Whitford Properties Limited v Bruce
[2016] NZHC 58
•3 February 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-1977 [2016] NZHC 58
BETWEEN WHITFORD PROPERTIES LIMITED
Plaintiff
AND
ROBERT IAN BRUCE First Defendant
COUMAT LIMITED Second Defendant
GREGORY BRUCE HAYHOW Third Defendant
Hearing: 14 December 2015 Appearances:
Mr M C Black for Respondent/Plaintiff
Mr A L Harlowe for the ANZ Bank
Ms J S Cooper for Wayne AllenJudgment:
3 February 2016
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
03.02.16 at 4 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
WHITFORD PROPERTIES LIMITED v ROBERT IAN BRUCE [2016] NZHC 58 [3 February 2016]
Introduction
[1] These proceedings were commenced in August 2014. A five day trial has been allocated to hear the matter in August 2016. On 6 November 2015, the third defendant applied to join Wayne Ramon Allen, the respondent, as a third party in the proceeding. The application did not set out particular factual reasons why the respondent should be joined. It referred to the High Court Rules (Rules) and to the affidavit the respondent had filed. It would have been helpful for the grounds that are specific to the factual circumstances that this case gives rise to be explicitly identified.
[2] Ms Jennifer Cooper sought leave to appear for the proposed third party. Although it is unusual for a proposed third party to be heard on an application for joinder, there was no strong resistance to her doing so in this case from counsel for the second and third defendant applicants, Mr Steve Barter.
[3] The proposed third party opposes the application for joinder as does the plaintiff who was represented by Mr Michael Black.
[4] The facts have been comprehensively considered in an earlier judgment that Wylie J gave on an application for freezing orders which the plaintiff had sought, the judgment being dated 18 June 2015. Because the application before me, like the application that Wylie J heard, must be considered on the basis of provisional conclusions about factual issues, I will adopt the views of the facts that he did. I respectfully agree with them. I do not consider there would be any profit in setting out for a second time a lengthy discussion of the factual issues and reasons for coming to conclusions on what is known about the factual background I note that counsel accept that judgment contains a sufficiently accurate and convenient statement of those matters for the purposes of the application which I have to
decide.1
[5] The plaintiff was established in 2002 by the respondent and Mr Bruce who were directors and shareholders in the company. It acquired a property at Whitford
1 Whitford Properties Ltd (in rec and liq) v Bruce [2015] NZHC 1426.
and granted security over that property by mortgage to ANZ. Those borrowings were also secured by a general security agreement and the personal guarantees of Messrs Allen and Bruce. The plaintiff intended to sub-divide the property which would unlock its development potential. That required the cooperation of nearby land owners so that a waste water disposal field could be created. This was known or anticipated to be a condition of consent to the development.
[6] The plaintiff’s development was unable to proceed for various reasons with Wylie J noting that finance was tight and that may have been the reason. The company got into financial difficulties, owing the ANZ a sum of $8,500,000 by early
2014 and it was unable to service the loan. A default notice was served. Mr Bruce was also in financial difficulty. He had borrowed approximately $0.3 million from Mr Hayhow, the third defendant, and that loan was secured by a security agreement over Mr Bruce’s shares in Whitford.
[7] When the default notice that the ANZ had served expired unsatisfied, ANZ
exercised its mortgagee’s powers and sought tenders for the property.
[8] The ANZ accepted the tender that Mr Allen put in of $12.5 million and Mr Hayhow paid an initial deposit of $1.25 million to the bank Mr Allen tendered for the property on the basis that he and Mr Hayhow would acquire it through a new company, Whitford Property Developments Ltd, but this tender was never settled. Mr Hayhow and Mr Allen blame each other, with the former saying that Mr Allen failed to provide funding or to take steps to procure for the joint venture the promised waste water disposal system. Following the issue of a settlement notice, ANZ cancelled the agreement.
[9] Mr Bruce then took steps to acquire the mortgages from ANZ, which involved him (as assignee of the mortgagee) exercising the power of sale and transferring the property to another new company, Coumat Limited. Later it would seem, Mr Bruce paid the amount owing to the ANZ of $7,454,902 and took an assignment of the mortgages. He then proceeded with the sale to Coumat Limited. The claim that the plaintiff now brings against, amongst others, Mr Bruce, is that Mr Bruce and/or Coumat Limited received on the sale additional value over and
above the amount that was required to pay out the ANZ as mortgagee. It is alleged Mr Bruce held the surplus on trust for the plaintiff as mortgagor and that he ought to account for the amount in question.
[10] Wylie J described the allegation in these terms:
It is asserted that Mr Bruce failed to account to Whitford for the surplus and that Mr Bruce, Coumat and Mr Hayhow received the surplus proceeds for their own personal benefit and failed to comply with section 185 of the Property Law Act.
[11] The excess amount allegedly recovered was $2,560,054.
[12] The plaintiff claims, therefore, that Mr Bruce has not passed on all of the sale price to it and it sues Mr Bruce.
[13] Mr Hayhow, in turn, brings a claim against Mr Allen. He considers that Mr Allen, by breaching the abortive tender agreement with ANZ, failed to comply with the obligations that he owed to Mr Hayhow as a joint venturer causing Mr Hayhow loss when that transaction failed because, it is alleged, Mr Allan did not meet his obligations as one of the co-venturers.
[14] The key allegation in the third party statement of claim is as follows:
19.As a result of the [cancellation of the abortive tender] the plaintiff’s payment of $1.25 million was forfeited to the bank (and applied against the borrowings of Whitford, reducing the liability of Allen and the first defendant under the personal guarantees) [that they had given to the bank.]
[15] By his third party claim, Mr Hayhow appears to be alleging that he paid the
$1.25 million to the bank which forfeited that amount when the joint venture did not proceed as a result of the failure of Mr Allen to obtain the necessary finance. He further apparently claims that if he is required to account for the proceeds of sale as a mortgagee, he will be required to pay the $1.25 million a second time, in effect. The
$1.25 million is over and above the figure which was owing to and paid to the bank. Therefore, ANZ, as the initial mortgagee, obtained an advantage to that extent. Mr Hayhow and the other assignees of the mortgage from the bank, similarly, must account to the mortgagor for any money received under the mortgage which exceeds
the amount the mortgagor owed to the bank, it is alleged. Mr Hayhow wants to recover that sum from the proposed third party.
[16] The second component of the amount that Whitford said it did not receive – being part of the purchase price Coumat Limited obtained for the property – is the sum of $1,310,054. This part of the purchase price was credited off by recognising the repayment of a debt owed by Mr Bruce to Mr Hayhow. The plaintiff alleges that in failing to account for these monies, Coumat Limited breached its obligations as a trustee under s 185 of the Property Law Act 2007 through failing to account for these monies and, as the mortgagee, it was in breach of its obligations as a trustee and/or that the second and third defendants assisted a breach of that trust. While I mention that amount for the sake of completeness, I should add that Mr Hayhow does not claim to be entitled to recover that figure from Mr Allan as a result of damages that
he suffered because of Mr Allen’s failure to meet his obligations in relation to the
joint venture which put forward the abortive tender offer to the bank.
The Rules
[17] The relevant rule is r 4.4 which provides:
4.4 Third parties
(1) A defendant may issue a third party notice if the defendant claims any or all of the following:
(a) that the defendant is entitled to a contribution or an indemnity from a person who is not a party to the proceeding (a third party):
(b) that the defendant is entitled to relief or a remedy relating to, or connected with, the subject matter of the proceeding from a third party and the relief or remedy is substantially the same as that claimed by the plaintiff against the defendant:
(c) that a question or issue in the proceeding ought to be determined not only between the plaintiff and the defendant but also between—
(i) the plaintiff, the defendant, and the third party; or
(ii) the defendant and the third party; or
(iii) the plaintiff and the third party:
(d) that there is a question or an issue between the defendant and the third party relating to, or connected with, the subject matter of the proceeding that is substantially the same as a question or an issue arising between the plaintiff and the defendant.
(2) A third party notice must be issued within—
(a) 10 working days after the expiry of the time for filing the defendant's statement of defence; or
(b) a longer time given by leave of the court.
(3) A third party notice may be issued only with the leave of the court if—
(a) an application for judgment is pending under rule
12.2 or 12.3; or
(b) a proceeding is entered on a commercial list established under section 24A of the Act at a registry of the court.
[18] Mr Barter submitted that the claim which his client wants to bring against the third party is justified by all four sub-paragraphs of that rule.
[19] Ms Cooper submitted that rule cannot be relied upon to confer jurisdiction on the facts of this case. She said:
Firstly, the third defendant is not entitled to a contribution or indemnity from Mr Allen – rather the proposed third party claim is for damages for breach of contract and no common obligation or right of indemnity exists or has been pleaded (see Meates v Westpac Banking Corp [1991] 3 NZLR 385 (PC), Westwood Group Holdings Ltd v Rilean Construction [2013] NZHC 1739).
Secondly, the relief intended to be sought against Mr Allen is not substantially the same as the relief claimed by the plaintiff against the third defendant as it is different in both nature and in the total amount. The plaintiff’s claim relates solely to the defendants’ duties to the plaintiff and their liability to account to the plaintiff for the full proceeds of the sale of the Property, the amount not accounted for being $2,560,054. The proposed claim against Mr Allen arises from previous dealings between him and the third defendant and has no bearing on whether the defendants complied with their duties to the plaintiff in respect of the sale and purchase of the Property. The fact that both claims make reference to a deposit amount of $1,250,000 paid by the third defendant in relation to a previous transaction is a red herring – the third defendant’s attempt to justify withholding funds from the plaintiff on the grounds of the previously forfeited deposit is spurious and misconceived, and therefore cannot be relied upon as a uniting factor between the existing and proposed claims.
[20] Mr Black, in his submissions, took broadly the same points but also focused on the discretionary element inherent in the decision which the court must make. Joining a third party so late in the proceedings has the potential to de-rail progress towards trial. That is because inevitably there will be further discovery and the like sought with regard to the third party claim.
Discussion
[21] The statement of claim which has been produced in draft does not identify any basis upon which the third defendant considers his claim arises under r 4.4. As I have already noted, he nonetheless claims through his counsel’s submissions that he is entitled to claim against the third party under all of the sub- heading of r 4.4(1). It will be necessary to examine each of the sub paragraphs of r 4.4 in order to determine whether the contentions of the applicant are correct.
[22] The suggested entitlement of Mr Hayhow to claim under r 4.4(1)(a) refers to the fact that the defendant “seeks a contribution or an indemnity from a person who is not a party to the proceeding”. That is, contribution or indemnity is sought from a Mr Wayne Allen, who is a director of the company in liquidation and, in fact, the person who has accepted liability to pay for its costs.
[23] No basis is disclosed for the reasons for this contention. I am unable to discern any basis upon which Mr Hayhow would be entitled to a contribution or indemnity from Mr Allen within the meaning of r 4.4 (1)(a).
[24] Subrule 4.4(1)(b) at first sight appears to be more promising. That sub-rule requires that the applicant satisfy two qualifying grounds, with the first requirement being an entitlement to relief for a remedy “relating to, or connected with the subject matter of the proceeding”.
[25] I accept that there is some connection with the subject matter of the proceeding in that Mr Hayhow was the source of funds used to pay the deposit under the transaction which ended with the sum of money being forfeited by the bank when the transaction did not proceed.
[26] The second requirement is that the applicant demonstrate that “the relief or remedy is substantially the same as that claimed by the plaintiff against the defendant”.
[27] The proceedings which the plaintiff brings seek remedies pursuant to s 185 of the Property Law Act. It is asserted in the head claim that Mr Bruce acted as mortgagee in selling the property to Coumat Limited and that he was a “statutory trustee” of the price received. It is asserted that the statutory trust required him to repay all amounts secured by the mortgages, first, and then to pay any surplus to Whitford as the mortgagor.2
[28] While there was no express reference to authority in this case establishing the trusteeship which the claim is based upon, no party for the purposes of the present application dissented from the view that the mortgagee, holding a surplus after payment of his entitlement, is in possession of that amount as a trustee for the mortgagor. While the duty to account is made explicit by s 185 of the Property Law Act, there does not appear to be any statutory provision constituting the mortgagee who finds himself or herself in that position as a trustee. However, there is authority that the mortgagee is a trustee of the proceeds of sale even where the statutory
provisions are silent as to the mortgagee’s status.3
[29] If the plaintiff is correct and succeeds in establishing that the assignees of the ANZ mortgage held the proceeds as trustees, then the remedies which will be available to the plaintiff will be equitable in nature.
[30] There was no exploration in the argument put forward by the defendant/ applicant as to what relief or remedy would be available to the plaintiff in the event that the existence of a trust and breach of that trust is established.
[31] In order to appreciate the basis of the claim, I will start with the assumption that the trustees will be required to perform their primary liability as trustees to
safeguard the surplus proceeds and pay them to the person entitled to them and, if
2 Whitford Properties Ltd, above n 1, at [46].
3 Adams v Bank of New South Wales [1984] 1 NSWLR 285 (CA), and see Wayne Clarke
(ed)Fisher and Lightwood’s Law of Mortgage (14th ed, LexisNexis, London, 2014) at [30.46].
they do not, to render substitutive performance of this duty. Those considerations point towards the remedy which the plaintiff would have as being different from what is described in one leading textbook as a “[w]rong-based ‘secondary’ liability to repair the harm caused by [the trustee’s] breach of duty.”4
[32] Those considerations suggest that any remedy against the defendant/applicant as mortgagee and trustee will be of quite a different type from that which the defendant/applicant would seek against the third party. The draft statement of claim which the defendant/applicant has filed pleads a breach of contract for which he claims damages.
[33] If the foregoing analysis is correct, the defendant/applicant is not seeking to pass on to the third party the obligation to compensate for breach of trust. This last mentioned consideration was referred to in Myers v N & J Sherick Ltd:5
Although similarity of facts is an important element, it is not necessarily decisive, and the fact that the third party claim is designed to determine who should ultimately bear the losses is also very important. Every case must depend on its own facts.6
[34] I conclude that sub-paragraph 4.4(1)(b) would not justify the making of an order joining the third party.
[35] The next head under which a third party may be joined requires there to be a question of issue in the proceeding that ought to be determined not only between the plaintiff and the defendant, but also between the defendant and the third party.7 I do not consider that the present claim satisfies those requirements.
[36] An example of where the sub-rule has been applied was a situation where the defendant vendors of a rental property were being sued by the plaintiff purchasers for a shortfall in guaranteed minimal rental and were allowed to join their valuer as a
third party for allegedly giving negligent advice on the rent obtainable.8 Cases of
4 Refer David Hayton, Paul Matthews and Charles Mitchell (eds) Underhill and Hayton Law of
Trusts and Trustees (18th ed, LexisNexis, London, 2010) at [87.1].
5 Myers v N & J Sherick Ltd [1974] 1 All ER 81 at 85.
6 Refer also to McGechan on Procedure (online looseleaf ed, Brookers) at [4.4.05].
7 High Court Rules, r 4.4(1)(c).
8 Green v S G Harvey Ltd (1991) 3 PRNZ 139 (HC), noted at McGechan on Procedure, above n 6,
that kind represent fact situations where there was a reasonably close link between the plaintiff’s cause of action and the defendant’s cause of action. In the case now under consideration, the fact that the assignee/mortgagees did not account for part of the proceeds of sale would seem to have little connection with a prior abortive transaction that did not proceed. The only commonality between the two claims is that they both relate to the same property and the same mortgagee was involved as a party with regard to both contracts, one of which only proceeded. This does not disclose, in my view, any requirement for the question in issue between the two claims being determined in the same proceeding. The applicant/defendant intends to sue the third party for damages arising from an entirely separate transaction from the one in which the plaintiff alleges that the mortgagee did not account for all of the proceeds of sale. No doubt, it would be helpful to the defendant/applicant if he were to simultaneously obtain a judgment on amount of damages, which if paid, he could apply to meeting his separate liability as an alleged defaulting mortgagee/trustee. But that, in my view, does not satisfy the requirements of the sub-rule.
[37] The reasons which I have given for concluding that joinder should not be permitted under r 4.4(1)(c) are equally applicable when considering r 4.4(1)(d). While it is clear that the claim between the defendant and the third party that relates to forfeiture of the deposit by the ANZ on the abortive transaction is factually related to the plaintiff’s claim, the subject matter of the proceeding cannot be said to be “substantially the same as a question or an issue arising between the plaintiff and the defendant”. The third party claim would be concerned with an alleged breach of contract by Mr Allen as a co-venturer. It would require exploration of implied terms governing the relationship between the applicant/defendant and the third party, and perhaps other matters such as forseeability of the type of loss which the applicant/defendant would sue for. The issue between the plaintiff and the defendant is whether the defendant and others failed to account for the proceeds of sale of the property which was carried out under the mortgagee’s powers of sale. That will involve consideration of the duties under the trust that would at least arguably be
imposed upon the assignee/mortgagees and the consideration of what form any
at [HR4.4.06].
equitable remedy would take. But, as already stated, substantially the same question or issue does not arise in the two different claims.
[38] Finally, there is the discretionary element of the decision that the Court is required to make when determining whether to join a third party. These proceedings were commenced in August 2014. It was not until November of the following year, approximately one year and three months later that the present application was filed to join Mr Allen as a third party. This delay is considerable. I do not consider that there is a proper explanation for it. I am also of the view that when considering the delay in issuing the third party claim, questions of prejudice to other parties to the proceeding are relevant. Plainly, the party which would be most likely to be adversely affected by delays in commencing the third party proceedings would be the plaintiff. That delay would come about in circumstances where the addition of the third party claim would cause or give rise to a risk that the fixture that has been allocated in the proceeding would have to be deferred. On balance, I do not consider that there is a major risk that would occur in the circumstances of this case. It is true that discovery between the third party and the other parties would still have to be undertaken. Given the nature of the claim and the little that is known about the parties’ circumstances, it is unlikely that there would be a large volume of documents in existence. Discovery may not, therefore, be particularly time- consuming. Discovery does, however, represent the greatest risk for delays occurring. Given that this judgment is being issued at the beginning of February
2016, there are only be six or seven months available to the parties to complete preparation for trial. If it is assumed that a close of pleading date would be required some two or three months prior to the commencement of the trial, then the time available in reality is even less. However, assessing matters overall, it would be possible with firm case management directives to complete the interlocutory phases of the case that addition of the third party would give rise to in time for him to take his part in the trial.
[39] But in the end, I do not consider that the claim is one that is contemplated by r 4.4, and the application must be declined. There will be an order accordingly.
[40] The costs of the application are to be met by the defendant/applicant. Costs
will be on a 2B basis together with disbursements as fixed by the Registrar.
J.P. Doogue
Associate Judge
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