Xiqi Trustee Limited v Zhao

[2024] NZHC 211

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-1765

[2024] NZHC 211

IN THE MATTER OF

A loan secured by second mortgage over 10 Oakpark Place, West Harbour, Auckland

BETWEEN

XIQI TRUSTEE LIMITED

Plaintiff

AND

YAN ZHAO

Defendant

Hearing:	1 February 2024
Appearances:	X Lin and M S P Pang for the Plaintiff J E G San Diego for the Defendant
Date of Judgment:	19 February 2024
Reissued:	21 May 2024

JUDGMENT OF ASSOCIATE JUDGE BRITTAIN

This judgment was delivered by me on 21 May 2024 at 1.45 pm.

Pursuant to Rule 11.5 of the High Court Rules.

…………………..

Registrar/Deputy Registrar

Solicitors/Counsel:

Integritas, Auckland

Cowan Law, Auckland

XIQI TRUSTEE LTD v ZHAO [2024] NZHC 211 [19 February 2024]

Introduction

[1]    The plaintiff, Xiqi Trustee Ltd (Xiqi), applies for summary judgment to enforce a loan agreement and a registered mortgage which name the defendant, Yan Zhao (Ms Zhao), as borrower and mortgagor.

[2]    The mortgage is the second mortgage registered against the title to Ms Zhao’s property at 10 Oakpark Place, West Harbour, Auckland. In November 2022, Xiqi advanced $150,000 pursuant to the loan agreement and the mortgage.

[3]    Ms Zhao says that her purported signatures on the loan agreement are forgeries procured by her former husband, Zhu Zhi (Philip) Zhang (Mr Zhang), and that she had no knowledge of the transaction or the associated documents at the time of the transaction, and she has never received any part of the advance. She says that Mr Zhang fraudulently received the advance from Xiqi.

[4]    Xiqi does not directly contradict Ms Zhao’s evidence that she did not sign the loan agreement. However, Xiqi’s director, Ms Ye, deposes her belief that Ms Zhao was acting “in concert” with Mr Zhang. Ms Ye does not elaborate.

[5]The application for summary judgment raises the following issues:

(a)Is it arguable that the loan agreement and the mortgage are fraudulent and unauthorised by Ms Zhao?

(b)If so, is it arguable that the fraud can be imputed to Xiqi to defeat Xiqi’s indefeasible registered interest?

(c)If not, does the indefeasibility extend to the unregistered loan agreement?

Summary judgment principles

[6]    The Court may give judgment against a defendant if satisfied that the defendant has no defence to a cause of action in the statement of claim.

[7]    The leading authority on  applications  for  summary  judgment  is  Krukziener v Hanover Finance Ltd.1 The Court of Appeal set out the following principles:2

(a)The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried. The Court must be left without any real doubt or uncertainty.

(b)The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated.

(c)The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as, for example, where the evidence is not consistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable. In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it.

[8]    The defendant is under an obligation to lay a proper foundation for the defence in the affidavits filed in support of the notice of opposition.3

[9]    It is well established that if the defendant fails to provide an evidential foundation for a defence, then the plaintiff’s verification of the statement of claim stands unchallenged and ought to be accepted, unless it is patently wrong.4

1      Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162.

2 At [26].

3      Middleditch v New Zealand Hotel Investments Ltd (1992) 5 PRNZ 392 (CA) at 394.

4      Australian Guarantee Corp (NZ) Ltd v McBeth [1992] 3 NZLR 54 (CA) at 58–59.

Indefeasibility of title

[10]   Indefeasibility of title arises under s 51(1) of the Land Transfer Act 2017 (LTA):

51Title by registration

(1) On registration under this Act of a person as the owner of an estate or interest in land, the person obtains a title to the estate or interest that cannot be set aside.

[11]   There are exceptions to indefeasibility.    Indefeasibility does not apply where there is land transfer fraud. Section 52(1)(a) of the LTA provides:

52Exceptions and limitations

(1)The title of the registered owner to an estate or interest in land is subject to the following exceptions and limitations:

(a)in a case where the title of the estate or interest of the registered owner is acquired through fraud on the part of the registered owner or the registered owner’s agent:

[12]Section 6 of the LTA defines fraud:

6        Meaning of fraud

(1)        For the purpose of this Act, other than subpart 3 of Part 2, fraud means forgery or other dishonest conduct by the registered owner or the registered owner’s agent in acquiring a registered estate or interest in land.

(2)For the purposes of subsection (1), the fraud must be against—

(a)the registered owner of an estate or interest in land; or

(b)the owner of an unregistered interest, if the registered owner or registered owner’s agent,—

(i)in acquiring the estate or interest had actual knowledge of, or was wilfully blind to, the existence of the unregistered interest; and

(ii)intended at the time of registration of the estate or interest that the registration would defeat the unregistered interest.

(3)For the purpose of subpart 3 of Part 2, fraud means forgery or other dishonest conduct by any person.

(4)The equitable doctrine of constructive notice does not apply for the purposes of deciding whether conduct is fraudulent.

[13]   Therefore, a mortgagee immediately obtains an indefeasible title to the mortgaged interest on registration unless it can be shown that the mortgagee was party or privy to a fraud,5 including fraud by an agent of the mortgagee.6

[14]   Registration of a mortgage is achieved by registration of either a paper or electronic instrument that includes “prescribed information”.7 A mortgage instrument must be used to register a mortgage of an estate or interest in land under the LTA.8 The mortgage instrument is designed to be used in conjunction with a memorandum of terms registered under s 209 of the LTA (the memorandum of mortgage).9

Is it arguable that the loan agreement and the mortgage are fraudulent and unauthorised by Ms Zhao?

[15]In her affidavit evidence, Ms Zhao describes an elaborate fraud by Mr Zhang.

[16]    Mr Zhang instructed Alice Lawyers Limited (AL) to act for Ms Zhao, on the pretence that Ms Zhao was in China. Ms Zhao says that she was in New Zealand at all material times and she did not instruct AL.

[17]Ms Zhao says that Mr Zhang provided AL with falsified documents:

(a)A grant of  a  power of  attorney from Ms Zhao  to Mr Zhang dated  10 February 2017, which purported to authorise Mr Zhang to execute documents on behalf of Ms Zhao if she was outside New Zealand. The power of attorney was purportedly signed by Ms Zhao, and witnessed by her solicitor, Sarah Wong. Ms Zhao says that the signature on the document is not hers. Ms Wong’s evidence is that her firm has no record of the document, and she has no recollection of witnessing it. Ms Zhao and Ms Wong accept that there was a valid power of attorney in favour of Mr Zhang dated 17 February 2010, however that may have been revoked and Mr Zhang did not use or rely on that document.

5      Nathan v Dollars & Sense Finance Ltd [2008] NZSC 20, [2008] 2 NZLR 557.

6      At [5]–[7].

7      Land Transfer Act 2017, s 101(3).

8      Section 100(1). See subs (3) for an exception to the rule.

9      DW McMorland and others Hinde McMorland & Sim Land Law in New Zealand (online ed, LexisNexis) at [15.022].

(b)Bank statements for an account with Bank of New Zealand (BNZ), allegedly altered to be in the name of Ms Zhao. Ms Zhao says that she is not the owner of the account, and this is confirmed by a letter from BNZ. The advance from Xiqi was paid into that account.

(c)Bank statements for an account in Ms Zhao’s name with Bank of China, the first mortgagee, allegedly altered to significantly reduce the stated draw down of an advance from Bank of China to Ms Zhao. Ms Zhao has provided copies of the bank statements in question which she says are true copies, which show a significantly larger draw down from Bank of China. By letter, Bank of China has confirmed that the copies produced by Ms Zhao are accurate.

[18]   Settlement of the transaction was undertaken by AL on behalf of the borrower, purportedly Ms Zhao, and by Xiqi’s solicitors, Towers Law Ltd (TL). The solicitors exchanged emails regarding execution of the documents associated with the transaction, including the loan agreement and a printed copy of the memorandum of mortgage.

[19]   An issue arose regarding whether Ms Zhao would sign the documents personally, or whether the documents would be signed on her behalf by Mr Zhang under the power of attorney. On 1 November 2022, AL emailed TL documents executed by Mr Zhang as attorney, including the memorandum of mortgage and the loan agreement. Ms Zhao says that she did not authorise Mr Zhang to sign any documents on her behalf.

[20]   If Ms Ye’s allegation that Ms Zhao was acting in concert with Mr Zhang is proven at trial, then that may amount to Ms Zhao authorising Mr Zhang to execute the documents on her behalf. However, there is no evidence to justify such a finding at this stage of the proceeding, particularly considering Ms Zhao’s evidence denying the authorisation.

[21]   TL did not accept the documents were validly executed by Mr Zhang and required the documents be signed by Ms Zhao. Later that day, AL emailed TL some of the same documents purportedly executed by Ms Zhao, including the loan

agreement. An email from AL to TL on 2 November 2022 advised that a lawyer from AL had witnessed Ms Zhao’s signatures remotely, apparently in a video conference. Ms Zhao says that she did not attend the video conference, and that the signatures on the documents are not hers.

[22]   On 2 November 2022, TL asked AL to undertake that it would provide, after settlement, the original documents signed by Ms Zhao. AL was not prepared to provide that undertaking because AL was not in possession of the original documents purportedly signed by Ms Zhao. Instead, AL undertook that it would courier to TL the original documents signed by Mr Zhang as attorney. TL agreed to settle on that basis.

[23]   It is not possible at this summary stage of the proceeding to make findings of fact on whether the purported signatures of Ms Zhao on the loan agreement are forged. However, I find that Ms Zhao has discharged the evidential onus upon her, and established that it is arguable, that:

(a)the documents purportedly signed by her are forgeries; and

(b)the documents purportedly signed on her behalf by Mr Zhang were signed without her authority and fraudulently.

Is it arguable that the fraud can be imputed to Xiqi?

[24]   Xiqi and the borrower both had independent legal representation. Mr Zhang purported to act as Ms Zhao’s agent. Mr Zhang was not acting as Xiqi’s agent. There is no basis to impute any fraud by Mr Zhang to Xiqi.

[25]   For Ms Zhao, Mr San Diego submitted that the communications between TL and AL on 1 and 2 November 2022 regarding execution of the documents may provide a basis for an argument that Xiqi had sufficient knowledge of irregularities with the execution of the documents to render Xiqi privy to the fraud.

[26]   Mr San Diego submitted that the emails on 1 and 2 November 2022 show that Xiqi was initially unprepared to accept documents executed by Mr Zhang as Ms Zhao’s attorney. Mr San Diego suggested that further evidence of the communications

between the solicitors on 1 and 2 November 2022, including evidence of any telephone discussions, may establish Xiqi’s knowledge of irregularities in the execution of the documents. The only direct evidence that Mr San Diego could point to in support of his submission was the exchange of emails between the solicitors on 1 and 2 November 2022.

[27]   For Xiqi, Ms Lin submitted that there was nothing untoward about the transaction apparent to TL or Xiqi. Ms Ye’s evidence is that her preference at the time of the transaction was for Ms Zhao to sign the documents personally, but ultimately she agreed that Xiqi would rely on the original documents signed by Mr Zhang as Ms Zhao’s attorney.

[28]   Ms Lin submitted that Xiqi was entitled to rely on certifications and representations made by AL, including:

(a)the View Instrument includes a certification by Ms Nie, the solicitor purportedly acting for Ms Zhao, that  she had  authority  to  act  for Ms Zhao and that she had taken reasonable steps to confirm the identity of the person that gave her authority to lodge the Instrument;

(b)AL gave Xiqi a solicitor’s certificate dated 1 November 2022, which included an undertaking that “the Borrower” had been identified in accordance with the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, and that AL held original certified identity documents;

(c)AL’s provision of documents purportedly signed by Ms Zhao, followed by an email confirming that Ms Zhao was overseas and that AL had witnessed the signing remotely;

(d)AL’s undertaking that it would courier the loan documents signed by Ms Zhao’s attorney, Mr Zhang, after settlement.

[29]   I find that Ms Zhao has failed to discharge the evidential onus upon her in respect of her allegation that Mr Zhang’s fraud can be imputed to Xiqi. The emails

between AL and TL do not suggest that there was anything untoward about the implementation of the transaction which would alert a lender to a potential fraud. The issues that arose regarding the borrower’s execution of the documents could reasonably have been viewed at the time as arising because the borrower was in China at the time of the transaction. There is no evidence to suggest that Xiqi knew, or ought to have known, that Ms Zhao was in New Zealand. Xiqi was entitled to rely on the certifications made by AL.

[30]Therefore, Xiqi’s registered second mortgage is indefeasible.

Does the indefeasibility extend to the unregistered loan agreement?

Legal principles

[31]   An invalid but registered mortgage will provide security to a mortgagee who is innocent of fraud for any amount stated in the mortgage itself.10

[32]   In the present case, the registered memorandum of mortgage secures all obligations of the mortgagor to the mortgagee. No specific secured amount is stated in the mortgage itself. Therefore, the charge extends to any obligation in an unregistered document which has been incorporated by reference in the memorandum of mortgage.11

[33]   An obligation in an unregistered loan agreement which was not signed or authorised by the mortgagor is incorporated in the mortgage if the mortgage and the memorandum of mortgage must be interpreted as so requiring.12

[34]   The process of interpretation begins with the “primary registered documents, namely the mortgage and the incorporated memorandum, the construction of which must determine what other documents are incorporated by reference”.13

10     Frazer v Walker [1967] NZLR 1069 (PC); Westpac New Zealand Ltd v Clark [2009] NZSC 73, [2010] 1 NZLR 82 at [43] per Blanchard J.

11     Westpac, above, at [43] per Blanchard J.

12     At [44] per Blanchard J.

13     At [48] per Blanchard J.

[35]   The Court should not strain to find that a reference in a registered document encompasses an unregistered forged document.14

The terms of the memorandum of mortgage

[36]   The preamble in the memorandum of mortgage includes the following relevant passages:

In this mortgage, when we use the words “you” or “the party giving this mortgage” we mean the person or persons to whom we lend money against the security of this mortgage as well as the person or persons who are registered as the owner or owners of the land over which this mortgage is secured.

This mortgage secures all obligations that you owe the mortgagee being loans or credit made available to you by the mortgagee relying upon the security of this mortgage. The details of these obligations may be recorded in a “secured agreement” or any other document.

…

If the proceeds of sale do not repay the debt in full then, unless we have agreed in writing to the contrary or the law requires otherwise, you will remain liable to repay the balance of the debt owing.

[37]   The interpretation provisions of the memorandum of mortgage include the following relevant provisions:

1(b)(ii)The expression “party giving this mortgage” and the word “you” includes all persons executing this mortgage regardless of how they may be described in the mortgage…

1(c) Meaning of certain words: In this mortgage, unless inconsistent with the context:

“accommodated person” means any person:

(i)with whom the mortgagee contracts or makes any arrangement; or

(ii)to whom the mortgagee provides any financial services or facility

for the accommodation of the party giving this mortgage;

“for the accommodation of the party giving this mortgage” means for the accommodation of, at the request of, at the direction of or on account of the party giving this mortgage or, if there are more than any one of them, any one or more of them;

…

14     At [51] per Blanchard J.

“secured agreement” means any agreement under which the mortgagee agrees to make an advance to an accommodated person or to a party giving this mortgage that specifies that that advance is to be secured by this mortgage and includes the mortgage instrument and any agreement in the future recording a future advance;

(Emphasis in original)

[38]Clause 2 defines “the secured moneys”:

2(a) In this mortgage, “the secured moneys” means:

(i)all moneys which are now or at any time in the future owing by the party giving this mortgage or an accommodated person to the mortgagee;

(iii)each and every payment or performance of an obligation:

(A)by a party giving this mortgage, or if there is more than one, any one or more of them; or

(B)by any accommodated person, in respect of any secured agreement

[39]Clause 3 sets out the mortgagor’s obligation to pay:

3(a) Pay and comply: the party giving this mortgage must:

(i)pay the secured moneys at the times and in the manner provided by this mortgage or by any secured agreement and, to the extent that there is no such agreement, then upon demand;

(ii)comply with all of the obligations contained in every secured agreement or arrangement relating to the secured moneys where such obligations are:

(A)undertaken by any person liable for payment of the secured moneys; and

(B)       intended to be for the benefit of the mortgagee (Emphasis in original)

[40]   Ms Lin submitted that the words “party giving this mortgage” and “you” in  cl 1(b)(ii) include a fraudster executing the memorandum of mortgage. Alternatively, Ms Lin submitted that Xiqi’s advance of funds to Mr Zhang, even if procured by fraud, was an arrangement with Mr Zhang as an accommodated person as defined in cl 1(c).

[41]   I reject those submissions. When cl 1(b)(ii) and the definition of “secured agreement” in cl 1(c) are read in the context of the memorandum of mortgage, including the preambles, it is plain that the party giving the mortgage is the registered owner of the mortgaged land. Mr Zhang was not a party giving the mortgage. Mr Zhang’s signature on the memorandum of mortgage was only purported to be as attorney for Ms Zhao.

[42]   The Supreme Court reached a similar conclusion in Westpac New Zealand Ltd v Clark, when considering a similar memorandum of mortgage.15 The rationale is that the lender could never at the point of execution have taken, or intended to take, a valid security from anyone other than the registered owner, being the only person with the power to grant the mortgage.

[43]   Clauses 2(a) and 3 of the memorandum of mortgage make it clear that the security is limited to monies owed by the mortgagor, or a person accommodated by the mortgagor.

[44]   On Ms Zhao’s case, Mr Zhang was not an accommodated person as defined in cl 1 (c). Xiqi did not contract or make any arrangement with Mr Zhang to provide him financial services. Ms Zhao’s case is that Mr Zhang obtained an advance from Xiqi by fraud. This is the antithesis of a contract or an arrangement to which Xiqi consented. Neither was Xiqi’s provision of the advance to Mr Zhang for the accommodation of, or at the request or direction of, Ms Zhao.

[45]   On Ms Zhao’s case, there are no monies owed by Ms Zhao or an accommodated person under cl 2(a) of the memorandum of mortgage. The advance is owed by Mr Zhang. The loan agreement was executed by Mr Zhang as an imposter, and his covenant to pay in the loan agreement is not within the ambit of the memorandum of mortgage, and therefore not secured against Ms Zhao’s land.16

15     Above n10, at [45] per Blanchard J.

16     At [45] per Blanchard J.

An alternative ground

[46]   If I had found that the loan agreement was incorporated in the mortgage, I would have declined summary judgment on an alternative basis, not argued for Ms Zhao.

[47]   A fraudulent but indefeasible mortgage is enforceable as a charge on the land, but the personal covenants are not enforceable against the mortgagor by a proceeding for recovery of a debt. The mortgagee’s remedy is limited to a mortgagee sale.17

[48]   In this case, Xiqi has not exercised its power of sale and instead seeks judgment for the full amount of the debt relying on the personal covenant by the mortgagor. That relief is not available.

Costs

[49]   My preliminary view is that costs should be reserved, as is usually the case with an unsuccessful application for summary judgment by a plaintiff.18

[50]   I see nothing that takes this case outside of the ordinary. If counsel are unable to agree costs, then:

(a)the defendant may file and serve written submissions on costs, of no more than five pages, by 31 May 2024;

(b)the plaintiff may file and serve written submissions of costs, of no more than five pages, by 14 June 2024; and

(c)I will determine costs on the papers.

Associate Judge Brittain

17     At [33] per Blanchard J.

18     NZI Bank Ltd v Philpott [1990] 2 NZLR 403 (CA) at 405–406.