, not the form, of the transaction (Castle Hill Run Ltd (supra)). An option to purchase confers on the grantee an equitable interest in the property (Bevin v Smith [1994] 3 NZLR 648 (CA)). The deed of agreement does not contemplate that CH Finance would register a mortgage against the property. Indeed, granting a mortgage would be inconsistent with the deed. Again the entire factual matrix is relevant.
[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.
[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 clause 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)).
(b) Decision
(i)Existence of Equitable Interests
[34] This first issue must be determined in two stages. First, did each of the original owners retain an equitable interest in the properties immediately prior to registration of the memoranda of mortgage from CH Finance to third parties? It is axiomatic that legal title passed on registration of the memoranda of transfer to CH Finance, and the mortgagees acquired separate legal interests immediately thereafter (s 41). Whether either event had the effect of extinguishing any equitable interests vested in the owners’ must be determined at the next stage.
[35] Equitable interests exist outside of the statutory framework of legal ownership or estates provided by the Land Transfer Act. They are created where Courts recognise that a right or interest in land, normally contractual, requires the protection of an equitable remedy (Bevin v Smith (supra) at 660-665). The most common example is of a purchaser’s right to a decree of specific performance under an agreement for sale and purchase. There is little reported authority on equitable interests held by vendors, presumably because of the standard conveyancing practice of completing settlement in accordance with the contractual obligation to tender the full amount of the purchase price in exchange for title. Nevertheless, the authorities recognise that an unpaid vendor retains an equitable interest in a property until
payment of the full purchase price. This interest is “personal and substantial”, including rights of protection and assertion against acts in derogation (Re Universal Management [1983] NZLR 462 (CA) per McMullin J at 479-480). The discrete right to set aside for fraud has been described as a mere equity, that is as a right in personam (Morland v Hales & Somerville [1911] 30 NZLR 201). However, that limitation only applies where the subject interest has passed to a purchaser for value without notice so that an owner who has been induced by fraud to convey title to another party continues to retain an equitable interest in the land until that event (Latec Investments Ltd v Hotel Terrigal Pty Ltd [1965] 113 CLR 265 per Taylor J at 281-286). Our Court of Appeal has expressly recognised the jurisdiction to set aside a transfer procured by fraud where its effect is to extinguish an equitable estate (Efstratiou, Glantschnig and Petrovic v Glantschnig [1972] NZLR 594 (CA) at 601).
[36] Equity has frequently used the remedy of the constructive trust to protect an owner’s equitable right or interest. A constructive trust (Beatty v Guggenheim Exploration Co 225 NY 380 1919) per Cardozo J at 386, applied by Bingham J in Neste Oy v Lloyds Bank Plc [1983] 2 Lloyds Rep. 658, 665-666 and approved by Cooke P in Elders Pastoral Ltd v Bank of New Zealand [1989] 2 NZLR 180 at 185):
… is a formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee.
Alternatively expressed, a constructive trust is created (Gissing v Gissing (1971) AC 886 at 905 per Lord Diplock):
Whenever the trustee has so conducted himself that it would be inequitable to allow him to deny to the cestui que trust a beneficial interest in the land acquired.
[37] In Australia, the High Court has imposed a constructive trust upon a registered proprietor who refused to honour or recognise a repurchase provision in an earlier contract for the sale of land (Bahr v Nicolay (No.2) (1987-1988) 164 CLR 604). Wilson and Toohey JJ were content to rely upon the general proposition that the owner became subject to a constructive trust once the repurchase provision was treated as constituting an equitable interest in the land (638-639). Brennan J identified the fraud which attracted equity’s intervention as the owner’s
unconscionable attempt to deny an unregistered interest to which he had undertaken to subject his title (654-656). English Courts have employed the same equitable remedy of a constructive trust where the legal owner of a property seeks to use his title to defeat a beneficial or equitable interest which “according to the true bargain” belongs to another (Bannister v Bannister [1948] 2 All ER 133 (CA) per Scott LJ at 136).
[38] Doubtless these principles are the source of Blanchard J’s observation that a purchaser takes title subject to a constructive trust if he has persuaded the vendors to part with it by fraud, in contrast to a situation where vendors elected to settle without requiring payment of the unpaid balance of the purchase price, for which they became unsecured creditors with personal rights of recovery (Gordon v Treadwell Stacey Smith (supra) at 289).
[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. CH Finance never promoted or sold its scheme on the basis that its lending took the form of absolute or outright sales of property in exchange for payment of a small portion of the agreed price, leaving the owners as an unsecured creditor for the unpaid balance. (All deeds of agreement, except Mrs Harris’, were signed subsequent to registration. Their relevance in this context is limited to confirmation of the owners’ understanding that they would resume control of their properties in three years time.) The contractual arrangements did not reflect the true bargain between the parties.
[40] In any event, the contractual terms were unequivocal. The agreement provided for payment of the purchase price by way of cash or bank cheque in one lump sum on settlement date. CH Finance never satisfied this obligation. The memorandum of transfer incorrectly acknowledged receipt of the consideration
nominated in the document. CH Finance never paid the nominated price to the owners.
[41] I am satisfied all owners had a right to set aside the transfers. That right constituted their equitable interests in the properties prior to registration of mortgages to DSNC or individuals. Until that event CH Finance’s title would have been subject to a constructive trust imposed in the owner’s favour, either to protect rights of re-conveyance of title or payment of the balance of the purchase price.
[42] With respect to Mr Tingey, a constructive trust of this nature is not limited to the victims of forgery. It does not matter how the owner was defrauded. Forgery is only one means of fraud. I am satisfied that both those whose signatures were forged on the memoranda of transfer and all other owners parted with their titles as a consequence of CH Finance’s fraud.
(ii) Extinguishment of Equitable Interest
[43] Second, were the original owners’ equitable interests extinguished by registration of the memorandum of transfer, as Mr Galbraith suggested, so that effectively they did not exist when the memorandum of mortgage was registered? I am satisfied that this question must be answered in the negative. The Torrens system, as Mr Tingey emphasised, is essentially a registration mechanism. It is designed to provide safety and security for the titles of registered owners, whether of fee simple or mortgages. It was not intended to interfere with fundamental doctrines by which Courts of Equity have enforced conscientious obligations entered into by registered proprietors (Barry v Heider (1914) 19 CLR 197 per Isaacs J at 213-214). That is why the Courts recognise that s 41 allows an unregistered document to create a legal interest in land (Universal Management (supra) at 471 and 478).
[44] On registration CH Finance only acquired legal title to the 12 properties. As noted, those titles were defeasible for its fraud. The owners’ equitable interests survived registration in CH Finance’s favour; and but for registration of the subsequent mortgages, the Courts would have set the transfers aside and ordered CH Finance to re-convey the properties. This begs the question, which must be later
decided, whether those subsequent instruments are defeasible for fraud. However, for these purposes I am satisfied that the relevant interests remained intact immediately prior to registration of the mortgages.
[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 (supra)). Except for Mrs Harris, all options were signed after registration.
[46] I repeat my finding that immediately prior to registration of all memoranda of mortgage CH Finance held title to all properties as constructive trustee for the owners, and that as a result they retained an equitable interest which was defeated by registration of the mortgages unless they are tainted by fraud.
(2) Fraud
(a)Submissions
[47] On the premise that the original owners then retained an equitable interest in their properties, the second issue is whether Mr Davies acted fraudulently when registered all 12 memoranda of mortgage immediately after CH Finance’s acquisition of legal title. While acknowledging that Mr Davies was not guilty of
actual fraud, Mr Tingey submitted that he was guilty of its equivalent of wilful blindness or voluntary ignorance of the adverse interests vested in the original owners. His suspicions must have been aroused. He breached his duty as an honest man to make use of his means of knowledge to find out about the owners’ interests (Assets Co Ltd v Mere Roihi [1905] AC 176 (PC); Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd [1923] NZLR 1137 (CA) (affirmed on appeal [1926] AC 101 (PC)). CH Finance, DSNC and the lenders had notice of Mr Davies’ fraud because at all relevant times he was acting as their agent. Accordingly, their registered interests are defeasible (ss 62 and 182 Land Transfer Act).
[48] In opening Mr Tingey sought to draw a close analogy between this case and a judgment in the Supreme Court of Queensland as an example of a finding of fraud against a solicitor in similar circumstances (Young v Hoger [2000] QSC 455). His omission to mention this authority in closing may have been influenced by Mr Galbraith’s citation of the decision of the Court of Appeal of that state allowing an appeal in terms unusually critical of the trial Judge (Young v Hoger [2001] QCA
453 at paras 14 & 15). Mr Tingey pre-empted Mr Galbraith’s reliance upon Australian authority by a submission that Courts in that jurisdiction have been more reluctant to find fraud than New Zealand Courts. In this country fraud has been given a wide meaning (Bunt v Hallinan [1985] 1 NZLR 450 (CA) per Richardson and McMullin JJ at 458). In common, though, with Mr Galbraith, Mr Tingey accepted that the result in each case must be determined by the particular facts.
[49] As forecast, Mr Galbraith, supported by Mr Simon Judd for the mortgagees, did rely upon leading Australian authority to support a proposition that the holder of a registered interest should only be deprived of the benefits of indefeasibility where his behaviour, either directly or through an agent, has the necessary element of dishonesty, conscious moral turpitude or wickedness to justify the Court’s intervention to set aside (Russo v Bendigo Bank Ltd [1999] 3 VR 376 (CA) at para 42). He submitted that, within this required context of dishonesty, wilful blindness or voluntary ignorance is not constituted by want of care, recklessness, or breach of professional standards (Bunt v Hallinan (supra); Pyramid Building Society v Scorpion Hotels Pty Ltd [1998] 1 VR 188 (CA) at 194; Young v Hoger (supra)).
[50] In Mr Galbraith’s submission, the statutory managers can only establish fraud against Mr Davies by proving that: first, he had direct knowledge or was wilfully blind or demonstrated voluntary ignorance of the existence of the original owners’ adverse interests; and, second, he then acted dishonestly to defeat those interests by registering the mortgages to confer indefeasibility. He identified a number of factors which he submitted were particularly relevant to any assessment of Mr Davies’ honesty such as that prior to Mr Davies’ receipt of instructions other solicitors had previously acted for CH Finance without any apparent concerns; the transactions were a continuation of lending by existing third party lenders; the nature of the legal work required from Mr Davies was ‘mechanical conveyancing’; and Mr Davies had proper authority to act for the original owners on all transactions.
(b) Decision
(i)Legal Principles
[51] The ‘true test’ of Land Transfer Act fraud (Waimiha (supra) (CA) at 1175 per Salmond J, applied in Efstratiou (supra); Bunt v Callinan (supra); and Jessett Properties v UDC Finance Ltd [1992] 1 NZLR 138 (CA) per Hardie Boy J at 142):
… is not whether the purchaser actually knew for a certainty of the existence of the adverse right, but whether he knew enough to make it his duty as an honest man to hold his hand, and either to make further inquiries before purchasing, or to abstain from the purchase, or to purchase subject to the claimant’s rights rather than in defiance of them. If, knowing as much as this, he proceeds without further inquiry or delay to purchase an unencumbered title with intent to disregard the claimant’s rights, if they exist, he is guilty of that wilful blindness or voluntary ignorance which, according to the authorities, is equivalent to actual knowledge, and therefore amounts to fraud.
[52] I would add a number of points which are material to this case. First, later in the same judgment Salmond J emphasised that this type of imputed knowledge arises from a person’s dishonest failure to employ available means of acquiring actual knowledge (Waimiha at 1177); second, as Mr Galbraith pointed out, want of care, even recklessness, or breach of professional standards are insufficient to constitute fraud; third, the standard required to prove fraud is high, commensurate with the seriousness of the allegation; fourth, fraud exists where the requisite knowledge is
brought home either to the party directly or to his agent (Assets Co (supra) per Lord Lindley at 210); and, fifth, in my judgment, the ‘intent to disregard the claimant’s rights’ of which Salmond J speaks is not the party’s dominant motive in acquiring title but is the intention to be inferred from the facts as the natural or likely consequence of his actions – the law presumes that his dishonest intention was a causative link or factor leading to registration.
[53] In deciding this issue, it is not my place to offer an opinion about whether Salmond J’s test formulated in Waimiha differs from that of the Privy Council in the same case or in Assets Co, or whether the Australian authorities have imposed a more stringent test for fraud than in New Zealand. In this case, as in others, the outcome of my inquiry will be determined by the particular facts. In preparation for it I have found particular assistance from the paper presented by the Rt Hon Justice Peter Blanchard on “Indefeasibility Under the Torrens System in New Zealand”, reported in Torrens in the 21st Century, edited by David Grinlinton.
[54] The relevant provisions of the Land Transfer Act are the starting point for my inquiry into whether or not Mr Davies committed fraud. The governing principle is that, except in the case of fraud, the registered proprietor of land or an estate or interest shall hold it subject only to such estates or interests as are notified on the register but absolutely free from all others (s 62). Consequently, except again in the case of fraud, no person contracting, dealing with or taking a transfer from a registered proprietor of any registered estate or interest shall be effected by notice of any trust or unregistered interest, and knowledge of the existence of such trust or interest shall not of itself be imputed as fraud (s 182). I agree with Mr Tingey, however, that acting with knowledge of the existence of such a trust or interest plus other factors may well amount to fraud.
[55] These statutory provisions embody the principle that a registered interest is indefeasible or absolute, and can only be impugned on proof that it was gained or tainted by fraud. In essence, proof of fraud requires evidence of dishonesty; in this context of wilful blindness or voluntary ignorance. Mr Davies’ state of knowledge at the time of registration of the mortgages is central to this inquiry.
(ii) Davies Law and CH Finance relationship
[56] It is necessary to say a little more about Davies Law and its relationship with CH Finance. Mr Davies is the sole principal in the firm. He was admitted in 1981. He entered partnership with another practitioner in 1985. The firm was dissolved in 1995 when he set up Davies Law. It now consists of three salaried solicitors, two legal executives, a manager, an accountant, two secretaries and a receptionist. The firm provides what Mr Davies describes as a full range of legal services and also operates a solicitors nominee company. I shall return to this latter aspect of his activities more fully when considering the third issue.
[57] ICMG first instructed Davies Law in mid January 2002, following an earlier approach by a CH Finance representative. Mr Davies delegated responsibility for carrying out its instructions to Z. He had originally engaged Z as a legal secretary/executive in December 2000 but in June 2001 employed her as a solicitor following her admission to the bar. Z has excellent academic and other credentials. She soon assumed responsibility as an author and fees earner.
[58] Mr Tingey subjected Z’s evidence to careful and at times critical scrutiny, although he did not maintain a challenge to her character or credibility in closing. This exercise afforded me an opportunity to evaluate her credibility. I am satisfied that Z was an honest and reliable witness. Aspects of her performance of her duties may attract legitimate criticism, but it must be remembered that this was her first professional position. Throughout she remained subject to Mr Davies’ teaching, guidance, and supervision. I accept Z’s evidence that the two of them discussed her files daily. Mr Davies acknowledged that he opened all the mail, regularly reviewed the file book to check what files had been opened, signed all cheques, and monitored invoicing on a daily basis. And for reasons which will shortly become apparent, I accept her evidence in preference to Mr Davies’ wherever it is in conflict.
[59] The relationship between CH Finance and Davies Law flourished. The firm acted on 123 files additional to these 12 relating to the company’s activities. Z remained as its primary point of contact. CH Finance transactions generated about
$88,000 in fees for Davies Law in 2002.
(iii) Mr Davies’ knowledge on 29 May 2002
[60] On or about 29 May 2002 Davies Law received instructions from ICMG to act on the first three of the 12 subject transactions. They were sales by Mrs Julianna Thompson, Mrs Mihiroa Shanks, and Mr and Mrs Ian Burgess of properties at 14 Sandbrook Avenue, Otara, 36 Eivers Road, Whakatane, and 20 Peters Avenue, Palmerston North respectively. By then the firm had acted on a number of similar transactions for CH Finance which Mr Davies described as straightforward. He was confident of Z’s ability to handle them.
[61] Mr Davies was aware that the apparent effect of the agreement for sale and purchase was that Davies Law would act for both vendor and purchaser. He discussed the conflict of interest issue with Z. He told her that:
… provided the vendor was advised to take independent advice but elected not to do so that Davies Law could act on the conveyancing aspects of the transaction.
[62] While he did not draft the deed of agreement executed some months later by CH Finance and Mrs Thompson, I am satisfied that by 29 May 2002 Mr Davies was familiar with its standard terms. On ICMG’s behalf Mr Rapata had instructed the firm to advise on its contents. I accept Z’s evidence that she and Mr Davies spent some time perusing and considering the document. Mr Davies noted its acknowledgement that the “balance of the purchase price” remained unpaid.
[63] In a letter to ICMG dated 28 May, following her discussions with Mr Davies, Z recommended substitution of an agreement to mortgage for the deed of acknowledgement of debt. This mechanism would provide the original owners with a registrable interest in the land for the unpaid portion of the purchase price. Mr Davies and Z were concerned to improve and protect the owners’ positions. Z noted their “… concerns about how an independent lawyer would advise clients on these agreements…”. On 31 May 2002 Davies Law charged for its attendances. CH Finance neither amended the deed of agreement in accordance with Davies Law’s advice nor subsequently sent signed copies to the firm.
[64] I do not accept Mr Davies’ denial of knowledge of the type of arrangement entered into between CH Finance and the owners as recorded in the deed of agreement. He attempted unconvincingly to distance himself from familiarity with the essence of the transactions between CH Finance and the original owners and in particular of the deed. Mr Galbraith realistically acknowledged Mr Davies’ participation in the redrafting exercise with Z on or about 28 May 2002. But he submitted that their suggestions for improving the original owners’ positions were hardly consistent with the conduct of a person who knew or suspected his client’s dishonesty. He also noted that the agreement was not itself in any sense fraudulent. With respect to Mr Galbraith, the significance of Mr Davies’ participation lies in his acquisition of knowledge about the status of the vendors as unpaid vendors, confirmed the next day upon receipt of ICMG’s written instructions to act. And the statutory managers do not rely upon the terms of the agreement as direct evidence of CH Finance’s fraud.
[65] Mr Davies’ preparation of the acknowledgement form signed by Mrs Thompson and other original owners is also directly relevant. He conceded to Mr Tingey that when preparing the document he knew a transaction was very unusual whereby an owner transferred his or her property to CH Finance without payment of the purchase price on settlement. He might have added that the novelty would be compounded where the contract expressly provided for payment. He would have been ‘very unhappy about …’ putting together such an agreement if asked to advise. He constantly drew a distinction between advising a client on terms of a contract and acting on what he described as the mechanical aspects of conveyancing. His purpose was to diminish the significance of performance of the latter.
[66] Mr Davies thought that his own position would be protected by including in the acknowledgement the words ‘we understand that Davies Law have recommended we obtain independent legal advice and we have decided not to do this’; he conceded, though, that neither he nor Z ever spoke to any of the owners or actually made this recommendation.
[67] Mr Davies volunteered that he would be ‘uncomfortable’ in acting on such a transaction where an original owner was not in receipt of independent advice. For that reason he included a confirmation in the acknowledgement to be signed by owners that ‘Davies Law is not acting for us in this transaction’. However, that statement directly contradicted a critical provision included in copies of a standard form letter found on Davies Law’s files for all 12 subject transactions. That letter, addressed to the relevant owner, stated:
We confirm we are in receipt of an agreement for sale and purchase between yourself and CH Finance Ltd.
As you are aware we will be acting for both parties in this transaction.
We strongly advise you to take independent advice on this matter.
We further understand that you will not be receiving the full proceeds of sale from the sale. We are instructed that you and CH Finance Ltd have made private arrangements regarding this and we are to take no action. Again we strongly advise you to take independent advice on this point.
[Emphasis added]
[68] The statutory managers challenged the authenticity of these letters. In answer Mr Davies said this:
My memory is that after discussing the conflict issues [with Z] that a letter was drafted, which was to be sent to each vendor, advising them to obtain independent advice. That became a standard letter which was to be sent out to every vendor. I believe that I signed each of those letters. The regular conveyancing letters on the file would have been signed by [Z]. [Z] and I shared a secretary and my assumption is that our secretary prepared the standard letters when the initial agreement came in and obtained my signature and the secretary posted them.
[69] I regret having to record my findings that (a) the original letters never existed; (b) copies were prepared by Mr Davies or somebody acting under his direction and placed on all 12 files after he learned of complaints to the Auckland District Law Society about his firm’s conduct in December 2002 and February 2003; and (c) Mr Davies deliberately misled me at trial in asserting that he signed each original. I agree with Messrs Tingey and Caird that these facts are determinative:
these circumstances. Despite that distinguishing factor, Mr Tingey submitted that the decision was authority for the proposition that a solicitor who represents both parties in a transaction and was also a director of a nominee company may be personally identified with it; thus his knowledge was the actual knowledge of the nominee company. I do not read the judgment in that way at all. Holland J did not discuss the rules of attribution. Instead he applied orthodox agency principles, notwithstanding the nominee company’s interposition.
[161] My conclusion that Mr Davies’ fraud should not be attributed to DSNC is consistent with my finding that his knowledge of the owners’ adverse interests should not be imputed to individual mortgagees. It would be anomalous if lending through the administrative vehicle of a bare trustee to hold securities which would otherwise be in an individual’s name led to a radically different result. The application of primary rules of attribution and general principles of agency in similar circumstances should have the same or similar consequences. The law would seem illogical or capricious if the result was otherwise.
[162] Also, I am satisfied that my finding against the owners on this issue is not unfair or irrational. It is arguable that all members of both groups acted unwisely – the owners in becoming involved with a finance company managed and promoted by people of obviously questionable character, and the mortgagees in accepting investment proposals which on any critical analysis were equally questionable, commensurate with the interest rates offered. But neither party is to be penalised on that account. However, I assume that the statutory managers will invoke their powers to suspend interest liabilities from the date of statutory management if not the company’s earlier default in repaying the mortgages (s 44 Corporations (Investigations and Management) Act 1989).
[163] I should add also that, while I understand Mr Judd’s submission that the mortgagees believe that the statutory managers have failed to have regard to their interests, I am satisfied that they acted properly and fairly in applying for directions in this way. All three substantial issues required judicial determination. I suspect that individual owners would otherwise have brought piecemeal claims against individual mortgagees, leading to delay, inconsistency and additional cost. This
proceeding was the most expeditious process available for resolving all major areas of dispute between all interested parties.
Summary
[164] The statutory managers’ amended statement of claim (para 273) seeks five directions and one order. S58 Corporations (Investigation and Management) Act authorises the managers to apply and the Court to give:
… directions concerning the business or property of the corporation, or the management or administration of any such business or property, or the exercise of any powers under this Part of the Act.
[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 and 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). 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.
[168] Costs normally follow the event, and the statutory managers appear entitled to an award against Mr Davies. Subject to hearing from counsel, I record Mr Davies is at risk of an order for indemnity costs fixed on a reasonable solicitor/client basis given my findings of fraud. While the statutory managers failed against the mortgagees, I am satisfied that they were properly joined, and in this case it would also be appropriate for Mr Davies to pay those costs, especially where his conduct was the cause of this litigation (Sanderson v Blyth Theatre Co [1903] 3 KB 533 (CA)). However, if counsel are unable to agree I will accept memoranda, the first to be filed by the statutory managers within 30 days of this judgment, with the defendants to file memoranda in answer within the next 30 days (I will be absent on sabbatical leave between 3 June 2005 and 25 July 2005).
[169]I reserve leave to all parties to apply for further directions or orders.
[170] In closing, I wish to express my deep gratitude to all counsel for the quality of their representation of the parties and of their submissions on the relevant issues, and to acknowledge the financial and emotional suffering visited upon both the original owners and mortgagees by the events giving rise to this litigation.
Rhys Harrison J
APPENDIX
(1)6 Clensmore Place, Torbay
a)Mrs Rose McDonald owned this property. She lived in Australia between 1990 and 2002 but returned when her estranged husband died. She found herself with funeral bills, utility and rates arrears totalling $7000. Mr Daniels is her first cousin. He and his relations visited her and her son in Clensmore Place saying that they had “come over to help whanau”. Mrs McDonald had immediate financial needs of $30,000. Mr Daniels said that she could lease the house to CH Finance for $30,000 over three years. She signed a piece of paper which she understood covered leasing arrangements;
b)Mrs McDonald inquired of Mr Daniels when the advance of $7000 would be available. He attempted to placate her with promises. Later he presented her with documents described as a deed of acknowledgement and a deed of assignment of debt. She observed that their effect was that she had agreed to sell her house with a buy- back option, which was contrary to her understanding. She remonstrated with Mr Daniels and refused to sign both deeds;
c)Mrs McDonald later learned that title to her property had been transferred to CH Finance pursuant to an agreement for sale and purchase between the parties dated 29 July 2002 at a purchase price of
$205,000 and a memorandum of transfer dated 1 August 2002. She denies ever signing either of these documents. I accept her evidence that her signature was forged. Mr Clayton has signed the transfer as a witness.
(2)16 Waltons Avenue, Masterton
a)Mrs Sandra Reiri is a 50 year old social worker who owns a property at 16 Waltons Avenue, Masterton. She raised three children there but now lives alone in the house. In early 2002 she owed about $11,000 on a mortgage to Nationwide Home Loans Ltd;
b)In 2002 Mrs Reiri participated met a Mr Tom Atua at a Maori and Management Diploma learning institution at Otaki. Mr Atua was apparently a salesman for CH Finance or ICMG. Mrs Reiri was cautious but nevertheless interested in the scheme for the purpose of funding repairs to her home. She spoke frequently to Mr Atua. He told her that the first step in the process was to have the house valued. Without committing herself, Mrs Reiri signed a valuation form and three weeks later her house was valued by a valuer whom she knew;
c)Mrs Reiri heard nothing more for nearly six months. In May 2003 she received a letter from CH Finance, discussing her property. She had also received a letter from Nationwide advising that nothing was owing on the mortgage. While this news was pleasing, she did not know how it had happened. She attempted without success to contact Mr Atua. She then went to her lawyer who advised that CH Finance was now the registered proprietor of her home. The relevant documents were an agreement for sale and purchase of her property dated 6 August 2002 for $75,000 and a memorandum of transfer dated 23 September 2002 and witnessed by Mr Clayton. She accepts that the signatures on both documents look like hers but is emphatic that she never signed either and that they must have been copied by someone else. She has never met Mr Clayton. I accept her evidence that the signatures are forgeries.
(3)45 Belair Avenue, New Plymouth
a)Mr Taukoi and Mrs Mere Atua owned the property at 45 Belair Avenue, New Plymouth. The former is 71 years old; the latter is 64 years of age and works as a retail officer for New Zealand Post. They
bought the property, which was originally owned by Mrs Atua’s parents, in early 2000. Their son is Thomas Atua, who worked for ICMG in the Manawatu area and who dealt with the previous witness, Mrs Sandra Reiri;
b)Tom Atua introduced his parents to Mr Clayton. The Atuas wanted to ‘sort out’ an $86,000 mortgage on their property; they also owned an unencumbered property at 20 Seddon Street, Palmerston North. As a result of meeting Mr Clayton, the Atuas understood that ‘he would manage our finances and sell the Seddon Street property for us’. With the proceeds of sale he would discharge the mortgage on the Belair property and purchase a car for the Atuas. At Mr Clayton’s request, Mr and Mrs Atua signed a small piece of paper, about a third of the size of an A4 page, in blank;
c)Some time later the Atuas received a letter from Davies Law, whom they did not know, advising that the Belair mortgage had been repaid. They were also able to purchase a vehicle with assistance from CH Finance, although it was later repossessed because the company failed to pay instalments upon it. Later still the Atuas sold the Seddon Street property to their grandson for $110,000 but those funds apparently went to CH Finance;
d)Mrs Atua acknowledged that the signatures on an agreement for sale and purchase of the Belair Avenue property for $90,000 and a memorandum of transfer looked like those of her and her husband. She denied ever signing either document. She noted that Mr Rapata, of whom she had never heard, witnessed the signatures on the memorandum of transfer. Mr Galbraith carefully cross-examined Mrs Atua about her assertion that the signatures were forged, paying particular attention to a letter sent by the Atuas’ solicitor following CH Finance’s demise which gave an account inconsistent with that given by Mrs Atua in evidence. I am not satisfied that the Atuas’ signatures were forged. In my judgment Mrs Atua has equated her
inability to recall signing the memorandum of transfer with a denial that she ever took that step. She expressly agreed with Mr Galbraith that the signatures on the transfer looked like those of her and her husband, adding that ‘I must have had a bad day’.
(4)1/17 Lodge Avenue, Mt Maunganui
a)Mrs Elsma Matthews owned the property at 1/17 Lodge Avenue, Mt Maunganui. She is 71 years of age and lives alone. She moved there 23 years ago. She has known Mr Clayton since he was a boy;
b)Mrs Matthews owed $21,000 secured by way of a mortgage to the National Bank of New Zealand. She was interested in buying a car for about $10,000. In due course, on two or three occasions, she signed documents presented to her by a CH Finance employee. She never received any money under the scheme, although she acknowledges that CH Finance paid off her mortgage;
c)Mrs Matthews now admits that she signed an agreement to sell her house to CH Finance for $186,000 dated 13 September 2002. She admits that she signed other documents including an acknowledgement form and a disbursement request and a deed of acknowledgement and assignment of debt. Three memoranda of transfer have been located, each bearing her signature. She admits that she signed all three but is only familiar with one of them. All are signed and witnessed by Mr Clayton but one is blank while the other two are in identical form, reciting a consideration of $186,000;
d)Later in examination-in-chief Mrs Matthews changed her evidence to say that one of the three transfer documents looked familiar to her. She rationalised her change by saying that at the time she swore her affidavit she was confused. With the benefit of hindsight, she asked “… why would I sign a document with nothing on it?” Later she said
that she did not recall signing them. I am satisfied that Mrs Matthews did sign the memoranda of transfer.
(5)2 Oakura Road, Northland
a)Mrs Susan Hepi was the original owner of this property at 2 Oakura Road, Northland. She is a 72 year old retired woman. She and her late husband bought the property in 1986 as a beach house and moved there permanently in 1992. Mr Hepi died in 2001. Mrs Hepi now lives in the property alone on a widow’s benefit;
b)In 2002 Mrs Hepi owed $5000 on a mortgage secured against the property. She was introduced to Mr Rapata through her son as a lawyer in Whangarei who was associated with a finance company and may be able to assist with money. She said that she filled out “an application form” at the meeting. She was told that she could get
$23,000 to reimburse her daughter and son-in-law for earlier mortgage repayments. She recalls signing some papers in Mr Rapata’s presence when he came to her house. The latter said the meeting was lengthy. At his request she signed some blank pieces of paper at two meetings. Later she learned that Mr Rapata had some money and requested him to retain possession and control of it. Some months later she received $10,000 from CH Finance;
c)Mrs Hepi accepts that she signed an agreement to sell her property to CH Finance dated 30 July 2002 at a price of $210,000 (although she would not agree to sell her property at all and certainly not for that price). She accepts that the signature on a number of other documents including a memorandum of transfer, an acknowledgement and a disbursement request look like hers but she does not remember signing any of them. She acknowledges that her signature is on deeds of agreement and acknowledgement and assignment of debt. Mr Rapata witnessed her signature on the transfer. He remembered her signing the transfer in the joint presence of himself and her son,
Martin. Mr Simon Judd, counsel for the lenders, asked Mrs Hepi whether she accepted Mr Rapata’s version. She did not deny Mr Rapata’s account, saying that she signed a lot of papers in his presence. I accept Mr Rapata’s evidence on this point. I am satisfied that Mrs Hepi signed the transfer.
(6)20 Peters Avenue, Palmerston North
a)Ian and Valerie Burgess originally owned 20 Peters Avenue, Palmerston North. They built the house in 1964. They have lived there for 40 years. They have raised three children there. They consider it their family home. They paid off a mortgage over a period of 30 years;
b)One of the Burgess’ daughters is married to Mr Clayton’s brother. Mr Clayton contacted them with advice that provided they gave him the deeds of their house, CH Finance would pay $185 per week, a lump sum payment of $7000, a new car, and overseas travel expenses. The Burgess’ wanted to re-floor their home and do some renovations. In time Mr Clayton prevailed upon them to borrow from CH Finance. Mrs Burgess remembers signing documents which were witnessed by Mr Clayton. In time they received a lump sum payment of $7000 and weekly payments totalling $4070;
c)Mrs Burgess admitted that signatures on a number of documents including an acknowledgement, disbursement request and transfer looked like hers but said she had never seen them before. She said that she would never agree to sell her property for $109,500. She does, however, admit signing deeds of agreement and acknowledgement of debt. The former recites that a company called Opol Ltd (part of the CH Finance group) and the Burgess’ are parties to an agreement for sale and purchase but does not recite the purchase price; the latter recites that the Burgess’ had agreed to lend or advance Sleinad Finance Ltd (another CH Finance company) $109,500. Under
cross-examination by Mr Alan Galbraith QC, Mrs Burgess also acknowledged that she had signed an agreement for sale and purchase with CH Finance dated 21 May 2002 at a price of $109,500. She acknowledged also that the relevant documents anticipated that the Burgess’ would execute a memorandum of transfer;
d)I am not satisfied that the signatures on the memorandum of transfer were forged. In my judgment Mrs Burgess has rationalised her view that the signatures were not genuine on the ground that she and her husband would not have agreed to sell the property for $109,000. Clearly they signed the agreement, and it is logical that they signed the memorandum of transfer as well.
(7)14 Sandbrook Avenue, Otara
a)Mrs Juliana Thompson was the original owner of 14 Sandbrook Avenue, Otara. She is a 65 year old widowed, retired postal worker. She and her late husband bought the property 40 years ago and raised their eight children there. Mr Thompson died in May 1996. Some of Mrs Thompson’s children still live at 14 Sandbrook Avenue. She lives in Kaeo, Northland;
b)Mrs Thompson was introduced to CH Finance through a friend. She attended a meeting in mid 2001 at Kaikohe where Mr Clayton spoke. She was interested for the reasons that CH Finance would provide a chance to renovate her house and that the scheme would also assist others to buy their properties including members of her own family. She remembers Mr Clayton signing the deeds of agreement and acknowledgement of debt but giving an assurance that she was “not really signing over my house because it would automatically come back to me after three years”. In reliance on these assurances Mrs Thompson signed the two documents. Later she received
$16,000 in her bank account;
c)Mrs Thompson acknowledges that the signature on an agreement for sale and purchase with CH Finance dated 27 March 2002 for
$141,000 and a memorandum of transfer dated 30 May 2002 look like hers but she does not recognise or remember the documents. Mrs Thompson’s daughter, Jacqueline, admitted that Mr Rapata was present when her mother signed the deeds of agreement and acknowledgement of debt but he talked her out of instructing her own solicitor. Mr Rapata said he was sure that he witnessed her signature on the memorandum of transfer. I accept his evidence on this point. I am satisfied that Mrs Thompson’s signature was not forged.
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