White v Brkic
[2019] NZCA 514
•24 October 2019 at 12 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA389/2018 [2019] NZCA 514 |
| BETWEEN | CAROLINE RUTH WHITE AND CRUMMER TRUSTEES NO. 82 LIMITED AS TRUSTEES OF THE GRAFTON ROAD TRUST |
| AND | GORDAN BRKIC, EMILIJA BRKIC AND NAGI FALTAUS AS TRUSTEES OF THE MADEG TRUST |
| Hearing: | 8 April 2019 |
Court: | Clifford, Katz and Thomas JJ |
Counsel: | L Herzog for Appellants |
Judgment: | 24 October 2019 at 12 pm |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellants must pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Clifford J)
Introduction
The appellant, Caroline Ruth White, has for some time been a trustee of the Grafton Road Trust (Grafton). On 11 November 2011 Grafton settled the purchase of a commercial unit, 3B1, in a unit title development at 160 Grafton Road, Auckland from the Madeg Trust (Madeg), the family trust of Gordan and Emilija Brkic. Together with Mr Nagi Faltaus, their solicitor, the Brkics are the trustees of Madeg and the respondents in this appeal.
The agreed purchase price for 3B1 was $469,820. On settlement Grafton paid $360,000. The balance, provided as vendor finance, was repayable on 10 May 2012. Grafton failed to repay that finance as and when required. Madeg subsequently issued proceedings against Ms White and her fellow trustees. Ms White defended the proceedings, arguing the vendor finance was unenforceable because of fraud. Madeg was, when it sold 3B1, on notice that the redevelopment of 3B1 had breached various regulatory requirements.[1] Ms White claimed Madeg had not disclosed those breaches to her. The fraud Ms White alleged was that, after she had signed the sale and purchase agreement and without her consent, cl 6 — containing the vendor’s warranties and undertakings — had been crossed out by Mr Faltaus at the time Madeg’s trustees signed the agreement. The cl 6 vendor warranties would have protected Ms White from the losses she incurred consequential on those “non‑disclosed” regulatory breaches. Ms White said she would not have signed the agreement if, when she did, cl 6 had been crossed out.
[1]See [6] below.
In the High Court, Moore J upheld Madeg’s claim for repayment of its vendor finance by Ms White.[2] The Judge was satisfied that Mr Faltaus had not crossed out cl 6 as alleged. Ms White now appeals. She says the Judge’s findings were inconsistent with the evidence.
Background
[2]Brkic v White [2018] NZHC 1458.
Madeg acquired 3B1 from Citiland Ltd in December 2007. For some time previously a Mr Stephen Kelly, through various companies associated with him — including Progression Development Ltd, Great Western Land Ltd and Citiland — had owned all or a large number of the units constituting 160 Grafton Road. Madeg intended to lease 3B1 to Mr Brkic’s recently established engineering business, DHC Consulting Ltd. As matters transpired DHC never moved into 3B1. At all relevant times thereafter it remained vacant, all Madeg’s attempts to lease 3B1 failing.
In 2008, after 160 Grafton Road’s anchor tenant had moved out, Mr Kelly embarked on a project to convert the commercial units on the third floor into residential apartments, including by combining the still vacant 3B1 with 3A4, an adjoining unit owned by Progression, to create three apartments. Mr Brkic agreed in principle that Madeg would sell 3B1 to Mr Kelly to enable that development to go ahead. It was envisaged the sale of 3B1 by Madeg would settle contemporaneously with the issue of title for the three apartments, and their sale by Mr Kelly. Madeg would be paid the market value at that time of 3B1. Given the incomplete state of the redevelopment, Madeg would not provide vendor warranties.
Between 2008 and November 2011 — when Grafton purchased 3B1 from Madeg — the project for the redevelopment of 160 Grafton Road faced a range of difficulties. Mr Kelly was bankrupted. The redevelopment faced opposition from other unit owners as plans changed over time, and building works impacted on use and amenity. In August 2010 owners of commercial units then under development at 160 Grafton Road, including the Brkics, Progression and Great Western, were put on notice by other unit holders of assertions of illegal works. In October 2010 an administrator was appointed to run the, by then moribund, body corporate, the affairs of which had until then been conducted by a company associated with Mr Kelly. In February 2011, the Auckland City Council issued a stop work notice; in April 2011, a notice to fix; and in September 2011, an application to the Department of Building and Housing for a notice to fix. Madeg was named as a party on that notice to fix.
Nevertheless, by early 2011 the physical conversion of 3B1 and 3A4 into three apartments was well advanced. However, reflecting the City Council’s actions, the subdivision required to provide new titles for those apartments had not been achieved, the status of the required resource consents was uncertain, and the project still faced opposition from other existing unit holders, including because the conversion work had resulted in unlawful encroachments into other units and common property.
Just when Grafton became interested in those apartments is unclear. But on 13 June 2011 the trustees, then Ms White, a Mark Stalker and a Mr Fergus Cleaver (representing the corporate trustee, Crummer Trustees No 82 Ltd) instructed their solicitors, Richard Allen Law, to prepare an agreement for Grafton to purchase “three apartments at 160 Grafton Road” from an unnamed vendor. Then, on 28 July 2011 Grafton entered into an agreement to buy the two units, 3B1 and 3A4, from Progression.[3] Grafton was to pay $1,010,000 for the units: $965,000 on 30 July 2011, and the balance five days after titles for the apartments issued. In the meantime, it was to “be entitled to clear and unencumbered title” to the units. Progression was to complete the subdivision at its own expense. If that had not occurred within two years, Grafton would be entitled to do so at Progression’s cost.
[3]We infer the “three apartments” were to result from the redevelopment of 3B1 and 3A4.
July 2011 was not the first time Ms White for Grafton had agreed to purchase units under development at 160 Grafton Road by Mr Kelly and his associates. Rather, she had done so on three previous occasions. That is:[4]
(a)First, in July 2008 Ms White caused one of her companies, Mount Eden Shops Ltd, to agree to buy 3B5 on deferred settlement terms. She did so on the recommendation of her partner Mr Gray. Mr Gray was involved in the redevelopment of 160 Grafton Road as an associate of Mr Kelly, as was Mr McCall. Mr McCall was then also Ms White’s accountant and her financial adviser. 3B5 was to be developed into two apartments. At the same time, Mount Eden agreed to lease 3B5 to the then body corporate and its manager. Settlement was to occur on 1 July 2009, once titles were available. It never did.
(b)Secondly, in March 2009, Ms White was advised by Mr Gray and Mr McCall that the focus of the redevelopment of 160 Grafton Road had shifted from third floor to the first. Ms White then agreed to purchase from Great Western two first floor units, 103 and 105. Those units were to be developed into four apartments. On 16 April 2009, Ms White and Great Western entered into a separate “underwrite agreement” in which Great Western agreed to cancel that sale contract after three months “of settlement by the vendor of its mortgage finance over” the two units. The purpose of that transaction was, fairly obviously, to assist the developer obtain finance for the project. That transaction never settled either.
(c)Thirdly, in September 2009 the development was refocused once more on the third floor. Subsequently, Ms White agreed to purchase 3B5 (again) and 3B1 (for the first time) from Great Western, in replacement for the level 1 units subject to the March 2009 contract. At that time, those units were to be developed into four apartments. Events also overtook that transaction.
[4]Aspects of the evidence were not particularly clear. We have drawn these factual conclusions from various documents exhibited in the Case on Appeal. The details are of no great significance: the significance is Grafton’s, and Ms White’s, long involvement with 160 Grafton Road’s redevelopment.
We return now to mid-2011. Remember, on 28 July Grafton had entered into a fourth contract for units at 120 Grafton Road, the unconditional contract to buy 3B1 (as we understand it, again) and 3A4 (as we understand it, for the first time) from Progression. The liquidation of Progression on 16 September therefore created obvious difficulties.
Somehow Mr Kelly was able to advance transactions for another of his companies, Pleasant Forest Trust Co Ltd, to acquire control of the title to 3A4 so that it and 3B1 (then still owned by Madeg, but subject to Mr Brkic’s agreement to sell) could be sold together to Grafton. In October Mr Kelly told a surprised Mr Brkic he had found a purchaser, Grafton, for 3B1. The purchase price was to be $469,820,[5] $360,000 of which would be paid on settlement, with vendor finance to be provided for the balance.
[5]Mr Brkic gave evidence that this figure was based upon a valuation conducted by Prendos New Zealand in May 2011.
On 1 November the solicitors acting for Pleasant Forest, Jesse & Associates, emailed Mr Faltaus. They advised Mr Faltaus that Pleasant Forest had signed an agreement to purchase 3B1 from Madeg; that Madeg had yet to do so as vendor; and that settlement was set down for the next day. No other details were provided. Mr Faltaus obtained instructions from Mr Brkic. On 2 November Mr Faltaus faxed Jesse & Associates. His instructions were that Madeg was to sell 3B1 to Grafton, not Pleasant Forest, on payment terms — which he set out — as had been agreed by Mr Brkic and Mr Kelly. Later that day Jesse & Associates repeated their understanding Madeg was to sell to Pleasant Forest, which would simultaneously sell to Grafton. Further discussions took place. On 3 November Jesse & Associates finally confirmed to Mr Faltaus (in a facsimile letter that referred to Pleasant Forest as their client) that, following a meeting of respective clients, the terms of the sale to Grafton had been agreed.
On 8 November Jesse & Associates acknowledged receipt of the body corporate disclosure relating to 3B1 that had been arranged by Mr Faltaus. That disclosure included the following statements:
a)THAT the contribution levied by the Body Corporate under section 121 of the [Unit Titles Act 2010] (s 121 Contribution Levy) in respect of the Unit is yet to be determined for the levy period 1 October 2011 to 30 September 2012.
…
e)THAT there are unauthorized works on the Unit, including changes to Common Property which the Body Corporate has not consented to and if not reinstated the Body Corporate will take action and seek recovery of costs from the then current proprietor.
…
g)THAT the Body Corporate has received notice from another Proprietor in relation to issuing proceedings against the Body Corporate for unauthorized development works and compliance matters.
…
On 9 November Mr Faltaus emailed Jesse & Associates settlement instructions for the sale of 3B1. Mr Faltaus would appear to have done so on the assumption that it was Jesse & Associates who were acting for Grafton. By a couriered reply that same day Jesse & Associates advised Mr Faltaus they were “facilitating” the transaction, and working with him and Richard Allen Law to achieve settlement that day.[6] Mr Faltaus was asked to amend his settlement statement to be addressed to Grafton, care of Richard Allen Law. That Jesse & Associates’ letter records it enclosed duplicate copies of an agreement for sale and purchase and a deed of acknowledgement of loan, signed by Grafton as purchaser and borrower respectively. Jesse & Associates asked that Mr Faltaus arrange for those documents to be signed by Madeg, and for one copy of each to be couriered to Richard Allen Law as soon as that had been done.
[6]Mr Kelly’s expectation appears to have been that Pleasant Forest would acquire both units, and in turn on-sell them to Grafton. On that basis Mr Faltaus would have dealt with Jesse & Associates, and Jesse & Associates in turn with Richard Allen Law for Grafton. It was when Mr Faltaus insisted on Grafton being Madeg’s counterparty that it became necessary for Mr Faltaus to deal, at a relatively late stage, directly with Richard Allen Law.
A 23-page fax sent at 1.29 pm on the afternoon of 9 November by Mr Faltaus to Richard Allen Law comprised settlement instructions for the sale to Grafton (two pages), a settlement statement (one page) together with the agreement for sale and purchase (11 pages) and the loan deed (nine pages), both signed by each of the trustees of Grafton (Ms White, Mr Stalker and Mr Cleaver as director of the corporate trustee Crummer Trustees No 82 Ltd) and by Mr and Mrs Brkic for Madeg.
On 11 November Richard Allen Law advised Mr Faltaus that funds to settle were available. The sale of 3B1 by Madeg to Grafton settled that day, the sale of 3A4 from Pleasant Forest to Grafton some days later.
The alleged fraud
In her evidence at trial in the High Court, Ms White based her allegation that Mr Faltaus had fraudulently crossed out cl 6 (the vendor warranties) on the basis that:
(a)She had attended Richard Allen Law on 3 November, at that time signing client instructions and the agreement for sale and purchase, witnessed by Mr Kelly. As evidence that she had done so, she relied on what she said was an (undated) agreement she had signed that day in which cl 6 was not deleted.
(b)It was in that form the agreement for sale and purchase had been sent to Mr Faltaus by courier from Jesse & Associates on 9 November, that Mr Faltaus had crossed cl 6 out, which deletion the Brkics had initialled. The agreement had then been sent to Richard Allen Law, and at some point prior to settlement had been signed by her two fellow trustees.
In support of that narrative Ms White pointed to the fact that, on the agreement for sale and purchase Mr Faltaus said he had faxed to Richard Allen Law on, and dated 9 November, her initials and those of Mr Kelly appeared in identical places to which they did on the document of 3 November that she had produced.
In further support of her narrative Ms White called her only other witness, Ms Morrell, a forensic document examiner. Ms Morrell’s evidence was that Mr and Mrs Brkic had signed and initialled the agreement for sale and purchase in black ink, save where they had initialled in blue ink the crossed lines deleting cl 6. Those crossed lines had also been made with blue ink. Ms Morrell was unable to distinguish between that blue ink and the blue ink used by the Brkics to initial the deletion of cl 6. The Brkics could therefore have executed the agreement with one pen, subsequently realised cl 6 was intact, and then with another pen deleted that clause and initialled that deletion.
Mr Faltaus’ evidence was that when he received the documents from Jesse & Associates by courier cl 6 of the agreement for sale and purchase had been deleted. That document had been signed by the Grafton trustees, although they had not initialled that deletion. After the Brkics had signed he noticed they had not initialled the deletion of cl 6. They had done so, Mr Faltaus said, after he had pointed out the need for them to do so. Mr Faltaus’ further evidence was that Mr Allen had spoken to him about the deletion of cl 6 after Mr Faltaus had sent the documents to him; Mr Faltaus had advised the deletion was agreed; Mr Allen said he would take instructions and that was the last Mr Faltaus heard on the point.
Ms White also relied on the absence of any documentary evidence:
(a)that Mr Faltaus had, as he said he had, been instructed at the outset by Mr Brkic that, as the conversion of 3B1 was not complete, there were to be no vendor warranties and it would be sold as is; or
(b)of Mr Faltaus having discussed that with either of Jesse & Associates or Richard Allen Law.
Moreover, there was no reason for Grafton to agree to the deletion of the vendor warranties, but every reason for Mr Faltaus to delete those warranties to protect the Brkics.
Analysis
The Judge based his conclusion that cl 6 (the vendor warranties) had been deleted before the agreement for sale and purchase, signed by the trustees of Grafton, was sent to Mr Faltaus on 9 November on eight main reasons.[7] To summarise:
(a)Mr and Mrs Brkic were well aware of the many complications associated with the redevelopment of 160 Grafton Road. Given the history of that development, and its status in November 2011, it simply would not have made sense for the Brkics to provide the ordinary vendor warranties.
(b)Given the involvement of Mr Gray and Ms White, since at least 2008, with Mr Kelly’s ongoing attempts to complete the redevelopment of 160 Grafton Road, it simply was inconceivable that in November 2011 Ms White would not have been aware of the problems of encroachment and subdivision that by then existed, which were recorded in a Prendos May 2011 valuation and referred to in the body corporate’s disclosure. Moreover, Ms White claimed to have first become aware of problems with the development some three months after settlement, which was surprising considering she had not taken steps to protect her position for several years. Indeed, over that period she had ongoing, apparently amicable, discussions with Mr Brkic up to the point when Madeg made demands on her for the outstanding vendor finance, when her attitude changed.
(c)Ms White’s assertion that she signed an agreement between Madeg and Grafton on 2 November was fundamentally inconsistent with it not having been agreed until 8 or 9 November that, rather than the purchaser being Pleasant Forest, it would be Grafton.
(d)The existence of a third version of the agreement for sale and purchase, with cl 6 deleted and signed by each of the trustees of Grafton, albeit not signed by the Brkics, contradicted her account.
(e)Whilst Mr Kelly’s role in witnessing each of the various iterations of the agreement for sale and purchase remained unclear, and whilst Ms White’s inability to explain his involvement in that process was unconvincing, the fact that Mr Kelly had nevertheless initialled both versions which included the signatures of each of the trustees of Grafton contradicted Ms White’s version of events.
(f)The absence of initials of the trustees of Grafton alongside the deletion of cl 6, was not as significant as Ms White made out. Overall, there were various inconsistencies in the way both sets of signatories had, or as the case may be, had not, initialled the document in what would be the conventional manner.
(g)Importantly, Ms White called none of the obvious witnesses who might have supported her version of events: that is, her fellow trustees, her partner Mr Gray and any of the solicitors who were involved from Robert Allen Law and Jesse & Associates. The failure to call a solicitor from Robert Allen Law was, in the Judge’s view, particularly significant as a waiver of privilege by Ms White herself would have allowed them to give evidence. Ms White’s failure to call those witnesses properly raised an adverse inference against her.
(h)Finally, the evidence of Ms Morrell was inconclusive: that is Mr Faltaus’ narrative, that he had got the Brkics to initial the deletion of cl 6 after they had signed and initialled the rest of the document, was equally explicable of the different inks in which that had been done.
[7]Brkic v White, above n 2, at [67]–[80].
In arguing the appeal, Mr Herzog in effect repeated the factual analysis and resulting arguments he had made on Ms White’s behalf before Moore J. For all the reasons the Judge gave, we are unable to accept the conclusion Mr Herzog argued for.
In reaching that view, two of the reasons identified by the Judge are, to us, of particular significance. They are:
(a)The long involvement Ms White had had in the redevelopment of 160 Grafton Road. That involvement, and in particular her previous signing of three separate contracts to purchase units under development into apartments, shows a significant degree of cooperation between her and those responsible for that development. That was evidenced particularly by her willingness to commit Grafton to purchase incomplete units for the obvious purpose of assisting those involved to finance the development. That Ms White’s partner, Mr Gray, and her accountant and financial adviser, Mr McCall, were also closely involved with Mr Kelly only serves to reinforce that conclusion.
(b)The glaring absence of evidence from any number of possible witness, but Mr Allen the principal of Richard Allen Law in particular, which if what Ms White had said was true would have provided powerful support for her narrative.
We also consider the commercial context of the sale by Madeg of 3B1 — agreed by Mr Brkic with Mr Kelly when both knew full well of problems besetting the redevelopment of 160 Grafton Road which were Mr Kelly’s to overcome — supports the Judge’s findings. There was simply no commercial reason for Madeg to give, nor for Mr Kelly to require, vendor warranties as provided by cl 6.
Finally, we think the existence of an undated copy of the agreement for sale and purchase, signed by the trustees of Grafton but not the trustees of Madeg in which cl 6 is nevertheless deleted, is likely to have a significance that might not have been perceived at trial. When commenting on the significance of that document, Moore J described it as being of uncertain provenance.[8] However, the copy the Judge was referring to appears to have been produced by Mr Faltaus from his files in response to a complaint Ms White had made against him to the Law Society in 2014. The Judge found that duplicate copies of the agreement for sale and purchase, executed by the Grafton trustees, had been sent to Mr Faltaus by courier on 9 November. The undisputed evidence was that a single copy, executed by the Brkics as well, had been faxed on to Richard Allen Law for settlement purposes. The reasonably obvious inference is that the second duplicate was not required for settlement purposes, hence it was not signed by the Brkics, and it remained in the possession of Mr Faltaus before re‑emerging in 2014 following the complaint by Ms White, which — we note — the Law Society dismissed. We also note that Ms White was unable to provide any credible explanation as to the circumstances in which her fellow trustees had signed that document after she had done so.
[8]At [73].
In all those circumstances, we are satisfied that Moore J did not err when he found Ms White had failed to establish the fraud she alleged. We dismiss this appeal accordingly.
Costs will follow in the usual course in favour of the Brkics for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Churton Hart & Divers, Auckland for Appellants
Haigh Lyon, Auckland for Respondents
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