BANK OF NEW ZEALAND v M FORTES and G M FORTES [2013] NZHC 2188

BANK OF NEW ZEALAND v M FORTES and G M FORTES [2013] NZHC 2188 [28 August 2013]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV 2013-404-000907[2013] NZHC 2188BETWEEN BANK OF NEW ZEALANDPlaintiffAND MANUEL FORTESFirst DefendantAND GLENNIS MEEGAN FORTESSecond DefendantHearing: 21 August 2013Appearances: L A O'Gorman/D T Broadmore for the PlaintiffD Grove for the DefendantJudgment: 28 August 2013JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSENThis judgment was delivered by me on28.08.13 at 10:30am, pursuant toRule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate[1] The plaintiff (the Bank) seeks summary judgment for the amount outstandingunder the defendants' housing term loan.[2] The defendants oppose the Bank's application on the grounds:The circumstances leading to the entering into of the housing term loan were oppressive and should be reopened pursuant to the Construction Contracts Act and Consumer Finance Act 2003 (CCCFA).[3] The defendants suggest they were the subject of a scam and that an employee of the Bank may have assisted to an extent which has disadvantaged the defendants.BackgroundThe loan application[4] The defendants owned a residential property at Mt Eden and a rental property at Mangere. In May 2010 they met with Glen Cooper. They had met him previously. There was a discussion about two properties for purchase as an investment. One was in Manurewa and the other was in Taupo. The defendants say the purpose of the investment was to purchase the properties and lease them for six months and at the end of that time to sell them to the property tenants. Mr Cooper indicated the defendants would realise a profit of $20,000.[5] The defendants accepted Mr Cooper's offer to arrange funding from theBank. They were not before then customers of the Bank. Mr Cooper arranged for the defendants to sign agreements for sale and purchase. The defendants assisted with completion of the Bank loan application. The defendants provided Mr Cooper with proof of earnings, payslips, photocopies of passports, confirmation of income and the password to access their internet banking account to enable Mr Cooper to obtain their bank statements.[6] The agreements provided for the payment of deposits but there was no request for the defendants to pay these.[7] The agreements recorded that the vendor was Home Investment Group Limited.[8] On or about 9 June 2010 the Bank received a loan application on behalf of the defendants. That application indicated the defendants intended to purchase the Manurewa property as a residence and the Taupo property as an investment.[9] In response, the Bank's officer undertook credit checks on the defendants,received confirmation of the defendants income, received copies of bank statements for the defendants existing accounts relating to their Mt Eden and Mangere home loans, received registered valuations for the new properties, and was advised of the rental income to be paid for the Taupo property.[10] The Bank's officer also received copies of the agreements for sale and purchase of the Manurewa and Taupo properties which indicated deposits in the region of 20% had been paid. The bank's officer also received signed copies ofagreements for sale and purchase of the defendants Mt Eden and Mangere properties.[11] The loans were approved very promptly. Advances of about 80% of the purchase price were provided for the new purchases.[12] Alex Lee of Alex Lee Lawyers was instructed by the defendants in relation to the two new loans. He was also instructed by the Bank to attend to the preparation and registration of the mortgage security.[13] The loans were advanced on 11 June and 16 June 2010 to the trust account of Alex Lee Lawyers. Subsequently Mr Lee registered mortgages over the Manurewa and Taupo properties in favour of the Bank.[14] Those loans were not paid by the defendants. In consultation with the Bank the Manurewa and Taupo properties were sold by the defendants. The Bank received all net proceeds of sale. There was sufficient to repay the Taupo property loan but insufficient to repay the other loan.What the purchases were really about[15] Mr Cooper has perpetrated a scam.[16] Mr Cooper was the director of the vendor company, Home Investment Group Limited, but he did not tell the defendants this. Mr Cooper's method was to locate a property being sold by way of mortgagee sale and purchase it at a minimum distressed sale price. He would then contact people to advise he had a property to sell and could arrange 100% funding. He would then sell the property to a willing buyer at an inflated price and to support that price he would obtain a valuation from a valuer whom the evidence suggests was not independent and, in this case, the evidence confirms was not approved by the Bank.The defence[17] The defendants' opposition is advanced on the basis that they have an arguable defence, that there are factual issues for determination at trial, and that they have a claim against Mr Lee the solicitor who acted for them.[18] The defendants and the Bank are victims of Mr Cooper's fraud. Thedefendants had no intention of selling their Mt Eden and Mangere properties. Independently, Mr Cooper had prepared those sale agreements for the purpose ofsupporting the bank's loan applications. Those showed that they would be sold to Greenfield Developments Limited (another company in the control of Mr Cooper) on the same day as the Manurewa and Taupo properties were to be purchased by the defendants from Home Investment Group Limited.[19] The signatures of the defendants upon the sales agreements have been forged. It is reasonable to infer that those sale agreements were prepared to convey an impression that the defendants were purchasing new residential and investment properties in substitution for those which were being sold contemporaneously. The Bank was less likely in those circumstances to offer funding at less than 80% which was calculated to be required to complete the new purchases.[20] There is no dispute about that description of the fraudulent process used. A dispute arises with claims that the Bank did not handle the loan applications appropriately. This complaint concerns the Bank's procedures whereby it operates according to internal policies and standard procedures designed to protect its position as a creditor. Concerning the defendants loans the Bank accepts that some of those usual procedures were not followed.[21] The defendants claim important factual considerations also arise because of an alleged personal relationship between the Bank's officer who received the application, and an associate of Mr Cooper.The CCCFA[22] At the forefront of the defendants case is its claim that the Bank's loansshould be reopened because of the circumstances surrounding the processing of the loans. They say that whether or not the Bank owed a contractual duty of care to the defendants, their liability to the Bank is subject to obligations requiring the Bank'sobservance of reasonable standards of commercial practice.[23] The loans were credit contracts. Under part 5 of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) the Court has the discretion to reopen any credit contract if that contract is oppressive.[24] "Oppressive" is defined in the CCCFA as meaning "oppressive, harsh,unjustly burdensome, unconscionable, or in breach of reasonable standards ofcommercial practice".[25] The terms "oppressive" and "harsh" have been interpreted to mean that thecredit contract must involve some real detriment or hardship. 1[26] An assessment of "reasonable standards of commercial practice" has beenheld to require more than an uninformed conclusion of fairness from the standpoint of commercial dealings. Rather, some evidence as to what the relevant standards of1 Italia Holdings (Properties) Limited v Longsdale Holdings (Auckland) Limited [1984] 2 NZLR 1 at p. 16.commercial practice are is necessary.2 The underlying concept of the definition is an assessment of whether there has been a breach of objective standards of reasonable commercial practice.3[27] In the Bartle case the Supreme Court assessed the potential for breach of reasonable standards of commercial practice by reference to:(a) The lender's knowledge of the borrower's income and whether the borrower had any other assets.(b) Whether the loan was within the ordinary lending limits on a loan- to-value ratio and whether the interest rate was unexceptional.(c) Whether the borrowers were advised by a lawyer whose independence was not put in issue.(d) The lender's knowledge of the details of the investment.[28] In our present case the Bank had appropriate details of the defendants'income and commitments; the loan offered was within normal lending limits; and the lawyer used had been engaged by or on behalf of the defendants. Therefore, it isreally in respect of the Bank's knowledge of the details of the investment that thiscase focuses upon.Breach of reasonable standards of commercial practice[29] Mr Grove submits that if it is determined at trial that the Bank's conduct inreceiving the application and thereafter advancing the funds in breach of its own guidelines was negligent, then the defendants will have a defence because of theBank's carelessness as a cause of the defendants' loss. In short, but for the Bank'sown negligence, the defendants would have suffered no losses.[30] It is the defendants' case that when lender responsibility can be established then the Court has the ability to apportion loss in a contractual claim, as in the present case.2 Italia Holdings at p. 16.3 GE Custodians v Bartle [2010] NZSC 146.[31] Mr Grove submits that the Bank's liability occurred for the following reasons:(a) The defendants' two agreements for purchase of new properties and the two forged agreements for the sale of their existing properties were all presented to the Bank as sales by way of private treaty that is without the use of a real estate agent.(b) Private treaty transactions are inherently risky due to the ability of a fraudster to undertake hydrauliking – a term associated with selling properties for much more than they were worth and by passing the excess cost on to the purchaser. For that reason Mr Grove submits, banks have special requirements and steps to take prior to finance being advanced.(c) The application for finance was made on 9 June 2010 and the funding was completed within two days on 11 June 2010 that is within too short a period to permit proper consideration of its merits.(d) The loan application documents were accepted by the Bank without any verification in writing or in person from the defendants.(e) Valuation evidence in support of the proposed sales was provided by a registered valuer who was not approved by the Bank.(f) Original bank statements of the defendants were not obtained.(g) The Bank ought to have confirmed that the vendors were the registered proprietors when it was clear from the valuation report, albeit from an unapproved valuer, that the registered proprietors of the two properties being purchased by the defendants were not HomeInvestment Group Limited, Mr Cooper's company.(h) That the acknowledged failure by the Bank's officer to recognise the contracts as private treaty sales warrants an enquiry of the Bank and of its officer.(i) That a proper enquiry into aspects of the Bank's actions is important because it would disclose the specific internal procedures for sales by private treaty in place at the time of the transaction.[32] The Bank's case is that it is suing in contract, for breach of a contractual obligation to provide repayment of the Bank's loan.[33] In that situation the Bank says it does not owe a duty to a lender who contracts to borrow and to repay. The case for the bank is that it does not owe a duty of care to its lender. The Bank acknowledges that considerations of duty of care aside, the CCCFA enables a Court to stand back and consider whether there is an arguable case for oppression entitling it to reopen a credit contract in situations where, relevant to this case, it is claimed that the borrower has been induced to enter into the loan contract by oppressive means. 4[34] As, Mr Grove for the defendants acknowledges, established case law does not provide for the Bank to owe a duty of care to its borrowers. Also, as Mr Groveappeared to concede, considerations of oppression focus upon the Bank's actions inits considerations about whether to grant a loan.[35] The defendants case is that it is available to them to defend the Bank's claimnot on a duty of care argument but on a causation basis, namely that it is arguable that the total debt or at least a reduced sum is owing because, but for the Bank'sdefault in granting the loan applications, the loans should not have been granted. In that situation Mr Grove submits that the Bank cannot hide behind claims that its rules and procedures were for its protection only. He submits that in appropriate situations where those loans have been granted they may not be recoverable, in full or in part if they have caused that loss.4 Section 120 CCCFA.[36] The defence appears to be based upon claims that the loan would not have been granted if the Bank had taken sufficient steps to identify that its loan was likely to facilitate a fraud upon its borrower.[37] The defendants' case is that had the Bank adopted its own lending guidelines involving applications relying upon private treaty contracts rather than agreements for sale and purchase prepared by licensed real estate agents, that it would have beenalerted to the probability of Mr Cooper's scam. The defendants say the signs of thescam were obvious, indeed because the Bank's own rules and processes weredesigned to alert the Bank to that probability.[38] Mr Grove submits that had the Bank taken sufficient care in its consideration processes it would have realised there was a real possibility the loan would not have been granted. He said that the fact that the two sale agreements and the two purchase agreements were subject to private treaty should have raised an immediatecause for alarm. Mr Grove submits that the test of "oppression" should focus uponwhether any cause arises to require an enquiry about the possibility of oppression existing. In this case he says there are alarm bells because the funds were paid out within days of the application for funding being provided; because a deposit had not been paid; because the Bank should have required proof of payment of the deposit; and because a prudent solicitor would have required verification of the agreements for sale and the agreements for purchase.[39] Mr Grove submits that on that basis it is available for the defendants to assert that the contractual claim of the Bank is susceptible to challenge, indeed defeat.[40] Also it is the defendants claim that the Bank's officer in question may havebeen complicit in the fraud.[41] Certainly in the context of the summary judgment application it is theplaintiff's obligation to satisfy the Court that there is an arguable case that the Bank cannot exclude the possibility that a defence is available.[42] To this end the defendants rely upon the evidence of Mr Bilkey a solicitor of considerable experience who has advised the defendants in the fallout of the Bank'sproceeding.[43] Mr Bilkey has provided three affidavits in support of the defendants'opposition to summary judgment. He has, from his experience, indicated thosefactors which would have alerted the Bank to the potential for Mr Cooper's scam.He has provided his view of what investigations the Bank ought to have taken at thetime it received the defendants' loan applications. Indeed Mr Bilkey has spoken to Mr Downs, the witness whose affidavit evidence suggests the Bank's responsibilityincorporates the failings of a particular bank officer whom it is said was arguablyconnected to Mr Cooper's fraud.[44] Mr Bilkey's evidence includes claims that because the purchase agreement deposits exceeded the ordinary 10% and because the defendants paid no deposit nor were asked to be paid those, that therefore the agreements for sale and purchase were a fabrication because they were being funded 100% by the Bank.[45] Mr Bilkey said that the fact that the Bank did not require any collateral security over the defendants' family home itself suggests there is cause for inquiry. Mr Bilkey also says that because the defendants paid "such a high deposit" the Bankshould have been alerted to the fact that there was a discrepancy.[46] Significant reliance is placed by the defendants upon the evidence of the Bank by the affidavit of its senior manager which confirmed:The Bank does have internal policies and standard procedures in placedesigned to protect the Bank's position as creditor. Although some of thoseusual procedures for sales by Private Treaty were not followed (such that there was no meeting with the [defendants] prior to the advance, the Bank did not scrutinise the valuations, original bank statements were not obtained and the Bank did not confirm that the vendors were the current registeredproprietors), from the Bank's perspective the loans were in accordance withan appropriate loan to value ratio and the [defendants] were well placed to service and repay the loans.[47] The defendants submit this statement supports claims that had the Bank done those things which they should have done by their own procedures then the potential for fraud was discoverable, indeed reasonably foreseeable.Discussion[48] Much is assumed from the proposition of the defendants that because the Bank was in a position to realise the fraud of Mr Cooper then it would not have advanced the funds to the defendants and would have prevented the losses they incurred.[49] The Court does not agree with that conclusion. The Court does not accept that even if the Bank did not measure up with its own internal creditor approval controls that it bore responsibility in this case to indemnify or to protect the defendants from the consequences of actions which were totally or largely within thedefendants' control. In that outcome the Court does not accept the Bank has induced the defendants to commit themselves to a loan contract, by oppressive means. Theterm 'inducement' suggests actions of positive persuasion in circumstances whenthat ought not to have been done. It should not suggest any obligation to a borrower to provide advice regarding the suitability of the investment the borrower pursues forwhich the Bank's funding is sought.[50] In this case the evidence is that the Bank processed the loan applications by reference to information provided on behalf of the defendants, which they had entrusted Mr Cooper to provide. Details of this include that which the Court has earlier referred to in paragraph 9 of this judgment.[51] The Bank agreed to lend housing loans of $196,000 for the Manurewa property and $320,000 for the Taupo property, which is within their normal lending range, to persons who already owned residential and investment properties, and whose credit checks confirmed were worthwhile borrowers.[52] Mr Lee of Alex Lee Lawyers was instructed by the defendants in relation to two new loans. Mr Lee had provided the Bank with a statement indicating whatportion of funds was required from the Bank after payment of the deposit and various other fees as well. It appears that it was incumbent upon Mr Lee to contactthe Bank if, by receiving the Bank's loan into his trust account, there was any factorthat ought to affect the ability of the defendant to complete that purchase. It is reasonable in these circumstances to infer that the Bank was never advised that the deposit was not paid. Indeed the Bank had received no information at all regarding the defendants investment for a short term purchase and promise of a resale to a tenant with a profit in the outcome.[53] If the defendants' case is arguable then it must be because there is sufficient evidence to indicate that the Bank induced the defendants to enter into the contract in oppressive circumstances. This can occur if the Bank had or ought to have hadknowledge of Mr Cooper's fraud. The defendants need to show that the Banks knew of sufficient details to trigger a duty to their borrowers in the circumstances. But, as is usually the case, borrowers act in their own interests. The fact that the Bank too has been duped is not sufficient to trigger a case for oppression. It seems to the Court that much of the information the defendants say that they did not have, which Mr Cooper presented on their behalf, is not information which the Bank ought independently to have obtained. The fact is the defendants were happy with the investment purchases that they paid Mr Cooper for.[54] The defendants were already property owners and investors. Mr Fortes deposes that he worked as a personal assistant in a real estate office. Indeed it seems he worked closely with a friend of Mr Coopers.[55] The defendants signed each page of the agreements for sale and purchase.[56] Regarding their reasons for not paying the deposit, the defendants say that they were never requested to do so. Yet, it is submitted on behalf of the defendants that the Bank failed to make adequate enquiries to determine if the deposit had been paid.[57] The valuer's evidence showed the names of the current registered proprietors of the properties being purchased. The fact is that Mr Cooper's had an agreement forthe purchase of those properties before selling same to the defendants. Assumptions of fraud do not necessarily arise in these circumstances.[58] It may be Mr Bilkey's opinion that the Bank should have required certifiedcopies of agreements for sale and purchase. He does not explain why this practise ought to be assumed as a matter of course by a bank when considering a loan application from a client represented by a solicitor.[59] Ms O'Gorman submits that rather than banks being responsible for those losses it is arguable that the defendants' position is simply that they did not get the return they expected from their investment. The Bank cannot be responsible for MrCooper's promises of an investment return. Conceivably there are many reasons forthe failure of those expectations for which Mr Cooper's promises are notaccountable.[60] Primarily the events involve an investment by the defendants. In those situations investors ought to rely upon their own advisors and their lawyer. There is no question in this case but that the defendants' lawyer was an agent for the Bank forcertain purposes. However, he was not the Bank's agent for the purpose of advisingthe defendants regarding the wisdom of their investments.[61] This is a case where the protection the defendants seek is not one for whichthe Bank ought to have assumed responsibility. The Bank's primary concern was to secure a registered mortgage security for the lending it provided.[62] The defendants say they were unaware that they were purchasing from Mr Cooper or that Mr Cooper had purchased the properties. Therefore, and as MsO'Gorman submits, those issues had no impact on their own assessment of the value when they signed the agreements for sale and purchase. It is clear that the Bank'slending was based on prices agreed to by the defendants as purchasers who were apparently at arms-length from the vendor.[63] On behalf of the defendants some issue is made of the fact that no deposits were required to be paid. Obviously the Bank was not alerted to this for likely theloans would not have been offered had the Bank been aware of the fact. Also inview of Mr Fortes' real estate agent's experience it was likely that he was well awarethat deposits are usually payable prior to settlement. As much can be inferred from the sale and purchase agreements which the defendants signed.[64] The Bank's position is that it is enforcing a contractual debt claim. The Courtaccepts in these circumstances concepts of contributory negligence, damages and causation are irrelevant. In this respect and appropriately Ms O'Gorman refers theCourt to the decision in Bank of New Zealand v Geddes and Pope 5. In that the Court stated:[21] The terms of the contract were written. There was no term imposing any duty on the BNZ to warn of any dangers or risks in the underlying transaction.[22] No duty of care in tort can be said to have arisen. The parties chose to govern their position by contract. In such circumstances, the BNZ can be seen as the offeror of a commercial service, and the customers as the purchasers of that service. Contract should be allowed to govern their legal rights, as they have intended.[23] ... Banks in New Zealand will examine a transaction from the point of view of their own purposes. In doing so they will take on no duty to the person who is seeking the loan to advise or warn. The imposition of such a duty would disrupt current banking practice, and add to the cost of bank loans. There is no policy reason why it should be imposed, particularly in a situation such as this, where the Bank and customer have no ongoing relationship, and the customers had the opportunity of getting their own advice.[25] In an ordinary lender – borrower transaction such as this, the relationship is commercial, with the two sides openly having different interests that they compromise in a bargain for their mutual financial advancement, the Bank to make interest on the advance, and the customer to have the use of the money. There were, between the BNZ and Mr Geddes and Ms Pope, no particular circumstances from which a relationship of trust could be inferred. Indeed, the relationship with so much at arms-length, that there was no meeting between the BNZ and them, prior to the advance, and only one meeting with their agent.[27] ...The unfortunate loss on mortgagee sale would be seen as primarily a result of the downturn in the economy, contributed to by a purchase at an over value. But even if there were odd aspects of the purchase by Mr Geddes and Ms Pope, the BNZ was not obliged to take on the mantel of their advisor.5 HC Auckland CIV 2008-404-8082, 28 May 2009.[29] ...If any person was fooled by the transaction it was the BNZ, not Mr Geddes and Ms Pope.Conclusions[65] The Court concludes there was nothing in the loan made by the Bank to the defendants giving rise for enquiry pursuant to s 120 of the CCCFA. Whilst the Bank may not have followed its own guidelines for an application from persons purchasing pursuant to a private treaty contract, there is nothing in that which supports suggestions of oppressive behaviour by a lender against its borrower where, as here the borrower pursued an investment with an expected return which was not realised. The Bank should not assume in general terms any responsibility, much less in the circumstances of this case any obligation to advise whether the investment wasunwise, or to suggest that the borrower's investment arrangements were likely to besubject to fraudulent activities.[66] Nothing in the facts of this case indicates that arguably the Bank ought to have assumed a responsibility to advise the defendants at all about the quality of their investments.[67] Addressing claims that the Bank may have been a party, through its officer, to that fraudulent activity, the Court has considered the affidavit evidence suggesting complicity or impropriety in the manner in which the defendants' loan applications were handled. Suggestions of a relationship between the Bank's officer and the person named as Mr Cooper's associate are firmly rejected by both persons concerned. Their evidence is more convincing than that of Mr Downs presented on behalf of the defendants, which evidence was speculative and based on hearsay.[68] The Court is not convinced that factual issues or indeed the availability of further discovery will be of assistance for a proper consideration of the defendants'case. The Court is satisfied the defendants do not have an arguable defence to theBank's summary judgment claim.Judgment[69] The Bank is entitled to judgment in the sum of $296,499.29 as at 15 May 2012 together with interest on that sum at 8.60% per annum from 16 May 2012 until the date of this judgment.[70] In addition the Bank is entitled to costs. These will be fixed upon an application being made for that purpose.Associate Judge Christiansen