Westpac New Zealand Limited v Gardiner
[2013] NZHC 683
•8 April 2013
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV2011-454-000586 [2013] NZHC 683
UNDER Part 12 of the High Court Rules
BETWEEN WESTPAC NEW ZEALAND LIMITED Plaintiff
ANDDENNIS JOSEPH GARDINER First Defendant
ANDHUTIA MONICA GARDINER Second Defendant
ANDSHELLY JANE OSTEN Third Defendant
ANDZANE JOSEPH GARDINER Fourth Defendant
Hearing: 10 August 2012
Counsel: P V Shackleton/T D Bloy for plaintiff
G N Cruden/L W Goodman for first, second and fourth defendants
Judgment: 8 April 2013
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
This judgment was delivered by me on 8 April 2013 at 5pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
G N Cruden/L W Goodman, Goodmans Solicitors, PO Box 1439, Palmerston North
P V Shackleton/T D Bloy, Simpson Grierson, Private Bag 92518, Auckland
WESTPAC NEW ZEALAND LIMITED V DENNIS JOSEPH GARDINER HC PMN CIV 2011-454-000586 [8
April 2013]
AND
CIV 2011-454-000890
IN THE MATTER of the Insolvency Act 2006
AND
IN THE MATTER of the bankruptcy of DENNIS JOSEPH GARDINER
Judgment Debtor
ANDWESTPAC NEW ZEALAND LIMITED Judgment Creditor
AND
CIV 2011-454-000891
IN THE MATTER of the bankruptcy of HUTIA MONICA GARDINER
Judgment Debtor
ANDWESTPAC NEW ZEALAND LIMITED Judgment Creditor
[1] These proceedings concern a dispute over liability for the balance of bank loans made by the plaintiff bank, Westpac, to Gardost Properties Ltd, after security properties were sold and the proceeds were applied in reduction of the loans. The defendants are the shareholders of Gardost, and who guaranteed the loans.
[2] Westpac has obtained judgment against the first and second defendants by default, and has served bankruptcy notices on them based on those judgments. Westpac has settled its claim against the third defendant.
[3] The following applications are before the Court:1
(a) An application by Westpac for summary judgment against the fourth defendant.
(b)Applications by Westpac to adjudicate each of the first and second defendants bankrupt.
(c) Applications by the first and second defendants to set aside the default judgments, and the bankruptcy notices.
[4] All applications are opposed:
(a) The first and second defendants initially opposed Westpac’s application, and brought their own applications, on the grounds that the guarantees are invalid (primarily because Westpac did not ensure that they received independent legal advice) and because they disputed the quantum of the debt (contending that Westpac breached its duty as mortgagee by selling the security properties below market value, and to the sales person acting on the sale). In further grounds advanced explicitly just before the hearing, the second defendant disputed liability under the guarantee on the grounds that it was
executed under the undue influence of the fourth defendant (their son)
1 An order was made on 14 June 2012 that the proceedings be heard together and that affidavits filed in one proceeding may be read in the others.
which Westpac knew or ought to have known, and that Westpac had breached a duty owed to her as guarantor by lending imprudently. Although these further grounds were advanced formally only on behalf of the second defendant, they appear to relate equally to the first defendant.
(b)The fourth defendant initially opposed Westpac’s application on the grounds that Westpac was in breach of its duty as mortgagee by selling at less than market value, and to the sales person acting on the sale, that the proceeding was not served validly, and that Westpac acted in bad faith by discontinuing the claim against the third defendant without notice to him (preventing him from claiming indemnity or contribution). He also amended his grounds prior to the hearing to include a contention that the guarantees were invalid for failure to ensure the guarantors had independent legal advice, and because Westpac acted imprudently in granting the loans.
[5] For the reasons I will give in this judgment, I find that the first and second defendants have not made out a case for setting aside the judgment against them, nor (consequentially) for the setting aside of the bankruptcy notices. Westpac has established the grounds for an order for adjudication. I also find that the fourth defendant does not have an arguable defence to Westpac’s application for summary judgment.
Background
[6] Gardost was incorporated on 19 July 2007 for the purpose of purchasing a rural property at 41 County Heights Drive, Palmerston North. The property has an area of 16.6425 hectares comprising three to four hectares of paddocks with the balance of the land planted with a pine forest. The fourth defendant was the sole director of Gardost. He is the son of the first and second defendants, and the former partner of the third defendant. Each of the defendants holds 25% of the shares in Gardost.
[7] Westpac was approached through a mortgage broker, Mike Pero Mortgages, for a loan to purchase the property.
[8] At the time of entering into the agreement for purchase, and applying for finance from Westpac, the fourth defendant was a lawyer employed by the law firm Tararua Law. He and the third defendant left New Zealand on 28 July 2007, to live and work overseas. Before doing so they gave Mr P Lindstrom, a partner of Tararua Law, power of attorney to complete the transaction on their behalf.
[9] The purchase price for 41 Country Heights Drive was $490,000 plus GST. Westpac approved finance of $404,000 for the purchase, and at the same time made further loans to Gardost, effectively to restructure loans already in place to the third and fourth defendants. They had taken out loans in early to mid 2006 to purchase both a residential property in which they were living (3 Maxwell Line) and a 2.3680 hectare lifestyle block at 39 County Heights Drive. According to the fourth
defendant,2 the first and second defendants provided $20,000 towards the purchase
of one (or perhaps both) properties.
[10] The third and fourth defendants sold 3 Maxwell Line in September 2007, with the proceeds of sale being applied towards the purchase of 41 County Heights Drive.
[11] In July 2007, the third and fourth defendants transferred 39 County Heights Drive to Gardost. The terms of that transfer are not in the evidence before the Court, but the fourth defendant’s evidence is that Gardost provided a guarantee (apparently of the third and fourth defendants’ loans to purchase 39 County Heights Drive), which guarantee was supported by a mortgage over the transferred property. At the time of the transfer the third and fourth defendants owed Westpac $167,662 under those loans.
[12] The second defendant also had a loan from Westpac (of $220,000) secured over a property at 24 Meridian Grove, Palmerston North that was the home of the
first and second defendant. At the time of the loans to Gardost and restructure of the
2 Paragraphs 13 and 17 of affidavit of the fourth defendant sworn on 1 June 2012.
prior loans to the third and fourth defendants in October 2007, the second defendant owed Westpac approximately $223,000 under that loan.
[13] Westpac and Gardost entered into four loan agreements on 31 October 2007, under which Westpac advanced a total sum of $631,906 to Gardost (through four separate loan accounts, styled 91, 92, 93 and 94). Two of those loans (loan accounts
92 and 93, for the total sum of $166,906) were used to repay the debt that the third and fourth defendants had incurred to purchase 39 County Heights Drive. The 94 account loan ($61,000) appears to have been a short-term facility to meet the GST component of the purchase price. Gardost also had a current account with Westpac through which interest payments were made.
[14] The four loans and the current account were secured by registered mortgages over 41 County Heights Drive, the adjoining 39 County Heights Drive, and 24
Meridian Grove. They were further secured by guarantees given by all defendants (Mr Lindstrom signed the guarantees on behalf of the third and fourth defendants, pursuant to his power of attorney).
[15] Gardost repaid the 94 loan account on 7 January 2008 (using a GST refund). In June 2008 it sold 39 County Heights Drive. The proceeds of sale were used to repay two of the three remaining loans (the 92 and 93 accounts) and the balance was credited to Gardost’s current account. As a consequence, from June 2008 Gardost had one loan only outstanding, being the 91 account loan taken out to purchase 41
County Heights Drive. It also had its current account.
[16] Gardost defaulted under its arrangements with Westpac in April 2010 when its current account went into unauthorised overdraft. Westpac made demand on 20
April 2010 for the overdrawn sum. When that demand was not met, it made demand on the guarantors. When those demands were not met it served Property Law Act notices. When those were not complied with, Westpac proceeded to exercise its power as mortgagee to sell 41 County Heights Drive.
[17] At about the same time as Gardost defaulted (April 2010), the second defendant defaulted on her separate obligations to Westpac. Westpac made demand
in respect of that default and subsequently issued a Property Law Act notice that was not remedied. Westpac proceeded to sell that property also.
[18] The property at 24 Meridian Grove was sold at auction on 10 February 2011 for $309,500. The net proceeds of sale were applied to repay the second defendant’s borrowings. The balance (a total amount of $45,000) was credited to Gardost’s accounts, clearing the current account and reducing the 91 loan account.
[19] The property at 41 County Heights Drive was marketed for auction on 17
February 2011. Before embarking on that process, Westpac obtained appraisals of value and recommendations for marketing from two real estate agents. Westpac also obtained valuations of the land from a registered land valuer and of the forest from a forestry specialist. It engaged one of the agents (Professionals) to conduct a five week marketing campaign and an auction.
[20] Shortly before the auction, and after some initial interest had fallen away, the sales person at Professionals who had been conducting the marketing, Mr P Read, decided to make an offer. He informed his manager, Mr Campbell. Mr Campbell satisfied himself that Mr Read was following up with all interested parties and was still actively pursuing the sale, and told Mr Read he could revisit the matter after the auction.
[21] No bidders attended the auction on 17 February 2011. After the property was passed in, Mr Read reconfirmed his interest. Mr Campbell immediately took over from Mr Read as the sales person responsible for this property. He reported Mr Read’s interest to Westpac on 21 February 2012, informing Westpac at the same time that he had taken over as the person handling the sale (and confirming that Professionals would continue to market the property until an offer was accepted and completed).
[22] Mr Read made an offer of $181,000, containing provision for Westpac to provide its consent in accordance with s 134 Real Estate Agents Act 2008, and being subject to Mr Read providing Westpac with an independent valuation form a
registered valuer as required by s 135 of that Act. The offer was sent to Westpac on
22 February 2012.
[23] Mr Campbell contacted all parties who had previously expressed any interest, to gauge whether there was any continuing interest. When no further interest was indicated, Westpac decided to accept Mr Read’s offer (being the only offer received at any time). Westpac accepted Mr Read’s offer, and provided its consent, on 25
February 2012. Mr Read subsequently provided Westpac with a valuation that valued the property at $185,000, excluding GST and the forest. Westpac elected to proceed with the sale. Mr Read nominated his company, Forestmarkets Ltd, as purchaser, and the sale to Forestmarkets Ltd was settled on 16 March 2012.
[24] The net proceeds of the sale of 41 County Heights Drive were applied to the sum then owing under the remaining loan (the 91 account), leaving a balance of
$238,397.34 unpaid.
The procedural history
[25] Westpac commenced its summary judgment proceeding on 10 November
2011. It obtained judgment against the first and second defendants, by default (and in the absence of any appearance), on 20 October 2011. Westpac issued bankruptcy notices against the first and second defendants on 15 December 2011. The first and second defendants took no steps in relation to them within the required time. Westpac filed its applications for adjudication of those defendants on 17 May 2012.
[26] The summary judgment proceeding was served on the third defendant then residing overseas on or about 18 October 2011, under an agreement for service on her mother. On 1 March 2012 Westpac advised the Court that it was discontinuing against the third defendant, having reached terms of settlement with her.
[27] The summary judgment proceeding was served on the fourth defendant on or about 26 October 2011, again under an arrangement reached with the fourth defendant (who was also residing overseas). He filed notice of opposition on 27
March 2012.
[28] On 25 May 2012 the first and second defendants filed a notice of opposition
to Westpac’s application for their adjudication,
[29] On 8 June 2012, the first and second defendants filed their application to set aside the summary judgment and bankruptcy notices, relying on the affidavits filed in support of their opposition to Westpac’s application. At a mention hearing on 14
June 2012 the Court granted the first and second defendants leave to bring their application to set aside, and directed that all applications be heard together (with all affidavits being available as evidence in all applications).
[30] Westpac filed notice of opposition to the first and second defendants’
application on 26 June 2012.
[31] The fourth defendant filed an amended notice of opposition on 25 July 2012.
Procedural matters
[32] At the commencement of the hearing both parties sought leave to file further documents:
(a) Westpac sought leave to file two further affidavits by its senior manager, Ms Tomkins. The first was a third affidavit sworn on 27
July 2012. Leave was sought on the ground that the first and second defendants had raised new matters in a joint affidavit sworn on 9 July
2012. The significance of the document only became apparent when the first and second defendants indicated their intention to advance undue influence as a ground for opposition and setting aside (this ground had not been identified explicitly in their original notice of opposition).
(b)The second defendant sought leave to file an amended notice of opposition, pleading that the guarantee was invalid and unenforceable on the grounds of undue influence (a ground advanced in the first and second defendants’ joint affidavit but not expressly pleaded in the
notice of opposition), and on the ground that Westpac had lent imprudently to Gardost (on an excessive ratio of loan to security and when it ought to have known that the loans could not be serviced).
[33] Neither party opposed the leave being sought by the other. Leave was granted, accordingly, for all documents to be filed and read.
Applicable principles
(a) Application to set aside summary judgment
[34] The first and second defendants’ application is brought under r 12.14 of the
High Court Rules:
12.14 Setting aside judgment
A judgment given against a party who does not appear at the hearing of an application for judgment under rule 12.2 or 12.3 may be set aside or varied by the court on any terms it thinks just if it appears to the court that there has been or may have been a miscarriage of justice.
[35] The Court has an unfettered discretion, but three matters have been identified as being particularly relevant (referred to as “of dominant importance”) in determining where the justice of a case will lie:3
(a) The availability of a substantial ground of defence. (b) A reasonable explanation of the delay.
(c) The plaintiff will not suffer irreparable injury if the judgment is set aside.
[36] A defendant seeking to set aside a judgment that was obtained regularly will normally need to adduce material that will allow the Court to conclude that there
was no arguable defence.4
3 Paterson v Wellington Free Kindergarten Association Inc [1966] NZLR 975 at 983, cited in Russell v Cox [1983] NZLR 654 (CA) at 659.
(b) Setting aside a bankruptcy notice
[37] A counterclaim based on the manner of a mortgagee sale can lead to setting aside of a bankruptcy notice if it is equal to or greater than the judgment debt and the debtor could not use it as a defence in the proceeding in which judgment was obtained (for example, if the conduct in question was after entry of judgment).5
However, the Court also has an inherent jurisdiction which can be used (even after adjudication) where there has been an abuse of process.6
(c) Summary judgment
[38] The principles that the Court applies are stated sufficiently in the succinct summary of the Court of Appeal in Krukziener v Hanover Finance Ltd:7
[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ
84 (CA).
The parties’ contentions
[39] The defendants do not dispute that they signed guarantees of Gardost’s obligations under the remaining loan agreement (in the case of the fourth defendant, through Mr Lindstrom as his attorney), or that the loan was in default and that the
requisite notices under the Property Law Act 2007 were served on them. It is also
4 Equitycorp Finance Group Ltd v Cheah [1989] 3 NZLR 1 (PC) at 9.
5 Sharma v ANZ Banking Group (New Zealand) Ltd (1992) 6 PRNZ 386 (CA) at 389.
6 Re Wise HC Auckland B227/95, 21 June 1995.7 Krukziener v Hanover Finance Ltd (2008) NZCA 187, [2010] NZAR 307 at [26].
common ground that Westpac sold 41 County Heights Drive and 24 Meridian Grove in exercise of the powers of sale given under its mortgages over those properties. There is also no dispute that Westpac obtained judgment against the first and second defendants, in default of any opposition, and has since served bankruptcy notices on them which have expired. Westpac, therefore, has a prima facie case for obtaining orders for adjudication against the first and second defendants and summary judgment against the fourth defendant. For that reason the overriding questions that the Court must determine are whether:
(a) The first and second defendants have established an arguable basis for setting aside the summary judgment and the bankruptcy notices (which will depend on whether they have demonstrated a reasonably arguable defence to the summary judgment); and
(b)Whether, having regard to the grounds of opposition advanced on behalf of the fourth defendant, Westpac has established that he has no arguable defence.
(a) The first and second defendants’ case
[40] The first and second defendants advanced the following grounds for contending that there has been, or may be, a miscarriage of justice in their cases which justifies setting aside of the summary judgment (and consequentially the bankruptcy notices and, therefore, dismissal of Westpac’s application for adjudication):
(a) They say that the guarantee on which Westpac obtained its judgment is invalid and unenforceable because:
(i)Westpac failed to advise them that they should obtain independent legal advice before they signed the guarantee;
(ii)Westpac was aware that they were acting under the undue influence of their son (the fourth defendant), yet by reason of
the instructions given to Tararua Law it failed to ensure that they received independent legal advice and so cannot rely on the solicitor’s certificate it received; and
(ii)Westpac acted imprudently in advancing loans to Gardost that were excessive having regard to the value of the security, and when it ought reasonably to have known that the guarantors were unable to service the loan.8
(b)They say they have an arguable counterclaim and set-off to the debt on the grounds that the sales of both 41 County Heights Drive and 24
Meridian Grove were not at market value (based on valuations that were substantially above the sums at which Westpac sold the properties) and taking into account the fact that 41 County Heights Drive was sold to Mr Read (who handled the sale process for Westpac) within a short time of the unsuccessful auction (raising an inference that Westpac may not have properly exposed the property to the market).
(b) The fourth defendant’s case
[41] The fourth defendant also argued that his guarantee is unenforceable because he did not receive independent legal advice and because Westpac failed to act prudently in granting the loans (because they were excessive having regard to the value of the security and to the defendants’ ability to service them).9 However, his primary ground of opposition was that Westpac breached its duty to him by selling
41 County Heights below market value and by selling to Mr Read. In his notice of opposition he also contended that he had a defence on the basis that he had not been served properly with the proceeding, and because Westpac had discontinued against the third defendant, so depriving him of an opportunity to seek contribution or
indemnity, but he did not pursue those grounds.
8 Relying on the decision of the Federal Court of Australia in Valcorp Australia Pty Ltd v Angas
Securities Ltd [2012] FCAFC 22.
9 Additional grounds added in his amended notice of opposition.
(c) The plaintiff ’s case
[42] Westpac says that there is no miscarriage of justice to justify setting aside of the summary judgment or the bankruptcy notice. It says that the first and second defendants have not shown that there was any actual undue influence10 nor any matters which might give rise to a presumption of undue influence11 or that it had knowledge of it. In any event, Westpac says it instructed Tararua Law to explain the
guarantee and to invite the guarantors to take independent legal advice, and is entitled to rely on the certificate provided by Tararua Law that it had carried out its instructions.12 As to the other bases of alleged invalidity, Westpac says that there is
no duty of care to lend prudently,13 and that there has been no breach of the
requirements of ss 134 and 135 of the Real Estate Agents Act.
[43] In relation to the alleged breach of duty as mortgagee, Westpac contends that the defendants have put up no evidence to challenge its evidence as to the process adopted, and that the sales that resulted (whether at auction or subsequent to auction) reflected the market value at the time. It says that the differences between the sale prices achieved and valuations can be attributed to the unique features of the property, but in any event any difference is irrelevant as the sale prices were achieved at or following auction and were clearly what was available in the market at the time. It says that the defendants have given no evidence to rebut the evidence of the real estate agents that Mr Read complied with the requirements of the Real Estate Agents Act and marketed 41 County Heights Drive appropriately both up to and after the auction.
The evidence
[44] Because of the way the case has developed, both sides have filed a number of affidavits. It will assist an understanding of the reasons for the decision to give a
summary of the evidence as it developed.
10 The fourth defendant had been out of the country for approximately three months by the time the first and second defendants signed the guarantee.
11 In the usual course the parent/child relationship does not give rise to a presumption of undue influence.
12 ANZ National Bank Ltd v Smith (2010) NZCPR 898 (HC) at [64].
13 Relying on Bartle v GE Custodians [2010] 1 NZLR 802 (HC) at [351].
[45] Westpac’s application for summary judgment was supported by a substantive affidavit by a senior lending manager, Ms Tomkins. She gave evidence of the loan, the guarantee, the default and demands made on the guarantors, the issue of Property Law Act notices, the sale of the security properties and the balance due after those sales. This evidence established a prima facie case against the defendants.
[46] The fourth defendant was the only defendant to oppose the application. He filed affidavits by the second defendant, himself and two valuers (one of the land and the other of the forestry) in support of his opposition:
(a) The second defendant’s affidavit gave background to the purchase of
41 County Heights Drive, referred to management of the property and the loan after the fourth defendant went overseas, and gave evidence of the rateable values of both 41 County Heights Drive and 24
Meridian Grove, together with the valuation obtained by Westpac prior to the mortgagee sale of 41 County Heights Drive, to support their contention that the sales of both security properties were below market value. She also referred to Mr Read’s role as sales person.
(b)The fourth defendant gave more detailed evidence of the background to the purchase, including: the arrangements made with regard to the properties owned by himself and the third defendant; brief evidence as to the management of the property after his departure overseas; and evidence of his lack of knowledge until recently of the terms of a certificate/acknowledgement by the guarantors (the terms being that they had been advised about the nature and effect of the guarantee, had been offered the opportunity to take independent legal advice, and had waived that right and the opportunity to read the guarantee).
(c) The valuers gave evidence that the land had a market value of
$265,000, and the trees a crop value of $39,000 plus GST and carbon value of $26,000 plus GST, thus giving a total market value for the property of $330,000. The land valuer commented that sales (by agreement or by auction) conducted in good faith after proper
preparation will usually be an indicator of open market value, whether conducted by the owner or a mortgagee. He said that a valuer may on occasions express a view on discount for a forced sale, and although this was a very subjective area of valuation, in his opinion 40% (the discount applied by the valuation that Westpac obtained prior to sale) would be excessive.
[47] The first and second defendants first took steps in opposition to Westpac’s application for adjudication. In support of their opposition they each filed an affidavit:
(a) They both gave evidence of a valuation of 41 County Heights Drive obtained in 2007 that gave a mortgage recommendation of $296,000 (whereas the loan was for $404,000), referred to the fourth defendant having left New Zealand before settlement (leaving them to manage the property), claimed that before they signed the guarantee the solicitors who acted for all of Westpac, Gardost and the shareholder guarantors (Tararua Law) had not given them an opportunity to seek independent advice, and referred to the valuation of the land obtained by Westpac ahead of the mortgagee sale (in particular to the discount of 40% applied for a mortgagee sale) and to the role of Mr Read.
(b)The second defendant contended that the solicitor who witnessed her signature on the guarantee had not given a certificate that she (the solicitor) had explained the general nature and effect of the guarantee (there was a certificate on the page, but alongside the first defendant’s name only). She also noted that Westpac’s pre-mortgagee sale valuation excluded the value of the pine trees, and stated that the family considered that the forest was a substantial asset the value of which Westpac had not appreciated (she referred to a forestry consultant having given them a value of $1,320,000 for the trees but did not provide any report or other support for this statement).
[48] Westpac then filed affidavits in reply on its applications and in support of its opposition to the first and second defendants’ application. These affidavits were by Ms Tomkins and another Westpac employee, by its valuer and its forestry expert, and by Mr Read and Mr Campbell:
(a) Ms Tomkins gave detailed evidence of the steps taken to market both
41 County Heights Drive, including:
(i)seeking marketing appraisals and estimates of sales price from two real estate agents: Unique Realty Ltd (trading as “Professionals”) gave a wide range ($200,000 to $350,000) for the current market value, reflecting in part the uncertain value of the trees and difficulties harvesting them and an estimated forced sale value of $185,000; Property Brokers Ltd gave an estimate of between $180,000 and $200,000 at mortgagee sale, and stated that the trees added limited value because of their age and extraction costs;
(ii)obtaining formal valuations both of the land from Firth Valuation Ltd ($168,000 plus GST on a forced sale basis, excluding trees) and of the trees from John Turkington Ltd ($15,131 plus GST, if any);
(iii)engaging Professionals to conduct the five-week marketing programme they had recommended;
(iv) the poor response received to the marketing programme and
Westpac’s decision to proceed with the auction nonetheless;
(v) the lack of any bid at auction and the offer received from Mr
Read post-auction; and
(vi)Westpac’s decision to accept Mr Read’s bid as the best price reasonably obtainable and in light of all the evidence received, including the further valuation supplied by Mr Read.
Ms Tomkins also gave similar evidence as to the process that Westpac followed for the sale of 24 Meridian Grove: it obtained appraisals of current market and forced sale value from the same two real estate agents (market value ranging between $330,000 and $360,000, and forced sale value between $310,000 and $325,000); it obtained a formal valuation from its valuer (estimated market value of $340,000 and forced sale value of $272,000); it engaged Professionals to market the property (on its recommended four-week marketing campaign) and to conduct the auction.
In addition, Ms Tomkins set out the history of all the loans, including the repayments received from the various sales. She produced the original guarantee and the solicitor’s certificate received from Tararua Law prior to advancing the loan, and a diary note made by mortgage broker Mike Pero Mortgages to support the application for the loan to purchase 41 County Heights Drive.
(b)Another Westpac employee, Ms Hague, responded to a statement by the second defendant that in May 2012 she had put a written proposal to Westpac for clearing the arrears, to which Westpac had not responded. She produced a file note of a telephone conversation with the second defendant immediately after receiving the offer recording that the proposal was declined because the timeframe for clearing the arrears was unacceptable. Ms Hague said that she told the second defendant that she could resubmit a further proposal, but it would need to provide for the arrears to be cleared within six months. She added that as far as she was aware the second defendant did not submit another proposal. In a later affidavit the second defendant accepted that she had had this response.
(c) Westpac’s valuers confirmed the valuations given to Westpac prior to the mortgagee sale, notwithstanding the later valuations provided by the defendants’ experts. They each commented on matters which explained apparent differences between their values and the more recent valuations for the defendants. In particular, the land valuer identified a number of factors which had led him to the view that a
40% discount was appropriate for a forced sale, and the forest valuer commented that he had not provided a forced sale value, and explained the factors which had caused him not to put any carbon value on the trees (as the defendants’ valuer had done).
(d)Mr Read and Mr Campbell between them confirmed the appraisal given to Westpac, the marketing undertaken, and the process followed when Mr Read became interested in making an offer, and in presenting that offer. In particular Mr Read referred to his forestry experience, which he had used both in preparing the appraisal and in marketing the property prior to the auction. He also referred to initial interest in the property, the contact that he had with interested parties, and a fall off in interest as the auction approached. He said that the fall off was disappointing but reflected the market at the time, as the markets for both bare land and forestry were slow.
[49] The first and second defendants filed a substantial joint affidavit in reply. In that affidavit they both advanced matters not previously raised (or not raised expressly) and replied to Westpac’s evidence. The salient matters were:
(a) First, they said that they signed the guarantee acting under the influence of their son (the fourth defendant) of whom they were very proud and in whom they placed great trust and confidence in family matters. They said that they regarded the formation of Gardost and the purchase of 41 County Heights Drive as their son’s personal venture (the offer of shareholding was accepted “as a family gesture”), they left the financial arrangements to him, and signed the guarantee as before he went overseas he had requested they sign any
documents to enable the purchase to be completed. They said that they did not appreciate until recently that they were guaranteeing his personal loans, and that when they signed the certificate and acknowledgment in Tararua Law’s offices on 30 October 2007 (before Mr Lindstrom) it was explained to them only briefly, and they did not get full details or ask questions because they had full confidence in their son and were wanting to help him. They added that they never considered not signing, or taking time to understand the risk and possible consequences. They said that they were not aware that by signing the certificate they were waiving the right to obtain independent advice, and, contrary to the terms of the certificate, never expressed the wish not to read the guarantee. Further, they stated that they did not recall receiving any detailed explanation as to the nature and effect of the guarantee when they signed it the following day (in front of a different solicitor, Ms Parker), notwithstanding a certificate to that effect.
(b)Secondly, they expanded upon earlier evidence that Westpac had not discussed with them the high ratio of the loan to the value of 41
County Heights Drive, nor addressed their abilities to service either the loan for 41 County Heights or the combined loans covered by the guarantees (referring to the need to sell 39 County Heights Drive in
2008 to reduce debt), describing the comments of the broker who submitted the loan application as optimistic, and noting that Westpac knew before advancing the loans that the third and fourth defendants had left their employment and gone overseas.
(c) They also responded in detail to Westpac’s evidence as to valuations, pointing to the fact that all the valuations of 41 County Heights Drive gave a market value for the land well in excess of the eventual sale price, and even Westpac’s evidence of both land and trees was some
$114,000 above the sale price.
(d)The second defendant said for herself that she would not have given the guarantee (supported as it was by the mortgage over 24 Meridian Grove) if she had been aware that the guarantee extended to the third and fourth defendants’ personal loans, and that she had not attempted to remedy the default under her own loan (although small) because of the pressure from Westpac to remedy the much larger default under the Gardost loans.
[50] In the further affidavits which Westpac was given leave to file, Ms Tomkins responded (inter alia) to the defendants’ contentions that it had knowledge that the first and second defendants were acting under undue influence:
(a) In the first of the affidavits she produced a full copy of the loan application submitted by Mike Pero Mortgages together with a copy of the solicitor’s certificate given to Westpac by Tararua Law prior to the drawdown of the loans, (certifying that the solicitor had complied with Westpac’s instructions) as evidence of the matters known to Westpac. She added that the certificate/acknowledgment to which the defendants had taken exception was not a Westpac document (and presumably was prepared by Tararua Law, although Tararua Law has advised Westpac that it is precluded by legal professional privilege from commenting on any matters).
(b)In the second affidavit, sworn on 9 August 2012, Ms Tomkins produced Westpac’s general instructions to solicitors acting for Westpac on completion and execution of security documents, which instructions were referred to in its specific letter of instructions to Tararua Law (that letter being an exhibit to the first and second defendant’s joint affidavit).
The claims of invalidity of the guarantee
[51] I will address first the defendants’ claims that the guarantees are invalid and unenforceable, as they will be a complete answer to all applications if they are established.
Failure to ensure the guarantors received independent legal advice
[52] Although all defendants advanced this as a discrete ground in their notices of opposition, counsel only developed it in the hearing as an aspect of the first and second defendants’ claim of undue influence. I will deal with that claim next, but in any event it clearly cannot assist the fourth defendant. Nor can he succeed in a stand-alone claim that Westpac failed to ensure he received independent legal advice: Westpac had no duty to him to explain the guarantee, warn him about the risks of entering into it, or to recommend that he obtain separate advice: Shivas v Bank of
New Zealand.14
The claim of undue influence
[53] A guarantee executed under the undue influence exercised by or on behalf of a borrower may not be enforceable by a creditor. The doctrine of undue influence is directed at conduct within a relationship which justifies the conclusion that the agreement was not the result of a free exercise of the guarantor’s will, so that the agreement should not be allowed to stand. The underlying rationale was stated by the Court of Appeal in Contractors Bonding Ltd v Snee:15
... As expressed in 18 Halsbury para 332, undue influence consists in the gaining of an unfair advantage by an unconscientious use of power by a stronger party against a weaker in the form of some unfair and improper conduct, some coercion from outside, some overreaching, some form of cheating, and generally, though not always, some personal advantage obtained by the stronger party. It is directed at conduct within a relationship which justifies the conclusion that the disposition or agreement was not the result of a free exercise of the disponer's will. The doctrine is founded on the principle that equity will protect the party who is subject to the influence of another from victimisation.
14 Shivas v Bank of New Zealand [1990] 2 NZLR 327 (HC).
15 Contractors Bonding Ltd v Snee [1992] 2 NZLR 157 (CA) at 165-166.
There are two categories of undue influence. One is where actual undue influence is proved. The other is where the relationship is such that undue influence is presumed, e.g. solicitor and client. In such a case the onus is on the other party, there the solicitor, to rebut the presumption. There is no such presumption of imposition in the relationship where, as here, a mother benefits a son.
[54] The application of the doctrine in relation to guarantees has been considered in several leading cases including cases in the House of Lords dealing with wives acting as sureties for debts incurred by their husbands or entities controlled by their husbands16 and in several recent decisions of the Court of Appeal.17
[55] Undue influence may be found from actual conduct (unacceptable means such as unfair conduct or over-reaching behaviour), or to arise out of a relationship where one party has a measure of influence or ascendancy over the other and takes advantage of it. It the latter case it can arise where the influence provides scope for
misuse, without any specific overt acts of persuasion.18
[56] It is common ground that it is a question of fact whether a transaction was brought about by the exercise of undue influence, and that the person who claims to have been unduly influenced has the burden of proving the allegation:19
The evidence required to discharge the burden of proof depends on the nature of the alleged relationship, the personality of the parties, their relationship, the extent to which the transaction cannot be readily accounted for by the ordinary motives of ordinary persons in that relationship, and all the circumstances of the case.
[57] It will normally be sufficient to discharge the burden of proof for a party to prove that he or she placed trust and confidence in the other party in relation to his or her financial affairs, and that the transaction calls for an explanation: the Court may
draw an inference from that evidence that the transaction was procured by undue
16 In Barclays Bank plc v O’Brien [1994] 1 AC 180 and Royal Bank of Scotland v Etridge (No 2)
[2002] 2 AC 773 – see explanation of the rationale at [6]-[7].
17 For example Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 (CA), A-G for England and Wales v R [2002] 2 NZLR 91 (CA), Hogan v Commercial Factors Ltd [2006] 3 NZLR 618 (CA), and UDC Finance Ltd v Down [2009] NZCA 192.
18 Etridge, above n 16 at [8]-[11].
19 At [13].
influence, in the absence of a satisfactory explanation of the transaction by the other party.20 The cases refer to this as establishing a rebuttable evidential presumption.
[58] In some specific cases the law presumes irrebuttably that one party has influence over the other. In those cases the complainant need only prove the existence of the type of relationship (such as a solicitor-client relationship), and does not have to prove that trust and confidence was reposed in the other party. The parent-child relationship is not one of these rare cases where a legal presumption
arises automatically.21
[59] In Wilkinson v ASB Bank Ltd the Court of Appeal commented as a guide that undue influence was likely to be presumed if the guarantor had limited commercial ability and no more than a minimal financial stake in the enterprise guaranteed, and there was an emotional tie between the guarantor and the principal debtor or a dependency of the guarantor on the debtor.22
[60] A lender bank is put on inquiry that there may be undue influence where it has knowledge that the relationship between a guarantor and the debtor is non- commercial.23 However, where the guarantor is also a principal debtor, the bank will not be put on inquiry unless it is aware that the loan is being made for the purposes of only one of the parties as distinct from the parties’ joint purposes.24 The position is less clear cut, however, where a minority shareholder guarantees the company’s debt, because the shareholder may not have a direct role in the company’s business.25
[61] When a lender bank has been put on inquiry, it should take reasonable steps to explain to the guarantor the risks of entering into the transaction. If these steps are
not taken, the bank will be deemed to have constructive notice of the undue
20 At [14].
21 Hogan v Commercial Factors Ltd, above n 17 at [39].
22 Wilkinson v ASB Bank Ltd, above n 17 at 690 – 691.23 Etridge, above n 16 at [87]; although the House of Lords was dealing with husband and wife relationships, the Court of Appeal in Hogan v Commercial Factors Ltd, above n 17 considered the principles in a parent-child relationship – at [41] , [45] and [57] .
24 Etridge, above n 30, at [48].
25 At [49].
influence.26 The fact that only brief explanations are provided does not necessarily mean that the lender failed to take sufficient steps:27
If Ms Down received only brief explanations from UDC Finance as to the nature of the documents, that tends to corroborate UDC Finance's account that it proceeded on the basis that Ms Down was familiar with the affairs of the company and with these particular transactions. She therefore did not need lengthy explanations. In any case Ms Down signed an acknowledgment that she had either had independent legal advice prior to executing the documents or that if she had not, that was her own choice freely made.
[62] Against the background of these principles it is again common ground that a guarantor wishing to avoid liability on the ground of undue influence will need to satisfy the court on three issues:28
(a) Was the [guarantor] subject to undue influence?
(b) If so, were the circumstances as known to the creditor such as to put the creditor on inquiry as to the risk of undue influence?
(c) If so, did the creditor act in such a way as to insulate itself from the consequences of such undue influence?
[63] I am not convinced that the first and second defendants have the necessary relationship of trust and confidence with the fourth defendant on which to bring a claim of undue influence. I can accept that they had great pride in him, and were happy for him to take the lead in the arrangements to purchase 41 County Heights Drive, including the formation of Gardost. However, that is not necessarily a relationship in which the fourth defendant had ascendancy or dominance, and I find it difficult to see that he exploited the relationship by requesting the first and second defendants to guarantee Gardost’s debts. It is also significant that the claim of undue influence has been raised late, and there is no evidence by the fourth defendant to support it. Counsel for Westpac invited me to take a robust view and find that there was nothing going on beyond a close parent/child relationship in which all were
working on a project of mutual family benefit. However, by the narrowest of margins
26 At [87].
27 UDC Finance Ltd v Down, above n 17, at [41].
28 Hogan v Commercial Factors Ltd, above n 17 at [13].
I find that there is an arguable basis for saying that there was a sufficient relationship of trust and confidence on which to advance a claim of undue influence.
[64] The first and second defendants’ contention that the transaction calls for explanation is equally questionable. They claim that they were unaware of Gardost’s additional borrowing, and would not have entered into the guarantees if they had known of it. The evidence about these loans is clear. The 94 loan was simply to bridge the GST paid on the purchase price, pending receipt of a GST refund (which occurred), and the 92 and 93 loans were part of the transfer of 39 County Heights Drive into Gardost (and continued to be secured against that property until it was sold in 2008). It seems unlikely that they would not have been aware of these matters in a general sense, even if they did not know the detail. I regard it as significant that they signed an authority to Mike Pero Mortgages to make the loan application on their behalf, and provided financial information to support the application. Although there is no evidence to show whether they saw the completed form that was submitted, it mentioned that 39 County Heights Drive was being transferred into Gardost.
[65] Further, although there is little evidence available to show what commercial ability the first and second defendants had, the second defendant stated in her second affidavit that the family saw substantial value in the trees, and sub-divisional possibilities for the land, including land that was eventually to be cleared of the trees. She also refers to the first defendant running livestock on the property and the proceeds of that enterprise being used to meet some of the outgoings. These matters tend to count against the passive and commercially naive parent role, who received their shareholding as a family gesture.
[66] Having said that, and although I consider it likely that the first and second defendants were aware of all of the elements, if not all of the detail, of the transaction, they have stated that they did not know of the other loans and would not have given their guarantees had they done so. Whether this contention will withstand scrutiny, given that the additional loans were all repaid within a year, is doubtful. However, I cannot resolve this point on this application. Accordingly, I accept that there is an aspect of the transaction calling for further explanation, and so
a weak but arguable basis for an argument that when they entered into the guarantee they were subject to undue influence of the fourth defendant.
[67] I am not persuaded, however, that Westpac was put on inquiry. Counsel for the defendants submitted that it was or should have been apparent to Westpac that this was a venture of the third and fourth defendant, and that the first and second defendants had a purely passive role in the transaction that provided no commercial benefit to them, but rather was a manifest disadvantage. He argued that this should have been apparent to Westpac from its knowledge of the third and fourth defendants’ other property transactions, and that the fourth defendant was the sole director of Gardost. However, that argument ignores that Westpac’s knowledge came primarily from the loan application which informed Westpac that:
(a) The purpose of the loan was for the third and fourth defendants to buy some land with the first and second defendants, to provide the latter with land to build on in the future;
(b)The third and fourth defendants had been intending to build on their own section (presumably 39 County Heights Drive) but now had this opportunity to buy a property with the first and second defendants;
(c) The property was being taken in the name of a company that all four had set up, and in which all four were shareholders;
(d)The purchase was to be funded jointly and was to be serviced by the incomes of all four shareholders (with financial details given for all four);
(e) The third and fourth defendants’ own property was also to be put into
the name of the company;
(f) The application was accompanied by financial statements on behalf of all four and signed authorities from all four to Mike Pero Mortgages
to act on their behalf in obtaining the finance and giving a declaration as to the truth of the information in the application; and
(g)The second defendant stated in her second affidavit that the family saw substantial value in the trees, and mentions sub-divisional possibilities for the land, including land that was eventually to be cleared of the trees. They say that they did not contribute any money to the purchase, but the fourth defendant says that at least $20,000 (and perhaps $40,000) came initially from them.
[68] There is an obvious commercial explanation for the first and second defendants’ guarantees in this evidence. The inevitable conclusion to be drawn from the information sent to Westpac is that this was a joint commercial venture in respect of which all defendants were to benefit equally, and to which each was applying personal assets (the third and fourth defendants were contributing the sale proceeds
of 3 Maxwell Line29 and any equity in 39 County Heights Drive and the first and
second defendants were supporting it with security over their equity in 24 Meridian
Grove).
[69] Counsel for the defendants submitted that the order in which Westpac listed the defendants in correspondence and documents was also an indication that they saw the fourth defendant as the driving party (he noted that the order had been reversed when this proceeding was issued). I do not see this as a significant point.
[70] Assuming, for completeness, that the first and second defendants can establish an evidential basis for an argument that Westpac was put on inquiry as to the possibility of undue influence, they must also show that Westpac failed to take reasonable steps to ensure that they were advised as to the risks they ran by signing the guarantees (to “inoculate itself” from presumed knowledge of the undue influence).
[71] Westpac contends that it took reasonable steps in its instructions to Tararua
Law, and is entitled to rely on the solicitor’s certificate that it received.
29 This apparently included money contributed by the first and second defendants.
[72] Counsel for the defendants argued that notwithstanding those instructions there remain factual issues for determination at trial as to whether Westpac brought home to the first and second defendants the risks they were running, what explanation had been given and whether that amounted to sufficient steps, what legal advice they were given when they signed the waiver in the acknowledgment certificate with the waiver of their right to advice. The essence of this argument is the contention that Westpac cannot claim to be ignorant of the lack of legal advice because in those instructions it required the parents to waive the right to legal advice. Counsel submitted that this was the construction to be taken from the requirement in Westpac’s letter of instructions that Tararua Law arrange for the guarantors to execute an enclosed “Waiver of Independent legal advice/Acknowledgment of Guarantor”, read together with the document that the first and second defendant signed in front of Mr Lindstrom. He argued that this requirement removed rather
than ensured the first and second defendants’ protection under common law30 and
under the Code of Banking Practice, so that Westpac could not rely on the solicitor’s
certificate it received.
[73] It is indisputable that in its letter of instructions to Tararua Law Westpac instructed the firm to act for it in arranging execution of documents, including the loan agreements, the mortgages and the guarantee, and a waiver of independent advice/acknowledgment of guarantor. However, there are two difficulties for the defendants with their argument. First, the opening paragraph of Westpac’s instruction letter stated that it was to be read in conjunction with Westpac’s standard form document giving general information and requirements for carrying out personalised instructions. Those general instructions contain a section on advising guarantors, which gives explicit instructions to the solicitor to ensure that every guarantor had a full understanding of the obligations being undertaken, to advise every guarantor to seek independent legal advice before signing, and if the guarantor declined independent legal advice to ensure that the guarantor signed a waiver:
It is your responsibility to ensure that there is a full understanding by every guarantor of the obligations being undertaken and there is no undue influence being exerted on the guarantor. In particular, if you are also acting on behalf of the Customer, or are in any way associated with the Customer,
30 Set out in Etridge, above n 16 at [64]-[65].
you should advise every guarantor that he/she should seek independent legal advice before signing the guarantee because of his/her risk of liability under the guarantee....
The Banks strongly recommend that each guarantor (if any) takes independent legal advice. However if any guarantor declines to take independent legal advice, please advise Westpac NZ and ensure that the “waiver of independent legal advice” form is signed by the guarantor. In such cases, you will need to provide the advice to the guarantor and execute the solicitor’ certificate in the guarantee.
[74] The instructions in the personalised letter of instructions for Tararua Law to ensure that each guarantor sign any document to which the guarantor is a party and to explain to the guarantor the meaning and effect of all documents is therefore to be read together with these more specific requirements. Read in that context there can be no issue that Westpac was requiring Tararua Law to obtain a waiver in disregard of the first and second defendants’ rights. It is clear that this was only to be obtained if they elected, after advice, not to do so.
[75] It is also significant that the first and second defendants have not said that the solicitor who gave a certificate of due advice on the guarantee itself did not give that advice. They have said only that they have no recollection of receiving a detailed explanation. I see no reason to treat that evidence as raising a dispute in the context of this case. It is too general to call into question the terms of the certificate, at least in terms of Westpac’s position.
[76] I find that when Westpac received Tararua Law’s solicitor’s certificate prior to advancing the loan, it was entitled to rely on clause 8 of that certificate that:
Any guarantee included in the Documents, and the separate solicitors’ certificate relating to each guarantee, has been signed in accordance with the instructions and any notes provided by Westpac NZ regarding completion of guarantees.
Counsel for the defendants conceded in his oral argument that Westpac was entitled to rely on the solicitor’s certificate if Westpac’s instructions complied with its duty at common law and under the Code of Banking Practice. I find that they did comply.
[77] Secondly, Ms Tomkins has stated in evidence that the certificate and acknowledgment form which the first and second defendants have said was
explained only briefly to them, and does not accurately represent what they recall of that explanation, was not Westpac’s form and she “can only assume that it was part of Tararua’s internal process”. Nevertheless, on the defendants’ own evidence an explanation was given, and the certificate was indisputably delivered to Westpac by Tararua Law as a waiver by the defendants:31
... it is not the bank’s role to inquire into and audit the quality of the advice given.
[78] Lastly I am not persuaded by the argument for the defendants that the guarantee of the second defendant is invalidated by the absence of a separate certificate alongside her signature on the guarantee. Ms Tomkins has explained that the second defendant’s name was added to that page of the guarantee because the blank signature pages had been crossed out inadvertently, and one was re-instated, with the first defendants name having been inserted in the space provided in the printed area, and the second defendant’s name then added below. There is no evidence to challenge that statement. I am satisfied that the certificate appearing on that page alongside the signature of the first defendant was intended to apply also to the signature of the second defendant.
The claim of imprudent lending
[79] I do not accept that the defendants have an arguable defence on the basis of alleged imprudent lending. There is no duty of care in New Zealand for a lender to act prudently.32 It was entirely for Westpac to determine whether to grant the loan.
[80] The authority that the defendants rely upon, Valcorp Australia Pty Ltd v Angas Securities Ltd,33 is clearly distinguishable. The comments in that case regarding prudence in granting a loan were made in the entirely different context of claims by three lenders against a valuer for damages for misleading conduct in a valuation that the lenders relied upon to make loans and take mortgage securities. It was not concerned with duties of a mortgagee to a mortgagor but, rather, with the
apportionment of loss as between the lenders and the third party value.
31 ANZ National Bank Ltd v Smith (2010) NZCPR 898 (HC) at [64].
32 Bartle v GE Custodians [2010] 2 NZLR 802 (HC) at [345] - [351].
33 Valcorp Australia Pty Ltd v Angas Securities Ltd, above n 8.
[81] Even if that was not the case, the facts do not support a lack of reasonable prudence. The loans were secured by three properties and were within usually accepted ratios to value their values. Further, the information in the loan application provided a reasonable basis for considering that the defendants could service them.
The claims of breach of mortgagee’s duty
Sale of 41 County Heights Drive
[82] A mortgagee exercising a power of sale has a duty to take reasonable care to obtain the best price reasonably obtainable at the time of sale.34
[83] The defendants’ case is that Westpac breached this duty. They base their case on the fact that the sale price of $181,000 for the property as a whole was significantly below market value as determined by rateable valuations for the land (excluding the value of the trees), the appraisals and valuations of the land and the trees that Westpac obtained prior to the sale, and the valuations of the land and trees that the defendants obtained for these proceedings. They say that the values need to be explored at trial (particularly the apparent differences between the parties over the value of the trees, and point to the value of $61,000 allocated for the trees in an apportionment of the purchase price in Westpac’s eventual agreement with Forestmarkets Ltd). These contentions require an analysis of Westpac’s duty, followed by consideration of the alleged breach.
[84] Counsel for the defendants submitted that best price as contemplated by s 176 always means full market value,35 and, given the differences between the valuers, the market value could only be determined at trial. He further submitted that a mortgagee’s duty does not permit it to sell the mortgaged property below market value, but then qualified that by submitting in the alternative that if a sale below market (by which I understood him to include a forced sale value) was lawful, a
discount of 40% was excessive and unreasonable. This submission appears to
assume that market value is determined by valuation.
34 Property Law Act 2007, s 176.
35 Relying on Apple Fields Ltd v Damesh Holdings Ltd [2001] 2 NZLR 586 (CA) at [56].
[85] In the authority on which counsel relied, Apple Fields Ltd v Damesh
Holdings Ltd, the Court of Appeal stated:36
What is the “best price” in the present context is to be assessed having regard to the purpose of s 103A,37 which is to protect the vulnerability of those to whom the duty is owed, arising from the absence of any incentive for a mortgagee to obtain the full value of the property over and above the sum needed to clear the mortgage debt. In the present context, that means the price stipulated in the Damesh contract cannot be considered in isolation from other benefits flowing to those protected by the duty, in particular, Apple Fields as mortgagor. In this respect matters which we shortly address on the question of whether reasonable care was taken are also highly pertinent to whether $13.7m was the best price. So is the fact that, when it must have realised its own offer was making no progress, the Carter group, the only other potential purchaser which had emerged in the months preceding the sale, failed to increase that offer prior to 26 January. We regard that fact as more significant than the evidence that Mr Carter would have offered a higher price at a shareholders' meeting had one been held. It is, however, unnecessary to further examine the question of best price as this case can plainly be decided on a consideration of the question of whether reasonable care was taken by Damesh.
However, by referring to full market value the Court of Appeal was clearly not addressing the means by which full market value is determined. Valuations may well be an appropriate mechanism for a private sale, and are frequently relied upon to assist in marketing and to provide a guide to market price, but clearly the best determinant of market value is the market itself.
[86] Although market value is usually defined in terms of a willing buyer,38 a forced sale value may be the best price reasonably obtainable.39 That is often the case with a mortgagee sale (assuming the property has been marketed appropriately) because of circumstances inherent in forced sales.40
[87] Furthermore, as is apparent from the Court of Appeal’s comments in Apple Fields, the duty is not to obtain the best price, but to take reasonable care to obtain the best price reasonably obtainable. It does not necessarily follow that the best
price reasonably obtainable will in fact be achieved.41 Mere inadequacy of price in
36 At [56].
37 The predecessor to s 176.
38 See, for example, Westpac Banking Corporation v Chisholm (2007) 8 NZCPR 301 (HC) at [16].
39 Wallace v Bank of New Zealand HC Auckland CIV 2009-404-3534, 25 June 2009 at [54].
40 At [18]- [20].41 At [54].
relation to the expected value will not normally suggest a breach of duty.42 It thus follows that valuations lose most of their significance if reasonable care is taken and there has been a properly advertised and conducted sale process.43 In those circumstances, market value will be determined by whatever price is realised at auction (or tender).44
[88] The principles that the Court applies when determining whether there has been a breach of the statutory duty (or indeed the parallel equitable duty to act in good faith) can be found in summary in the recent decision of the Court of Appeal in Long v ANZ National Bank Ltd.45 In determining whether reasonable care was in fact
taken, the following principles are relevant:46
(a) A mortgagee may exercise its power of sale at its convenience, and it does not matter that the time of sale may be unpropitious;
(b)A mortgagee sale for a price less than the current market value assessed by valuers does not, of itself, establish a breach of duty, although a large discrepancy may indicate a failure to take reasonable care;
(c) A mortgagee is not entitled to sell in a hasty way at a knock-down price sufficient to pay the debt which because of the speed of sale leads to a lower price than could otherwise be obtained;
(d) Proper care must be taken to expose the property to the market. [89] The following are indicators of reasonable efforts having been made:47
(a) The appointment of a reputable real estate agent to market the
property;
(b)Obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property;
(c) Marketing over a reasonably long period of time;48
42 Mitchell v Trustees Executors Ltd [2011] NZCA 519 at [68]; see also ASB Bank Ltd v Byrne [2012] NZHC 351 at [27] and [36] where the sale price achieved was 83% of the forced sale valuation.
43 Harts Contributory Mortgages Nominee Co Ltd v Bryers HC Auckland CP403-IM00, 19 December
2001 at [49]; ASB Bank Ltd v Urquhart HC Auckland CIV-2010-404-6913, 20 May 2011 at [85].
44 Mitchell, above n 43, at [68(c)].
45 Long v ANZ National Bank Ltd [2012] NZCA 132 at [17] – [21].
46 Public Trust v Ottow (2010) NZCPR 879 (HC) at [17].47 At [31].
(d) An extensive advertising and promotional campaign; (e) A properly conducted auction;
(f) A sale price that, given all the circumstances, can be reconciled with expert opinion as to value.
[90] Further, the Court should not be asked to second guess the actions of a mortgagee acting on apparently reasonable professional advice.49
[91] Lastly for present purposes, in deciding whether a mortgagee has fallen short of the duty to take reasonable precautions in a sale, the facts must be looked at broadly and in practical commercial terms.50 It is proper to allow some margin for business and risk assessment by the mortgagee in the realisation of the security.51 In evaluating judgments made by or on behalf of the mortgagee it should not be
forgotten that in the absence of bad faith, the mortgagee shares with the mortgagor and guarantor an incentive to maximise the price obtained. It is not lightly to be assumed that the mortgagee has acted in a way that was contrary to its own interests as well as the interests of others.52
[92] The defendants have not taken issue with any of the steps taken by Westpac other than Mr Read’s role in the sale process, and the timing of the sale to him. I regard the steps that Westpac took up to the time of auction as reasonable. Westpac was hardly going to adopt a process that did not achieve the best price available given the apparently inevitable shortfall. In my view the defendants could have no reason to challenge the process if the property had sold at auction (as occurred with
24 Meridian Grove).
[93] Further, although the price eventually accepted was a significant discount on the various appraisals and valuations of current market value that Westpac held, it is
reconcilable with the forced sale values: there is ample evidence of factors that were
48 It would seem that four to six weeks of advertising is acceptable: see, for example, ASB Bank Ltd v Anderson HC Christchurch CIV-2009-409-2522, 24 March 2010; Urquhart, above n 44; Westpac New Zealand Ltd v Singh HC Auckland CIV-2011-404-2434, 22 December 2011.
49 Taylor v Westpac Banking Corp Ltd (1996) 7 TCLR 177 (CA) at 182-183.
50 Apple Fields Ltd v Damesh Holdings Ltd [2004] 1 NZLR 721(PC) at [24]
51 Moritzson Properties Ltd v McLachlan (2001) 9 NZCLC 262,448 (HC) at [58]; ANZ National Bank
Ltd v Claydon [2012] NZHC 788, at [44].
52 Harts Contributory Mortgagees Nominee Co Ltd v Bryers, above n 44, at [43(h) and (i)].
likely to reduce interest in the property (the slow uptake of sections in that subdivision, the lingering effects of the global economic crisis, the limited number of likely buyers given the uniqueness of the property with both lifestyle and forestry elements, the concerns about the state of the trees and hence the market for them, and the legal restrictions (resource consent), the practical difficulties (access over a shared access road) and the economic costs of harvesting them). However, these valuation considerations fall away if the property was properly marketed, given that there were no bids at auction, and no interest in competing with Mr Read’s bid.
[94] The only matter of potential complaint can be that Mr Read did not market the property adequately in some respect because of his interest in purchasing it. However, the defendants have put forward no evidence to challenge Westpac’s evidence that Mr Read’s interest (which appears to have arisen only after initial interest in the property waned) did not affect the marketing. The advertising and marketing reports speak for themselves. There is no suggestion that any usual steps were not taken or that Mr Read did not follow up on any inquiries, and he gives evidence of specific efforts to market the property to his forestry contacts. Against that background I accept that the forced sale valuation gave Westpac a fair guide to the market, given the unusual nature of the property and the depressed market, notwithstanding a substantial discount from the estimated open market value, and that it was entitled to take up the only offer it received given the absence of bids at auction after a proper marketing programme. It was the best price reasonably obtainable in the circumstances. I find that the defendants do not have an arguable case.
[95] Counsel for the defendants also submitted that Westpac breached its duty by failing to explore the market further after the auction, and before accepting Mr Read’s offer. I find nothing in this point. Westpac had tested the market by the auction. It was not required to put the property back onto the market. It was sufficient in my view for Professionals to have checked with all persons who had expressed any interest. When that brought nothing further Westpac could be fairly satisfied that it had taken all reasonable steps. I repeat that it was hardly likely to accept Mr Read’s offer if it thought there was any prospect of getting more and thereby reducing the shortfall.
[96] For the sake of completeness I will refer to the defendants’ contention that Mr Read’s offer was a breach of ss 134 and 135 of the Real Estate Agents Act 2008. I find nothing in this submission to help the defendants. Mr Read complied with his obligations under that Act by obtaining Westpac’s consent and providing it with an independent valuation. There is no basis for any allegation of breach, let alone for contending that it affects Westpac’s entitlements.
[97] Similarly I find that there is nothing to help the defendants in the fact that in the agreement that Westpac accepted the purchase price was apportioned $120,000 for the land and $61,000 for the trees. Counsel for the defendants sought to argue that this fact lent strength to the defendants’ arguments that insufficient value had been given to the trees in Westpac’s valuation and that the land was sold well below its forced sale value. However, the apportionment clause states that the apportionment was “for revenue purposes”. Whatever that might mean (and what revenue consequences it might have) it is clear that this (last minute) allocation of the purchase price cannot assist in terms of whether the offer price was the best price reasonably obtainable.
[98] The last matter to address is the defendants’ contention that Westpac breached its duty in relation to the sale of 24 Meridian Grove. There is no arguable basis for a defence in this. The sale was at auction, and the price achieved was in line with the forced sale auction. The steps taken to conduct the mortgagee sale have not been challenged. The price achieved at auction was the best price reasonably obtainable.
[99] There is a further difficulty facing the defendants on this point. The summary judgment against the first and second defendants did not arise out of the second defendant’s loan, as repaid by the sale of 24 Meridian Grove. She may have a separate claim, but it is uncertain (at best) whether this could be used as a defence to the summary judgment against her. It cannot assist the second or the fourth defendants.
Decision
[100] For the reasons I have given, I find that there is no miscarriage of justice arising from the summary judgment against the first and second defendants because they did not have an arguable defence. For that reason, their applications to set aside the judgment entered against them on 20 October 2011, and the bankruptcy notices subsequently issued on the basis of the unmet judgment, are dismissed.
[101] Westpac has established the grounds for orders for adjudication against the first and second defendants. I make orders adjudicating each of them bankrupt. Those orders are made at the stated time of release of this judgment.
[102] Also for the reasons I have given, I find that the fourth defendant does not have an arguable defence to Westpac’s application for summary judgment for the balance due under its loan to Gardost for the purchase of 41 County Heights Drive. I enter judgment for Westpac against the fourth defendant for the sum of $238,397.34 as sought in the statement of claim, together with interest on that sum as set out in the memorandum of quantum of counsel for Westpac dated 1 March 2012.
[103] As the successful party Westpac is entitled to costs on all applications:
(a) I award it costs on its application for summary judgment against the fourth defendant on a scale 2B basis in the sum of $7,520.00 plus disbursements of $1,377.50, as set out in counsel’s memorandum of quantum.
(b)Counsel did not address me specifically on costs on Westpac’s application for adjudication or the first and second defendants’ application to set aside. I consider costs on a scale 2B basis are appropriate, together with disbursements as fixed by the Registrar. However, I reserve leave to apply by memorandum to be filed within
10 working days of this judgment if either party wishes to be heard on any aspect of these costs. I make an order, to come into force at the expiry of 10 working days if no issue is raised, that the first and
second defendants pay Westpac costs on both these applications on a scale 2B basis together with disbursements as fixed by the Registrar.
Subject to that, costs are reserved.
Associate Judge Abbott
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