Woodroffe v Coleman HC Auckland CIV-2011-404-4391
[2011] NZHC 1720
•11 November 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-4391
IN THE MATTER OF the Land Transfer Act 1952
BETWEEN JESSICA JANE WOODROFFE Applicant
ANDPETER JOHN COLEMAN AND KARYN- ANNE COLEMAN
Respondents
Hearing: 12 October 2011
Appearances: S A Grant for Applicant
R B Stewart QC for Respondent
Judgment: 11 November 2011 at 4:00 PM
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 11 November 2011 at 4:00 pm
pursuant to Rule 11.5 of the High Court Rules
.........................................................
Registrar/Deputy Registrar
Solicitors:
Barrie Hopkins, P O Box 106 027 Auckland, for Applicant
Gilbert Walker (M Smith) P O Box 1595 Auckland 1140, for Respondents
Copy for:
A Barker, P O Box 4338 Auckland 1140, for Applicant
Sandra Grant, P O Box 4338 Auckland 1140, for Respondents
Case Officer: [email protected]
WOODROFFE V COLEMAN AND COLEMAN HC AK CIV-2011-404-4391 11 November 2011
[1] This is an application to sustain caveat 8789259.1 under s 145A of the Land Transfer Act 1952. The caveator is Jessica Jane Woodroffe. The caveat is lodged against the land in identifier 489868, a cross lease title for a residential property at
113 Arran Road, Brown’s Bay, Auckland. Peter John Coleman and Karyn-Anne
Coleman are the registered proprietors. The interest claimed under the caveat is
a beneficial interest in the land contained in the above identifier 489868, pursuant to the constructive trust whereby the registered proprietor, Peter John Coleman, holds an interest in the land in the trust for the abovenamed caveator.
There is no claim to an interest in Karyn-Anne Coleman’s share of the property.
[2] On 4 August 2011, Associate Judge Faire made an order sustaining the caveat pending further order of the Court.
[3] The application is opposed on the grounds that:
(a) the caveat does not identify with sufficient particularity how the interest claimed is derived from the respondents; and
(b) the applicant’s claims in CIV-2010-404-7275, the substantive
proceeding, do not give rise to an interest in the respondents’ land.
[4] There are already proceedings pending in CIV-2010-404-7275 between The Woody Girl Company Ltd, first plaintiff, and Ms Woodroffe, the caveator, second plaintiff, and Peter John Coleman as first defendant and Jezreel Ltd as second defendant. Mrs Coleman, the other respondent, is not a party to the proceeding.
[5] The proceedings arise out of two agreements made in February 2005 between Jezreel Ltd as vendor, the Woody Girl Company Ltd as purchaser, and Ms Woodroffe as guarantor of the purchaser. Under the first agreement, Jezreel Ltd sold The Woody Girl Company Ltd 20 shares in Rangitoto Holdings Ltd for $325,000. Under the second agreement, Jezreel Ltd sold 50 shares in Estuary Developments Ltd to
The Woody Girl Company Ltd for $75,000. The Woody Girl Company Ltd is the corporate trustee of the Woody Investment Trust. Ms Woodroffe is the sole director and shareholder of The Woody Girl Company Ltd. Jezreel Ltd is a corporate trustee of the Jezreel Trust. Peter Coleman is the sole director. He and his wife are the shareholders.
[6] Rangitoto Holdings Ltd and Estuary Developments Ltd were established to carry out property developments. Rangitoto’s was on East Coast Road, Mairangi Bay, Auckland. Estuary’s was at Waipu in Northland. Estuary changed its name to Savannah Heights Ltd. Jezreel Ltd was a 20% shareholder of Rangitoto and a 50% shareholder of Savannah. The sales of the shares in Rangitoto and Savannah were completed. The plaintiffs say that they were induced to enter into the agreements by misrepresentations by Mr Coleman and they suffered significant losses. Not only did they not receive any return on their investment, but they also suffered additional financial losses as well as stress and hurt.
[7] The statement of claim sets out five causes of action:
(a) The first is for deceit against Mr Coleman. The Woody Girl seeks damages of $400,000, as the amount by which the price exceeded the value of the shares, interest, $516,485.20 for irrecoverable advances made to Savannah. Ms Woodroffe claims damages for loss of income, general damages for inconvenience, hurt, humiliation and stress, and exemplary damages.
(b)The second is for negligent misstatement against Mr Coleman. It seeks the same relief as the first cause of action.
(c) The third cause of action is said to be for equitable fraud, undue influence and unjust enrichment. It is by both plaintiffs against both defendants. Mr Coleman is alleged to have had the capacity to influence Ms Woodroffe because there was a relationship of trust and confidence between them. He is alleged to have used undue influence in inducing her to enter into the agreements. They are said to be
manifestly advantageous and ought to be set aside. There is no plea that the plaintiffs have given notice requiring rescission of the agreements. The defendants are said to have been enriched at the plaintiffs’ expense. The relief sought is:
(i)an account of profits on the $400,000 paid under the agreements and any moneys made from that sum and if necessary tracing orders to follow those sums;
(ii) alternatively, orders that the defendants pay The Woody Girl
$400,000, interest on that sum, $516,485.20; (iii) interest under the Judicature Act 1908;
(iv) an order for Mr Coleman to pay Ms Woodroffe lost income of
$272,500;
(v)damages against Mr Coleman in favour of Ms Woodroffe for mental stress;
(vi)exemplary damages. A contract voidable for undue influence is voidable and may be rescinded. However, there is no express prayer for orders to rescind the agreements. The claim for damages for undue influence is unusual – the standard remedy for rescission.1
(d) The fourth cause of action is a claim by The Woody Girl against
Jezreel for damages under s 6(1) of the Contractual Remedies Act
1979.
(e) The fifth cause of action is a claim by The Woody Girl against
Mr Coleman under s 149(5) of the Companies Act 1993 for damages
1 See Dominic O’Sullivan, Stephen Elliot and Rafael Zakrzwewski The Law of Rescission (Ocford
University Press, Oxford, 2008) at ch 6.03.
for selling shares in Rangitoto and Savannah at more than fair value. The damages claimed are $400,000 plus interest.
[8] The statement of claim does not expressly seek any order declaring a proprietary interest in Mr Coleman’s share in the Arran Road property. The statement of claim does plead in great detail particulars of the plaintiffs’ allegations.
[9] In her affidavits in support of her caveat application, Ms Woodroffe says that she lodged that caveat on behalf of the Jane Woodroffe Family Trust. She is the settlor, sole trustee and primary beneficiary of the Jane Woodroffe Family Trust established in April 2001. The Jane Woodroffe Family Trust advanced the $400,000 for the purchase of the shares to Woody Girl. She believes that Mr Coleman arranged for the $400,000 paid to Jezreel Ltd to be applied to reduce the amounts owing under mortgages against the Arran Road property and for improvements to the property. She gives circumstantial evidence to support her claim as to the use of the funds. She says that in the proceeding the plaintiffs are seeking a return of the funds by tracing the funds through the defendants’ assets so that the Woody Investment Trust can repay funds to the Jane Woodroffe Family Trust.
[10] The issues in the caveat application are:
(a) Has the caveat identified with sufficient particularity how the interest claimed is derived from the respondents?
(b)Has the applicant proved her allegations to the standard required to sustain a caveat?
(c) If so, do the claims made give rise to a caveatable interest in the
respondents’ land?
(d) If so, is the caveator the correct person to claim that interest?
Has the caveat identified with sufficient particularity how the interest claimed is derived from the respondents?
[11] Section 137 Land Transfer Act 1952 provides in part:
Caveat against dealings with land under Act
(1) Any person may lodge with the Registrar a caveat in the prescribed form against dealings in any land or estate or interest under this Act if the person—
(a) claims to be entitled to, or to be beneficially interested in, the land or estate or interest by virtue of any unregistered agreement or other instrument or transmission, or of any trust expressed or implied, or otherwise; or
(b) is transferring the land or estate or interest to any other person to be held in trust.
(2) A caveat under this section must contain the following information: (a) the name of the caveator; and
(b) the nature of the land or estate or interest claimed by the caveator, which must be stated with sufficient certainty; and
(c) how the land or estate or interest claimed is derived from the registered proprietor; and
(d) whether or not it is intended to forbid the making of all entries that would be prevented by section or a specified subset of them; and
(e) the land subject to the claim, which must be stated with sufficient certainty; and
(f) an address for service for the caveator ...
[12] The respondents argue that the caveat in this case does not satisfy s 137(2)(c) because it does not adequately state how the interest as beneficiary of a constructive trust is derived from the registered proprietors. For that they rely on the judgment of Associate Judge Faire in Allen v Hogan Developments Ltd.2 In that case, as in this, there was a bare statement that the caveator had an interest in the land under a constructive trust without further information as to how the alleged trust arose.
At [39] Associate Judge Faire said:
2 Allen v Hogan Developments Ltd (2001) 4 NZ ConvC 193,420 (HC).
The description of the interest claimed in the caveat does not comply with the requirements of the Land Transfer Act 1952 and the Land Transfer Regulations 1966. In particular, the caveat does not show how estate or interest is derived from the registered proprietor. If reliance is placed on an agreement, as are indicated by the first grounds, then the caveat should specify such agreement. If reliance is placed on the allegation that a trust exists, it should briefly state the nature and basis for the trust. I am satisfied that the caveat lodged in this case did not comply. Whilst a general description of constructive trust may be appropriate as the parties claim by virtue of a de facto relationship, it is an entirely different matter where the parties, as they are in this case, are in an arms-length commercial transaction. The basis for any alleged trust is not self-apparent. The party whose title is caveated will simply not know what the basis for the alleged claim of trust is, if simply a bald statement to that effect is made in the caveat. In short, it does not state how the estate or interest claimed is derived from the registered proprietor...
[13] In response, the applicant relies on the decision of the Court of Appeal in Zhong v Wang.3 There the caveats had claimed a ―beneficial interest in the land ... as cestui qui trust of which the registered proprietor W is trustee‖. The majority, Wild and Heath JJ, reviewed the authorities, noting a divergence of approaches between strictness4 and less exacting.5 They preferred the less exacting approach:
[54] As a general rule (for s 137(2)(b) purposes), it is sufficient to identify the form of trust alleged. While it would have been preferable for Mr Zhong’s caveats to refer expressly to a resulting or constructive trust, there can be no doubt that an interest of the type to which s 137(2) refers was claimed. In our view, the caveats complied with s 137(2).
[55] Applying the same test, did the caveats comply with s 137(2)(c)? In our view, they did. There was a clear link between the named trustee (Mr Wang) and the registered proprietors, of which he was one. The caveats made it clear that the interest was derived from Mr Wang’s involvement with Mr Zhong. The nature of the involvement would have been self-evident to Mr Wang.
[56] No suggestion was made to us that the caveat ought to be removed because
Ms Jin was a co-owner of the property.
[57] It is unnecessary to require a caveator to explain the precise basis from which the interest qua beneficiary arises. Section137(2)(c) applies to all types of interests that give rise to a caveatable interest. The derivation of those claimed interests may need greater explanation in some cases than in others. In this case a linkage between the claimed interest and Mr Wang suffices.
3 Zhong v Wang (2006) 5 NZConvC 194,308.
4 As in New Zealand Mortgage Guarantee Co Ltd v Pye [1979] 2 NZLR 188 (SC).
5 As in Buddle v Russell [1984] 1 NZLR 537 (HC).
[58] The purpose of the caveat procedure is to enable those with proper claims to proprietary interests to protect themselves against loss by forbidding dealing with the land pending resolution of substantive claims. The underlying purpose of the caveat regime could be undermined if too strict an approach were taken to the detail required to describe the interest claimed and its derivation from the registered proprietor
[14] I apply the approach of the Court of Appeal in Zhong v Wang. Under that approach, s 137(2)(c) is satisfied. It is unnecessary for Ms Woodroffe to explain the precise basis from which her alleged interest as beneficiary of a constructive trust arises. The caveat made it clear that the interest was derived from Ms Woodroffe’s dealing with Mr Coleman, and that the interest was not based on an express trust but on one imposed by equity, independently of the intentions of the parties. The caveat did not have to go further.
Has Ms Woodroffe proved her allegations to the standard required to sustain a caveat?
[15] Ms Woodroffe’s case is that she is entitled to a beneficial interest in Mr Coleman’s share of the Arran Road property because she is entitled to trace the funds from the Jane Woodroffe Family Trust to the Arran Road property. She says that she is entitled to trace on the basis of Mr Coleman’s deceit, negligent mis- statement, equitable fraud, undue influence, unjust enrichment, misrepresentation under the Contractual Remedies Act and breach of s 149 of the Contractual
Remedies Act 1979.6
[16] The standard of proof on a caveator is to show a reasonably arguable case for the interest claimed in the caveat.7 The respondents say that Ms Woodroffe has not proved an arguable case. They invoke the approach of Slade J in Re Lord Cable8, saying that the statements as to evidence in support of an application for an interim injunction also apply to a caveat application:
I add one further observation in relation to the evidentiary position. American Cyanamid Co v Ethicon Ltd may have led prospective plaintiffs to the belief, perhaps partially justified, that it is not necessary for them to adduce affidavit evidence in support of a motion for an interlocutory
6 Above at [7].
7 New Zealand Limousin Cattle Breeders Society Inc v Robertson [1984] 1 NZLR 41 (CA)
at 43.
8 Re Lord Cable [1976] 3 All ER 417, 413.
injunction of such a precise and compelling nature as might have been required before that decision. Nevertheless, in my judgment it is still necessary for any plaintiff who is seeking interlocutory relief to adduce sufficiently precise factual evidence to satisfy the court that he has a real prospect of succeeding in his claim for a permanent injunction at the trial. If the facts adduced by him in support of his motion do not by themselves suffice to satisfy the court as to this, he cannot in my judgment expect it to assist him by inventing hypotheses of fact on which he might have a real prospect of success. For example, if he wishes the court to grant him relief on the basis that another person has at all material times held certain assets as nominee for a third party, he must adduce sufficient factual evidence to show both the grounds on which such claim is made and that he has a real prospect of establishing that such assets are so held. Likewise, if he wishes the court to grant him relief on the basis that certain trustees have in the past been acting in breach of trust, he must adduce factual evidence sufficient to show not only what acts or omissions are relied on but also that he has a real prospect of establishing that they constituted a breach of trust under the relevant system of law.
[17] The target of their submission is the somewhat cursory evidence of Ms Woodroffe’s first affidavit as to the merits of the claim in the proceeding by The Woody Girl. While deposing that the allegations in the statement of claim are true and correct, Ms Woodroffe’s first affidavit adds little by way of elaboration. That affidavit does give adequate circumstantial evidence to give grounds to believe that funds from the sale of shares by Jezreel are likely to have been used on the property at Arran Road or to reduce liabilities on its mortgages.
[18] Ms Woodroffe filed further affidavits. The last set out more information in support of the claims made by The Woody Girl.
[19] I take into account the practical exigencies caveators face when applying under s 145 and 145A of the Land Transfer Act. The time for filing an application and giving notice to the Registrar-General under s 145 and 145A is 14 days.9
Ideally, caveators’ lawyers should be prepared to launch an application to sustain a caveat as soon as they receive notice from the Registrar-General, but that tends towards the aspirational. Realities must be recognised. In Industrial Group Ltd v Bakker,10 the Court of Appeal noted that the statutory scheme for applications to set aside statutory demands under s 290 of the Companies Act (with a comparable time
for filing and serving an application) was summary, required a prompt judgment and
9 Reg 39 Land Transfer Regulations 2002.
10 Industrial Group Ltd v Bakker CA 263/2010, 11 April 2011 at [24]-[25].
did not call for a detailed analysis of an alleged dispute or counterclaim. It referred to the approach taken in caveat applications as comparable. In light of this approach, the requirement for a caveator to show an arguable case for the interest alleged should not be judged too severely.
[20] Ordinarily, a brief statement deposing as to the truth and correctness of allegations in a pleading would not be enough to show an arguable case. In this case, the statement of claim is unusually detailed, so that Ms Woodroffe’s verification of it is almost a statement of evidence. Further, Ms Woodroffe’s supplementary affidavits reinforce the claims made in her first affidavit.
[21] Ms Woodroffe has made out an arguable case that:
(a) Between April 2002 and May 2005 Mr Coleman was her adviser for her financial affairs and had a close and detailed knowledge of her financial and personal situation.
(b)In 2003 Ms Woodroffe worked as contractor for Mr Coleman’s mortgage company, Quicksmart Ltd. He trained her as a mortgage broker.
(c) In 2003 Mr Coleman formed an association with a property developer, Mr David Orrell and assisted him with raising finance. Mr Orrell and his wife had a company, All About Finance Ltd, which developed and marketed investment properties with Housing New Zealand leases.
(d)In 2003 Ms Woodroffe arranged that the Jane Woodroffe Family Trust, that owned her family home, would borrow $350,000, the loan to be secured against the home, to on-lend it to Pepperwood Properties Ltd, a property development company of Mr David Orrell. Mr Coleman was instrumental in advising Ms Woodroffe to enter into the transaction and negotiated it for her. The loan was repayable in May 2004. When the loan was to be repaid, he advised her about other potential investments.
(e) In 2004 Mr Coleman became general manager of the company, All About Finance Ltd. It employed Ms Woodroffe as a salesperson. It changed its name to Corel Homes Ltd. The company entered into an agreement to buy land at Waipu and nominated Savannah to take title.
(f) The purchase of the Savannah development was to settle in early
2005. Funding was required to complete the purchase. Ms Woodroffe assisted in arranging funding through her brother and one of his associates.
(g)On 28 February 2005 Mr Coleman gave Ms Woodroffe information about the developments by Rangitoto and Savannah. For Rangitoto, some of the information was in a copy of a letter he had sent to Marac Finance Ltd and in a spreadsheet setting out costs to complete. For Savannah, some of the information was in a letter from Reyburn and Bryant Ltd setting out costs to complete, a letter from Thomas Consultants Ltd reviewing the Reyburn and Bryant letter, and a document headed Project Costing.
(h)The information about Rangitoto Mr Coleman gave Ms Woodroffe was representations as to land cost, civil works and development costs, costs for traffic works, finance fees, interest payable to Marac, value of land, project management costs, legal fees, and similar costs. Mr Coleman also told Ms Woodroffe that she would be a passive investor, that she would have her money back inside 12 months. The information was incorrect. Mr Coleman did not tell Ms Woodroffe about investor fees, directors’ fees for Mr Orrell and Mr Coleman, interest on inter-company loans, a contingent liability to her brother and his associate, company tax liability and a valuation of the land not disclosed in the Marac letter or the sheet of costs to complete.
(i)The information about Savannah Mr Coleman gave Ms Woodroffe was representations as to land cost, roading and right-of-way costs, telecommunications costs, legal costs, contingencies, costs of
obtaining title to one lot, planting and fencing costs, marketing costs, costs of sales, interest charges and finance fees, project management fees. That information was incorrect, mainly for understating costs. He did not tell her about certain miscellaneous costs; that Marac Finance had declined funding for the project; that GST on the purchase had already been claimed, received and spent, while GST would have to be paid on sales; that The Woody Girl would have to pay tax on a site it would take in the development; that the costs given in the Reyburn and Bryant letter were to be reviewed; that a fee of $430,000 had not been taken into account. The information was incorrect. The difference between actual and represented costs was
$1,836,000. There was no reasonable basis for saying that Ms Woodroffe would be out of the development within a year and that she would not have to be actively involved.
(j)Mr Coleman did not have an honest belief in the truth of the information he gave or was reckless as to its truth. The information was intended to and did induce Ms Woodroffe to enter into the transactions at issue in the proceeding, including the establishment of The Woody Girl Trust and the agreement to buy the shares in Rangitoto.
(k)Ms Woodroffe funded the purchase of shares by The Woody Girl by advancing $400,000 from the Jane Woodroffe Family Trust to The Woody Girl.
(l)The Woody Girl and Ms Woodroffe have suffered the losses claimed in the statement of claim.
(m) It is likely that the $400,000 paid to Jezreel was used on work on
Arran Road or in reducing debt secured on that property.
[22] Mr Coleman has not given any evidence to refute these aspects of
Ms Woodroffe’s case.
[23] There is no evidence that The Woody Girl has purported to cancel or rescind the agreements. Ms Woodroffe has not shown that the Jane Woodroffe Family Trust has made demand on The Woody Girl for repayment of the $400,000 advanced. Ms Woodroffe has not said when she found out that the information given by Mr Coleman was incorrect. The statement of claim says that Rangitoto and Savannah suffered losses and were put into liquidation. In an attempt to mitigate its losses, The Woody Girl arranged for incorporation of two companies to buy remaining sections in the Savannah development, complete the development and sell the sections. The Woody Girl continued with the development even after Ms Woodroffe knew that the information she had been given was incorrect.
[24] Ms Woodroffe has established that the first, second, fourth and fifth causes of action are arguable. The relief claimed for each of these causes of action is conventional – damages, interest and costs.
[25] The third cause of action invokes a mix of doctrines. While The Woody Girl has shown an arguable claim for undue influence, the relief sought is problematic. Claims that a contract is invalid for undue influence usually give a remedy of rescission, the object of which is restitutio in integrum, to put the parties back into the positions they were in at the outset. Damages are not ordinarily awarded. The mitigation steps taken to continue with the developments point to affirmation, a bar to rescission. The relief in a claim of unjust enrichment is the disgorgement of any benefits received. As The Woody Girl paid money under the agreements, the remedy to put it back into the position it was in at the outset, or to make Jezreel and Mr Coleman disgorge their gains, is to require repayment of the purchase price of the shares. The plea of equitable fraud seems to be a generalised claim that the defendants are accountable in equity.
Do Ms Woodroffe’s claims give rise to a caveatable interest in the respondents’
land?
[26] Ms Woodroffe claims that she is entitled to trace the $400,000 she paid as trustee of the Jane Woodroffe Family Trust through The Woody Girl, Jezreel and Mr Coleman to the Arran Road property so as to give her an interest in the property under a constructive trust. She has shown an arguable case on the facts that the
payment she made did benefit Mr Coleman’s interest in the property. The question
here is whether it gives her a caveatable interest in it.
[27] A caveat may be lodged to protect a claim to a property interest. If the claim is to something that is not an interest in property, it cannot be protected by caveat. In referring to the predecessor of s 137 of the Land Transfer Act 1952, the Court of Appeal said in Staples & Co Ltd v Corby:11
There the words are, "Any person claiming to be entitled to or to be beneficially interested in any land, estate, or interest." The word "interest," last used; shows that legal interest is meant, and this section was meant to guard equitable interests. Before a person can caveat under this section he must be a person who claims to be entitled to the land, or any estate or interest in the land, or to be "beneficially interested" in the land, or in any estate or interest in the land, and the person in either event must claim "by virtue of any unregistered agreement, or other instrument or transmission" "transmission" meaning acquirement by title or estate consequent on death, will, intestacy, bankruptcy, &c, "or of any trust expressed or implied, or otherwise howsoever." By this section a purchaser who has only an agreement to purchase, &c, may protect his agreement, or a cestui que trust may protect his interests.
A purely contractual or personal right will not support a caveat.12
[28] The property interest must exist at the time the caveat is lodged and when an order is sought for it not to lapse. It is not enough that the claimant may have a potential interest in the property later. In Philpott v NZI Bank13 Cooke P said:
Counsel for the respondent sought to maintain the caveats by various arguments, all of which come to substantially the same. It was said for instance that in sec 137(a) the words "beneficial interest" have a wider scope than equitable interest; that a caveat is supportable if the caveator has some "potentially" enforceable right; and again that, although the respondent had to accept that this was not an equitable charge, nevertheless it was an equitable interest. No authority was cited supporting any of these interpretations of sec 137(a). In my opinion, for all purposes material to the present case the words "beneficial interest" refer to equitable interests and the section cannot be stretched to include mere potentialities which have not ripened into interests in any particular properties.
11 Staples & Co Ltd v Corby (1900) 19 NZLR 517 at 536-537 (CA).
12 G W Hinde and others Land Law in New Zealand (looseleaf ed, LexisNexis, Wellington) at
[10.009]-[10.010].
13 Philpott v NZI Bank (1989) 1 NZConvC 190,246 (CA) at 190,248.
[29] Interests in land that come into being only on a court making an order that establishes the interest are not caveatable. So, a claim to a remedial constructive trust, as opposed to an institutional constructive trust, will not support a caveat.14
Ms Woodroffe does not claim a remedial constructive trust.
[30] The expression ―constructive trust‖ is used in a number of ways. It is important to recognise that not every use gives rise to a caveatable interest, as can be seen from the case of remedial constructive trusts, which rely on the court exercising a creative power.15 At times, the expression is used as a formula for equitable relief, as Millett LJ explained in Paragon Finance v D B Thakrar & Co Ltd:16
Regrettably, however, the expressions 'constructive trust' and 'constructive trustee' have been used by equity lawyers to describe two entirely different situations. The first covers those cases already mentioned, where the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff.
A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. Well- known examples of such a constructive trust are McCormick v Grogan... (a case of a secret trust) and Rochefoucald v Boustead ... (where the defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded). Pallant v Morgan ... (where the defendant sought to keep for himself property which the plaintiff trusted him to buy for both parties) is another. In these cases the plaintiff does not impugn the transaction by which the defendant obtained control of the property. He alleges that the circumstances in which the defendant obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property.
14 Metalplas Engineering Pty Ltd v Ellis HC Auckland M293-IM/02, 21 August 2002;
Three Chicks Ltd v NZ Building and Projects Ltd HC Auckland CIV-2011-404-5417
30 September 2011.
15 See Fortex Group Ltd (In Receivership)v McIntosh [1998] 3 NZLR 171 (CA) at 172 per
Tipping J.
16 Paragon Finance v D B Thakrar & Co Ltd [1999] 1 All ER 400 (EWCA) 409.
The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be 'liable to account as constructive trustee'. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions
'constructive trust' and 'constructive trustee' are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are 'nothing more than a formula for equitable relief': Selangor United Rubber Estates Ltd v Cradock (No 3) ... per Ungoed-Thomas J.17
[31] In her constructive trust claim, Ms Woodroffe is seeking to trace and follow the Jane Woodroffe Family Trust’s interest in the $400,000 it paid The Woody Girl to the Arran Road property. Tracing claims are available when the claimant can show that property to which they are entitled has been misappropriated. But the law draws a distinction between consensual and non-consensual transfers. If the claimant has voluntarily transferred an asset, they have surrendered any interest in it. Ordinarily they cannot later claim an interest in the asset or its proceeds. On the other hand if they have not agreed to the transfer of the asset, they cannot be held to have surrendered their interest in it. In the case of consensual transfers, a tracing right can only arise if the transfer can be undone so as to revest the asset in the transferor. The way that the law allows a transaction to be undone so as to revest an asset in the
transferor is by rescission. Nourse LJ gave a useful explanation in Collings v Lee:18
The basis of their argument is the principle stated by Millett J in the
Lonrho plc case:
A contract obtained by fraudulent misrepresentation is voidable, not void, even in equity. The representee may elect to avoid it, but until he does so the representor is not a constructive trustee of the property transferred pursuant to the contract, and no fiduciary
17 See also Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 at [142] per Lord Millett:
In this second class of case the expressions "constructive trust" and "constructive trustee" create a trap. As the court recently observed in Coulthard v Disco Mix Club Ltd [2000]
1 WLR 707, 731 this "type of constructive trust is merely the creation by the court … to meet the wrongdoing alleged: there is no real trust and usually no chance of a proprietary remedy". The expressions are "nothing more than a formula for equitable relief"… I think
that we should now discard the words "accountable as constructive trustee" in this context
and substitute the words "accountable in equity".
And see the reasons of the English Court of Appeal for declining to follow Attorney-General for Hong Kong v Reid [1994] 1 NZLR 1 (PC) in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] 4 All ER 335.
18 Collings v Lee [2001] 2 All ER 332 (EWCA) 337.
relationship exists between him and the representee: see Daly v
Sidney Stock Exchange Ltd ... per Brennan J. ...
The rationale of the principle, as it applies to a transfer of property, is that even where the transfer is obtained by fraudulent misrepresentation, the transferor nevertheless intends that the whole legal and beneficial ownership in the property shall pass to the transferee. ..
The distinction between the two situations is recognised in the two further authorities cited. Thus in Daly's case, Brennan J said:
There is no analogy between the present case and one in which a constructive trust is imposed on money or other property which is acquired by a fiduciary in breach of his duty but not pursuant to a voidable contract. In such a case there is no question of avoiding the contract before the constructive trust is imposed. ...
In the Twinsectra Ltd case Potter LJ said:
… the distinction of importance here is that between non-consensual transfers and transfers pursuant to contracts which are voidable for misrepresentation. In the latter case, the transferor may elect whether to avoid or affirm the transaction and, until he elects to avoid it, there is no constructive (resulting) trust; in the former case, the constructive trust arises upon the moment of transfer. ...
[32] Further, in Shalson v Russo,19 Rimer J explained how rescission gives rise to a right to follow and trace, following revesting:
Rescission is an act of the parties which, when validly effected, entitles the party rescinding to be put in a position he would have been in if no contract had been entered into in the first place. It involves a giving and taking back on both sides. If it is necessary to have recourse to an action in order to implement the decision, the court will make such orders as are necessary to put both contracting parties into the position they were in before the contract was made. There is, however, also a line of authority supporting the proposition that, upon rescission of a contract for fraudulent misrepresentation, the beneficial title which passed to the representor under the contract revests in the representee. The representee then enjoys a sufficient proprietary title to enable him to trace, follow and recover what, by virtue of such revesting, can be regarded as having always been in equity his own property. This may be an essential means of achieving the proper restoration of the original position if the representor has in the meantime parted with the property and is ostensibly a man of straw unable to satisfy the court’s orders for restoration of the original position.
There is a fuller exposition of the law in Chapter 16 ―Proprietary Claims‖ of The
Law of Rescission.20
19 Shalson v Russo [2005] Ch 281 (EWHC) at [122].
20 See also Lord Robert Goff and Gareth Jones Law of Restitution (7th ed, Sweet and Maxwell, London, 2007) at [2-016]-[2-019].
[33] There is a major qualification to the application of these principles in New Zealand law - the reform to the law of contractual misrepresentation under the Contractual Remedies Act 1979. The Act assimilated the remedies available for misrepresentation inducing contract to those for breach of contract. Rescission is no longer available for misrepresentation, but has been replaced by cancellation under ss 7 and 8. Section 7(1) makes this clear:
Except as otherwise expressly provided in this Act, this section shall have effect in place of the rules of the common law and of equity governing the circumstances in which a party to a contract may rescind it, or treat it as discharged, for misrepresentation or repudiation or breach.
The terminology of a contract induced by fraud being voidable has now gone.
[34] As with termination for breach at common law, cancellation under the Contractual Remedies Act for breach or for misrepresentation does not revest property transferred under the contract in the transferor. See s 8(3):
8. (3) Subject to this Act, when a contract is cancelled the following provisions shall apply:
(a) So far as the contract remains unperformed at the time of the cancellation, no party shall be obliged or entitled to perform it further:
(b) So far as the contract has been performed at the time of the cancellation, no party shall, by reason only of the cancellation, be divested of any property transferred or money paid pursuant to
the contract.
[35] Instead, a party wishing to recover property transferred under a contract must apply for relief under s 9. The ability to recover property transferred turns on the court exercising its powers under s 9 favourably. Until a court makes a vesting order under that section, the claimant has no interest in property transferred under the contract.
[36] For Ms Woodroffe’s claims based on misrepresentation, in particular the first, second and fourth causes of action in the proceeding, these considerations stand in the way of any tracing claim. The Woody Girl’s payment of $400,000 to Jezreel was a voluntary and effective transfer of the property in that money. Rescission is not available to undo the transfer. No proprietary claim can arise. It is therefore not
possible to trace the funds through Jezreel to Mr Coleman and his interest in the
Arran Road property.
[37] The fifth cause of action, under s 149 of the Companies Act, gives a remedy in damages only. It cannot give rise to any kind of tracing claim.
[38] As to the third cause of action, the claim is outside the Contractual Remedies Act. Ms Woodroffe says that the purchase of the shares is tainted for both misrepresentation and undue influence. The question arises whether rescission is possible for a contract tainted with both, so that property may be revested. Section 8(3) suggests that it is possible. ―By reason only of the cancellation‖ implies that grounds other than cancellation may divest property transferred under the contract. Rescission for grounds other than misrepresentation may revest. For Ms Woodroffe, I assume that the Contractual Remedies Act does not prevent rescission of the agreement for other grounds including undue influence.
[39] There is no evidence that Ms Woodroffe has rescinded the agreement for the purchase of the shares. Further, she has affirmed the agreement by continuing with the developments undertaken by Rangitoto and Savannah. So much time has passed since the agreements of February 2005 that the law will consider The Woody Girl to
have elected not to exercise any right of rescission.21 Rescission is not available
now. In any event rescission would not get her money back. For contracts where rescission is still available, the Privy Council has held that purchasers do not obtain a proprietary right for money paid. In Re Goldcorp Exchange,22 Lord Mustill said:
Whilst it is convenient to speak of the customers ―getting their money back‖ this expression is misleading. Upon payment by the customers the purchase moneys became, and rescission or no rescission, remained, the unencumbered property of the Company. What the customers would recover on rescission would not be ―their‖ money, but an equivalent sum. Leaving aside for the moment the creation by the Court of a new remedial proprietary right superior to those of all the vendor’s other creditors, exercisable against the whole of the vendor’s assets. It is not surprising that no authority could be cited for such an extreme proposition.
21 Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990]
1 Lloyd’s Rep 391 (HL) 398 per Lord Goff.
22 Re Goldcorp Exchange [1994] 3 NZLR 385 (PC) at 403.
As a statement of law by the Privy Council in a New Zealand appeal, it remains binding on this court.
[40] In opposition Ms Woodroffe relies on the Court of Appeal’s decision in Trustees Executors Ltd v Eden Holdings (2010) Ltd.23 In that case, Trustees Executors Ltd was the victim of mortgage fraud by a Mr Malcolm Mayer. His frauds covered a number of transactions. In one case, Champion Apartments Ltd, a company associated with him, had borrowed under a loan alleged to be fraudulent. Trustees Executors Ltd alleged that the proceeds of the fraud were applied to
purchase a property in Mt Eden. Champion Apartments Ltd sold the Mt Eden property in circumstances that were so questionable as to give grounds to believe that the sale was not at arm’s length or in good faith. Trustees Executors Ltd caveated the title of the Mt Eden property. At first instance, I applied an approach similar to that outlined above and held that Mr Mayer’s fraudulent representations
could not give Trustees Executors Ltd a caveatable interest.24
[41] In finding that Trustees Executors Ltd had an arguable case for an institutional constructive trust, the Court of Appeal said:
[17] We do not see why the equitable remedy sought by Trustees Executors against Mr Mayer, Champion and Eden in response to the fraud that it says was perpetrated by Mr Mayer should become unavailable to it because one element of the fraudulent scheme was the entry into a loan contract with Champion. Under that agreement, Trustees Executors unwittingly loaned money on a false understanding of the risk it was taking on and unaware that this was providing Mr Mayer with the ability to skim off funds for his own or associates' benefit. The effect of the Judge's decision is to confine Trustees Executors to the exercise of contractual and statutory rights against only the party with which it has a contract (Champion) and to avail itself of those rights it must rescind the loan agreement with Champion, even though it does not choose to do so. However, in the absence of argument from Eden on this issue, we confine ourselves to these comments and leave the matter for full argument in the substantive proceeding.
...
[21] Because of the approach we take to the case, we do not deal in detail with the High Court decision.
23 Trustees Executors Ltd v Eden Holdings (2010) Ltd [2010] NZCA 626.
24 Trustees Executors Ltd v Eden Holdings (2010) Ltd HC Wanganui CIV-2010-483-101,
12 August 2010.
...
[32] We find, therefore, that Trustees Executors has established that it is reasonably arguable that Mr Mayer/Champion obtained money by fraud from Trustees Executors and used those funds to purchase the Mt Eden property. The prerequisites for the creation of an institutional constructive trust, as identified by Eden in the High Court, are satisfied.
[33] We are conscious that the Associate Judge said in his judgment that Lord Browne-Wilkinson's dictum in Westdeutsche25 cannot be applied in New Zealand to contracts induced by fraud. We accept that there is controversy about the ability to trace stolen money in equity. However, in the absence of any argument to this effect from Eden, whether in this Court or the High Court, we propose to do no more than satisfy ourselves that it is reasonably arguable that the requirements for a declaration that an institutional constructive trust exists are satisfied.
[42] The Court of Appeal held that it was not necessary to consider whether and how the loan agreement could be unwound so as to give Trustees Executors Ltd a beneficial interest in the funds it had lent to Champion Apartments Ltd. At [33] of its judgment it suggests that it equated obtaining money by fraud with stealing money, so that the distinction made between consensual and non-consensual transfers made in other cases did not apply. The Court’s findings are provisional: at [17] it left the issue for full argument in the substantive hearing.
[43] The judgment cannot be read as ruling that in all cases of alleged fraudulent contractual representation there is an institutional constructive trust in favour of the representee over assets transferred under the contract and their proceeds. If the Court had intended to make such a wide ruling, it would have addressed statutory provisions, such as the Contractual Remedies Act (namely, that even on cancellation, property rights are not divested) and case law. If the Court had intended to depart from the approach taken in Australia and England, and to take a position different
from that stated by Tipping J in Estate Realties Ltd v Wignall,26 it would have set out
its reasons more fully.
25 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (HL) at 715-716.
26 Estate Realties Ltd v Wignall [1992] 2 NZLR 615 (HC) 631, recognising the right to trace, once a voidable contract is set aside.
[44] The decision is better understood as holding that Trustees Executors Ltd never lost a beneficial interest in the money it paid to Champion Apartments Ltd because the transaction was no more than a vehicle for obtaining money by false pretences. Lewin on Trusts27 says:
Nor are the rules relating to rescission requisite where a contract is not merely induced by fraudulent misrepresentation but is itself the instrument of fraud and no more than a vehicle for obtaining money by false pretences; in such a case the court is entitled to disregard the fraudulent contract and hold that the beneficial interest in the money remains with the innocent victim of the fraud...
[45] The case cited as authority for this is Halley v Law Society.28 There payments had been paid for commission for what Mr Halley, the fraudster called ―high yield investment programmes‖ but were no more than bank instrument frauds. The judge at first instance found that there was no point in entering into the transaction as it did not produce and was not intended to produce any benefit to the victim of the fraud. In the Court of Appeal, Carnworth LJ said:29
In such a case, it is meaningless to impose a requirement for the fraudster to be notified of ―rescission‖. From the fraudster’s point of view there is nothing to rescind; for practical purposes, he has parted with nothing of value and incurred no obligations; the victim is left with some documents which, from the outset, were known and intended by the other party to be worthless. The ―election‖ to which Potter LJ30 referred is not a real option. Although the case does not fit neatly into Potter LJ’s binary classification, he was not dealing with these facts.
[46] In Trustees Executors Ltd v Eden Holdings 2010 Ltd, the Court of Appeal referred to Mr Mayer skimming off funds for his own and his associates’ benefit, when all the money advanced was intended to fund part of the purchase of an investment property. To that extent, the case has similarities to the approach taken in Halley v Law Society.
[47] So the question here is whether this is a case like Halley and Trustees
Executors Ltd where the contract is no more than an instrument for fraud, or is one under which there was in a real sense a consensual transfer of property, even though
27 Thomas Lewis and others Lewin on Trusts (18th ed, Sweet and Maxwell, London, 2008)
at [7-28].
28 Halley v Law Society [2003] EWCA Civ 93.
29 At [48].
30 Referring to Twinsectra v Yardley [1999] Lloyd’s Rep Bank 527 (CA) at [98]-[99].
allegedly induced by fraud. On the pleadings and Ms Woodroffe’s evidence, The Woody Girl bought shares in two companies that undertook property developments. While those developments were unsuccessful and Ms Woodroffe suffered losses from her investment, there was nothing illusory about the consideration she received for the payment of $400,000. The agreements for the sale and purchase of shares were genuine, albeit arguably induced by fraud. This case is not like Halley or
Trustees Executors Ltd, but is similar to cases such as Lonrho v Fayed (No 2)31 and
Twinsectra v Yardley. There was a genuine consensual transfer of property. The Woody Girl has no arguable basis for claiming it has a beneficial interest in the money it paid under the agreement for sale and purchase of shares. In the absence of such a claim, there is no right to follow the proceeds of the payment into Mr Coleman’s interest in the Arran Road property. Accordingly none of the causes of action in The Woody Girl’s proceeding gives a tracing claim that allows the plaintiffs to claim an interest in the Arran Road property.
Is the caveator the correct person to claim that interest?
[48] This question is now academic, given that there is no caveatable interest. If I had found a caveatable interest, I would have held that the person entitled to lodge the caveat was The Woody Girl, as the person who was entitled to the beneficial interest in the funds paid to Jezreel Ltd. Although Ms Woodroffe as trustee of the Jane Woodroffe Family Trust provided The Woody Girl with the funds to pay Jezreel Ltd, there is no evidence that the transaction between Ms Woodroffe and The Woody Girl was anything but a genuine consensual transfer or that Ms Woodroffe as trustee retained a beneficial interest in the money paid to The Woody Girl. All the circumstances point to her paying the money so that it could be used to buy the shares, as it in fact was.
[49] Ms Woodroffe also guaranteed payment by The Woody Girl under the agreements to buy the shares. There is no evidence that she was called on under her guarantee. It was not submitted that the guarantee gave her a beneficial interest in any payment by The Woody Girl and I cannot see how such an interest could arise in
the circumstances of this case.
31 Lonrho v Fayed (No 2) [1992] 1 WLR 1.
[50] Neither The Woody Girl nor Ms Woodroffe has a caveatable interest in
Mr Coleman’s share of the Arran Road property.
[51] The ability to claim a property interest becomes relevant when a defendant is insolvent.32 A claimant with a property interest takes priority to the extent of that interest over other creditors. An unsecured creditor relying on breach of contract ranks pari passu with other unsecured creditors. A claim for breach of contract does not by itself give a property interest in the assets of the defendant, except where the court makes a vesting order under s 9 of the Contractual Remedies Act. Under that Act the remedies for a claim for contractual representation, including fraudulent misrepresentation, have been assimilated with the remedies for breach of contract. It
is consistent with the purpose of that act that a person who has been induced to enter into a contract by a misrepresentation does not have property revested in him by operation of law or by his or her election, but only on the court ordering a revesting. Insolvency law has its own remedies for setting aside transfers of assets, when they are placed outside the reach of creditors or some creditors are preferred. Under procedural law there are measures such as freezing orders and charging orders before judgment, where a basis for interim protection is made out. Insolvency law and procedural law can offer more nuanced and flexible means of dealing with transactions to put assets outside the reach of creditors than property law. The denial of a caveatable interest does not mean that The Woody Girl is necessarily without a remedy if Jezreel Ltd is insolvent.
[52] For The Woody Girl, Mr Barker asked that if Ms Woodroffe is unsuccessful, time be allowed for her to take advice and consider further steps before the caveat
lapses. That is an appropriate request.
32 See for example Lord Goff in Westdeutsche Landesbank Girozentrale v Islington London BC
[1996] AC 669 (HL) 684:
―But why should the plaintiff bank be given the additional benefits which flow from a proprietary claim, for example the benefit of achieving priority in the event of the defendant's insolvency? After all, it has entered into a commercial transaction, and so taken the risk of the defendant's insolvency, just like the defendant's other creditors who have contracted with it, not to mention other creditors to whom the defendant may be liable to pay damages in tort.‖
(a) Caveat 8789259.1 will lapse on 26 November 2011; and
(b) Ms Woodroffe will pay the respondents costs on this application on a
2B basis, plus disbursements approved by the Registrar. Any disagreement on costs will be referred to me.
......................................
R M Bell
Associate Judge
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