Watts v Leary
[2014] NZHC 3253
•16 December 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2013-090-000142 [2014] NZHC 3253
BETWEEN MICHAEL JOHN WATTS
Plaintiff
AND
DAVID VIVIAN LEARY First Defendant
SHIRLEY JEAN LEARY Second Defendant
RICE CRAIG Third Defendant
Hearing: 16 December 2014 Appearances:
J B Murray for the Plaintiff
H Twomey and W Robertson for the Third DefendantJudgment:
16 December 2014
ORAL JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
M J WATTS v D LEARY AND RICE CRAIG [2014] NZHC 3253 [16 December 2014]
[1] The plaintiff is a citizen of the United Kingdom and resides in England. The first and second defendants (Mr Leary and Ms Leary) were, in 2009, married. The third defendant is a firm of barristers and solicitors practicing in Papakura, Auckland. At all material times they acted for Mr and Ms Leary. At the time Ms Leary was the sole director and shareholder of FRL Holdings Limited (FRL).
[2] The plaintiff says that on 22 April 2009 he loaned the sum of £60,000GBP ($155,224.33NZD) to the Learys. The plaintiff said the loan was to be used by the Learys in the purchase of the business and was to be repaid after three years or earlier if the business was sold. Compound interest was payable at the rate of 5 per cent.
[3] On 27 April 2009 the said sum was paid by the plaintiff into the third
defendant’s trust account. The third defendant issued a receipt noting “MG Watts on
27 April 2009” to the credit of “D Leary” as a gift. When sending the funds the plaintiff’s bank noted ‘Reason for payment Gift’.
[4] The plaintiff said the money deposited to the trust account of the third defendant was not a gift but a loan to the Learys. The third defendant says it had no instructions from the plaintiff about the terms of the loan or authority to advance those to Mr Leary. The plaintiff said the money was not a gift.
[5] The plaintiff’s funds were used by the Learys as an advance to FRL to purchase the business known as Rosedale Liquor in or about June 2009. The plaintiff says the loan was not repaid when that business was on sold by the Learys about one year later; that on 24 April 2012 Ms Leary paid the sum of $10,831.19 to the plaintiff. Demand has been made for payment of the balance of ‘the loan’ but nothing since has been paid.
[6] The plaintiff claims the third defendant was bound in accordance with the Lawyers & Conveyancers Act (Trust Account) Regulations 2008 (the Regulations) to:
(a) Receipt the money to the credit of the plaintiff. (b) Hold the money in trust for the plaintiff.
[7] The plaintiff pleads the third defendant was in breach of the trust because:
(a) It failed to hold the money in their trust account to the credit of the plaintiff.
(b) Failed to hold the money on trust for the plaintiff.
[8] The plaintiff pleads the third defendant at no time received any authority to credit the money to the trust account of Mr Leary or to treat the money as a “gift” to Mr Leary.
[9] The plaintiff sues to recover the amount paid.
Application for security
[10] The plaintiff’s proceeding was brought in the District Court. It was transferred to the High Court on the application of the third defendant.
[11] In the High Court the third defendant has filed an application pursuant to Rule 5.45 for an order that the plaintiff pay security for costs on the grounds that the plaintiff is a resident outside New Zealand.
[12] The Court is able to make an order for security if the Court has reason to believe that a plaintiff is unable to pay the costs of the defendant if the plaintiff is
unsuccessful. If the Judge thinks it is just in all the circumstances the Judge may order the giving of security.
[13] The Court needs to assess whether it is appropriate for an order for security of costs to be made. In the balance of considerations there is a need to provide Court access to a genuine plaintiff, whilst ensuring the interests of defendants who should not be drawn into unjustified litigation. The Court will need to assess the merits of the plaintiff’s claim and review prospects of success. If the claim is altogether without merit then the Court may require security of a significant amount. Even if the claim appears to have reasonable prospects of success then security may be ordered albeit in a less than significant sum.
[14] Rule 5.45(5) provides a Judge may make an order even if the defendant has taken a step in the proceeding before applying for security.
[15] In this case the plaintiff argues the defendant has delayed making its application. The plaintiff says the application was filed after all parties (except Ms Leary) have undertaken a number of steps in both the District and High Courts, including the filing and service of pleadings, affidavits of documents and provision of discovery. Therefore whilst the third defendant ought to have made its application sooner, the plaintiff says, costs to all parties have increased significantly.
[16] The plaintiff says he ought not to be doubly punished by both having to file the proceeding and also having to pay security at what he claims is a late stage of the proceeding.
The evidence
[17] The third defendant says in April 2009 it was engaged to act for the Learys in respect of the proposed purchase of a liquor outlet; that when it received the plaintiff’s deposit into its trust account it received no communication from the plaintiff regarding the purpose of the funds. The Learys instructed Rice Craig that the funds were a gift to them. The third defendant says that in accordance with the Learys’ instructions it made a number of transfers from those funds held on trust to
FRL and that FRL engaged it to act on its behalf in respect of the purchase of a business and the funds were transferred to FRL for use in that purchase.
[18] The third defendant says that whilst Mr Leary has waived privilege in respect of the joint instruction, Ms Leary has not and accordingly the third defendant is constrained from disclosing the exact instructions given.
[19] In that summary of matters it appears the third defendant pleads the funds in question were held in trust for Mr Leary and have been applied to assist Ms Leary’s company to purchase a business and whilst Mr Leary is prepared to allow the third defendant access to the relevant file for the purpose of examination by the plaintiff, Ms Leary is not and therefore no access to their file, it is claimed, is permitted.
[20] Neither Mr nor Ms Leary has provided evidence upon the security for costs application. It appears from Mr Leary’s pleaded defence that he denies the funds were loaned to him for he says those funds were to be used by Ms Leary who was the sole director and shareholder of FRL. Also Mr Leary pleads that he has insufficient knowledge of the plaintiff ’s allegations that the third defendant at no time had instructions regarding terms of the loan or authority to advance those. Mr Leary denies any connection with the use of the funds to purchase the business.
[21] There is no pleading from Ms Leary.
[22] The plaintiff’s position is the third defendant had a duty to receipt the money on trust for the plaintiff; that at no time did it receive authority to credit those funds to the account of Mr Leary or for those to be treated as a gift; and that no authority was provided for those funds to be paid to FRL.
[23] In support of the plaintiff’s opposition to the security for costs application Ms Denning a legal secretary employed by the plaintiff’s solicitors has sworn an affidavit exhibiting copies of four documents being:
(a) An undated handwritten letter from the plaintiff to Mr and Ms Leary recording the terms and conditions of the loan;
(b) A copy of the third defendant’s bank statement numbered 257;
(c) A letter from the plaintiff to the first defendant dated 13 July 2010;
and
(d) Emailed correspondence from Ms Leary to the plaintiff’s solicitors
dated 24 April 2012.
[24] The first document refers to the transfer of £60,000 repayable after three years at 5 per cent compound interest. The second document confirms the deposit of the sums with the third defendant. The third document contains the plaintiff’s advice that he has heard that the ‘business’ sold for about £11,000 and expresses concern regarding ‘the massive shortfall’. In it the plaintiff states having known Mr and Ms Leary for 30 years and thinking theirs was a close friendship which was why he was prepared to make the loan. The plaintiff describes his poor financial and personal situation and expresses hope the position may be resolved without solicitors getting involved.
[25] The fourth document is an email of Ms Leary explaining the payment of
$10.831.19 to the plaintiff whilst outlining the poor personal circumstances of herself.
[26] Ms Twomey submits on behalf of the third defendant that even if the plaintiff succeeds in proving the funds were a loan his claim against the third defendant cannot succeed because the third defendant has not caused him any loss because that loss was caused by the failure of the first and second defendants to repay those funds. Counsel for the third defendant suggests that if the funds were a loan and had the third defendant sought direction as to the disbursement that it seemed clear on the balance of probabilities that the plaintiff would have said those funds could be disbursed in accordance with the loan agreement, as in fact they were.
Considerations
[27] The third defendant was within its rights to have the plaintiff’s proceeding transferred to the High Court. From the time it was transferred to the High Court the third defendant raised the possibility of applying for security for costs. The Court is not satisfied there has been unnecessary delay in the bringing of the security for costs application.
[28] The plaintiff’s primary claim is to recover the loan he says was made and which has been unpaid. The claim against the third defendant alleges a breach of trust in particular because of alleged breaches of the Regulations by which it is said the third defendant failed to hold the funds in trust for the plaintiff and by failing to obtain appropriate authority for the release of those funds. Mr Murray for the plaintiff submits by those Regulations the monies paid to the third defendant were deemed to belong to the plaintiff pursuant to s 110(3)(i)(a) of the Lawyers and Conveyancers Act 2006. Therefore it is submitted the plaintiff was a client of the third defendant and had to account to the plaintiff on monies received and held on his behalf.
[29] Mr Murray submits that although the third defendant received bank documentation indicating the payment “was a gift” the third defendant should have contacted the plaintiff with regards to the receipt of those funds and should have requested verification of the purpose for which the money was sent for – but they did not do so. Nor did they send a trust account receipt until the plaintiff made his demand for repayment.
[30] Mr Murray submits:
(a) that notwithstanding the plaintiff’s “inadvertent confirmation to his own bank” that the reason for the payment was “gift” that that document was not known to the third defendant and they did not rely on it;
(b) that contact by the third defendant with the plaintiff would have
“exposed that mistake”, that is that the payment was not a gift;
(c) that in the absence of contact with and any instructions from the plaintiff the third defendant was not able to receipt the monies to the credit of Mr Leary;
(d)that the third defendant had a clear, and strict obligation to receipt the moneys into their trust account ledger only to the credit of the plaintiff; and
(e) that the third defendant failed to verify the money was lent to both Mr and Ms Leary; also that it appears the third defendant took the instructions only of Ms Leary.
[31] Overall, counsel submits the consequence of these accumulative breaches of statutory obligation and fiduciary duty is that the money is or may have been lost.
[32] The balance of counsel’s submissions for the plaintiff focus upon the fact that the funds were deposited to Mr Leary’s account but used by Ms Leary as a loan to her company for the purchase of a business and in those circumstances sufficient security ought to have been arranged by the third defendant as sufficient security for the advance.
[33] Of course the value of these submissions depends very much on whether or not the plaintiff’s funds were deposited as a gift or as a loan. Only in that outcome can claims of a breach of trust be advanced.
[34] In due course the Court will likely hear the evidence of experts about whether or not there has been a breach by the third defendants of professional obligations. But, even if the Court decides there has been such a breach, there will be the difficult task of deciding whether such a breach has contributed to claims of losses incurred. Also the Court will want to prioritise the contractual claims against the first and second defendants before focussing upon claims of breach of tortious duties.
[35] The plaintiff is retired. The funds deposited with the third defendant were from the plaintiff’s retirement funds. The Court has insufficient information regarding the plaintiff’s financial circumstances. In part this lack of information has not been assisted by the third defendant’s failure to make better inquiry of the plaintiff.
[36] Each side has provided calculations of cost outcomes.
Conclusions
[37] The plaintiff a non New Zealand resident appears to have very modest resources. Indeed his most significant asset appears to be that which he claims is owed to him by the first and second defendants.
[38] It is arguable his payment of those funds to the third defendant was imbued with responsibilities of trust and obligation on the part of the third defendant. The documentation accompanying the deposit of those funds might have indicated it was a gift and may have significance in an assessment of obligations if any owed by the third defendant. Even if it is proved there was a breach a more difficult task awaits the plaintiff to prove losses as a consequence thereof.
[39] The proceeding is now before the High Court because it is permitted to be even though it was within the jurisdiction of the District Court to deal with it. In this Court’s view a plaintiff should not have to bear the consequences of any increased costs caused because the third defendant has chosen the High Court to provide determination.
[40] The merits of the claim against the third defendant are balanced and will require an examination of oral evidence before any conclusion can be reached. This is not the kind of case for which a significant sum in security ought to be ordered. But, it is a case for which nevertheless an order for security is appropriate.
Judgment
[41] The Court directs the plaintiff pay security in the sum of $17,500 in connection with his claim against the third defendant. That sum is to be provided in cash or upon such security as the Registrar of the High Court decides.
[42] The proceeding shall be stayed until security has been provided.
[43] In the circumstances costs are reserved for determination upon application in due course. The Court’s present view is that these costs remain deferred until
resolution of the proceeding.
Associate Judge Christiansen
0
0
0