BANK OF NEW ZEALAND V D D MCCALL HC AK CIV-2010-404-001646

BANK OF NEW ZEALAND V D D MCCALL HC AK CIV-2010-404-001646 20 August 2010IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2010-404-001646BETWEEN BANK OF NEW ZEALAND Plaintiff AND DAVID DONALD MCCALL Defendant Hearing: 20 August 2010 Appearances: JEM Lethbridge for Plaintiff S Carey for the Defendant Judgment: 20 August 2010ORAL JUDGMENT OF ASSOCIATE JUDGE BELLSolicitors/Counsel: Grove Darlow, PO Box 2882, Auckland Lovegroves (R Burrell), PO Box 25066, Auckland S Carey, PO Box 848, Shortland Street, Auckland[1] In this summary judgment application, the plaintiff claims the sum of $364,516.17, plus interest at 17.45% from 10 March 2010, plus costs on a solicitor/client basis. It sues the defendant on guarantees the defendant gave for the indebtedness of Grafton Office Services Ltd, a company of which he is the director and shareholder. [2] The Bank lent Grafton Office Services Ltd money under three term loans: a) A customised fixed rate term loan for $530,000 on 17 December 2007. The interest rate on this loan was 11.7% and the default rate is an additional 4%, making 15.7%. b) Special rate housing loan of 17 December 2007. This loan was for $180,000 and it was a table loan repayable over 25 years. The interest rate was 9.39% for the first two years, with a default rate of 2%, making 11.39%. c) A business term loan of 11 January 2008 for the sum of $70,000. This loan was for five years. The interest rate was 11.71% for the first year and the default rate was an additional 4%. [3] The total of these loans was $780,000. In addition, Grafton Office Services Ltd ran a trading account and that also went into overdraft. [4] The Bank had securities for the loans: a) Registered mortgage over office units at Datacom House, 160 Grafton Road, Auckland; b) The defendant, as trustee of the View Road Family Trust, gave a guarantee dated 11 January 2008. The limit of that guarantee is $250,000, plus additional amounts allowed under clause 5 of the guarantee. The guarantee document makes it clear that the customer whose indebtedness was being guaranteed was Grafton OfficeServices Ltd. A mortgage over properties in View Road, Mt Eden supported the guarantee; c) The defendant gave a guarantee in his own right dated 19 December 2007. The limit of that guarantee is $710,000, plus additional amounts under clause 5 of the guarantee; d) Another guarantee given by the defendant dated 11 January 2008, limited to $780,000, plus additional amounts under clause 5 of the guarantee. [5] All the guarantees in this case used the same form and all guarantees provide this:You must pay us on demand all costs, expenses and liabilities we incur in connection with, or in the actual or attempted exercise or enforcement by us of a power or remedy under this Guarantee or any other security or document given to us by you, the Customer, or any other Guarantor. These include administration costs and our legal fees and expenses on a solicitor and client basis.[6] Grafton Office Services Ltd defaulted in payments under the loans. The Bank began exercising its remedies. It served notices under s 119 of the Property Law Act on Grafton Office Services Ltd and on the defendant. The notice put in evidence shows a demand for $669,164.83. The defaults were not remedied. [7] The office units in Datacom House at 160 Grafton Road have now been sold. [8] The defendant filed a notice of opposition in person. In essence, his defence appears to be that he takes issue with the Bank's alleged failure to bring into account proceeds of sale of three properties, Units 2, 4 and 5 at 2 View Road, Mt Eden, Auckland, where, he says, there were net funds available. Mr Carey was instructed late. His submissions developed this defence. [9] The Bank answers these matters this way. As trustee of the View Road Family Trust, Mr McCall had borrowed from the Bank and, although this was notdirectly in evidence, I infer that he had also given the Bank the mortgage to secure that indebtedness. [10] The Bank sold the units at 2 View Road, Mt Eden, in the exercise of its powers as mortgagee. The Bank's reply affidavit describes how the proceeds of sale were applied and it also describes how the proceeds of sale of the commercial units at 160 Grafton Road were applied. [11] The units at View Road sold for $1,065,000 on 19 May 2009. The proceeds of sale were used to pay legal expenses, land agents, and other costs of sale. The Bank then applied the funds to repay the indebtedness of the View Road Family Trust to the Bank and there were three payments: $46,448.72, $790,227.43, and $17,731.96, a total of $854,408.11. After all those payments were made, there was a surplus in the View Road Family Trust account with the Bank. The amount of that surplus was $174,858.88. [12] Mr Carey criticised the Bank's evidence as to the indebtedness of View Road Family Trust to the Bank. He said that the Bank had done enough to show that the View Road Family Trust did owe the Bank the sums set out on the bank statement No. 18 for the period 30 April 2009 to 26 May 2009. The evidence from the Bank is minimal but I accept for this application that the Bank has satisfied me that View Road Family Trust was indebted to the Bank for the sums I have recited as at the date of the sale of the View Road Family Trust properties. Certainly, the Bank could have made the job easier if it had put more evidence in but in this case it just scrapes by. [13] The Bank transferred the surplus in the account View Road Family Trust into the accounts of Grafton Office Services Ltd. The amount transferred, $174,858.88, is within the guarantee limit of $250,000 given by Mr McCall as trustee of the View Road Family Trust. [14] The trading account of Grafton Office Services Ltd was overdrawn to the sum of $166,572.06. The surplus available from the sale of the units at View Road was applied against this to clear the overdraft of Grafton Office Services Ltd. Thatleft a surplus of $8,286.82. The Bank then applied that sum of $8,286.82 against the first term loan, that is the fixed rate term loan. At that time, the balance for that loan stood at $530,455.73, and with the payment of $8,286.82, the indebtedness was reduced to $522,168.91. [15] In October 2009, the sale of the units at 160 Grafton Road was completed. The Bank's solicitors paid the Bank the net proceeds of sale of the units. That sum was $509,150.50. The Bank used those funds to repay in full the housing term loan and the business term loan. It also applied $200,000 in reduction of the fixed rate term loan. Those payments exhausted the proceeds of sale from the sale of the units at 160 Grafton Road. The Bank's records show that the amount of the fixed rate term loan was reduced from $522,168.91 to $322,168.91. That balance was then increased by a payment of $23,765.63 paid to land agents for the sale of the units at 160 Grafton Road. That brought the amount owing under the fixed rate term loan to $345,934.54. That is the amount shown in the Bank's statement of 30 October 2009 for that loan. [16] The defendant takes issue with the way the Bank applied the proceeds of sale from the View Road properties. In the defendant's submission, there were funds available from View Road which could and ought to have been applied in reduction of the indebtedness of Grafton Office Services Ltd. Mr Carey's written submissions attacked the Bank's reliance on clause 9 of the guarantee. Clause 9 says:To meet your liability under this guarantee we can resort to any security which we hold from you at any time over any part of your property or assets, unless the security by its express terms does not apply to this liability.[17] Mr Carey's submission is that clause 9 does not apply to loans or facilities to other parties. Here, he was referring to the Trust's guarantee given for the indebtedness of Grafton Office Services Ltd. His submission is correct that clause 9 cannot be used to allow payments to be made in reduction of the indebtedness of persons other than Grafton Office Services Ltd. Mr Carey's argument was that the money paid to reduce the indebtedness of the View Road Family Trust - $854,408.11 – was misapplied, and if it was misapplied, then it was funds that could instead be used to reduce the indebtedness of Grafton Office Services Ltd so that recourse to Mr McCall under his guarantee was not necessary. As I have recorded, the Bank'srecords show that the View Road Family Trust was indebted to the Bank not only for the guarantee of 11 January 2008 for the indebtedness of Grafton Office Services Ltd, but also as primary debtor for its own borrowings from the Bank. [18] As a secured creditor, the Bank was entitled to appropriate the proceeds of sale to whichever debts it chose. There is authority for this in Fisher and Lightwood's Law of Mortgage, 12 th ed. LexisNexus 2006, page 892, paragraph 47.49:Where at the time of payment the debtor fails to declare the debt towards which the money was paid, he cannot afterwards do so. The right of appropriation is then with the creditor who may allocate the payment to the debt for which he has the least available security. However, when the creditor by himself or his authorised agent has accepted the payment on a particular account, he cannot afterwards change the appropriation without the debtor's consent. The creditor may appropriate the payment to a debt at any time after payment and before action brought or account settled between him and his debtor.[19] One of the authorities cited by Fisher & Lightwood is William Hall (Contractors) Ltd (In Liquidation) [1967] 1 WLR 948. In that case, Plowman J reviewed many old authorities. One of the cases of note is Ex Parte Glyn (1840) 1 MontD & de G 25 where a secured creditor was held entitled to allocate payment amongst debts of different debtors. [20] In this case, the Bank received the proceeds of sale of the View Road properties. There is no evidence that Mr McCall himself allocated where the proceeds of sale were to go. The Bank instead chose where the funds were applied. It applied those funds first in reduction of the indebtedness of the View Road Family Trust in its own accounts with the Bank, and then applied the balance in reduction of the indebtedness under the guarantee given in support of Grafton Office Services Ltd. The Bank was entitled to do so without resort to any of the provisions of the guarantee. However, I also note that clause 11.2 of the guarantee says:Your obligations under this guarantee are not affected by anything that might otherwise affect them under the law relating to sureties including: c) the fact that, in relation to any guaranteed amount or any security, guarantee or indemnity for them, we: (ii) give up, release, vary or exchange, or fail to obtain, perfect or register or realise, or deal in any other way with any security, guarantee or indemnity.[21] Those words are wide enough to cover the Bank's applying the proceeds of sale of the View Road properties towards the indebtedness of Mr McCall as trustee of the View Road Family Trust before applying the proceeds in reduction of his trustee's liability as guarantor of the indebtedness of Grafton Office Services Ltd. [22] There is some circularity in Mr McCall's defence. If more of the proceeds of sale of the View Road Family Trust had been applied in reduction of the indebtedness of the Grafton Office Services Ltd debt, that would have reduced the funds available to repay the indebtedness of the View Road Family Trust. Mr McCall was trustee of that trust and accordingly must have agreed with the Bank to repay the loans taken out by him as trustee. In one way or another, there was always going to be a shortfall that resulted in a personal liability of Mr McCall. [23] After the proceeds of sale of 160 Grafton Road had been applied in reduction of the indebtedness of Grafton Office Services Ltd, the balance owing under the fixed rate account at 30 October 2009 was $345,934.54. That amount, plus interest payable under the loan, is recoverable from the defendant under the guarantees he gave in December 2007 and January 2008. The Bank is also entitled to recover interest on this sum from 30 October 2009 at the default rate of 15.7% p.a. The terms of the guarantee also provide that the Bank can recover its costs on enforcing the guarantee on a solicitor/client basis. The Bank has claimed interest at 17.45% to the date of payment. I can see no basis in the contract documentation to recover interest at a higher rate than the default rate, or to recover interest at that rate after judgment. [24] There is judgment for the Bank against Mr McCall for the sum of $345,934.54 and interest on that sum at 15.7% from 30 October 2009 to 19 August 2010. The judgment will carry interest at the rate of 8.4% under r 11.27 of the High Court Rules. The Bank is also entitled to recover costs on a solicitor/client basis.[25] The Bank has not quantified its costs. The parties are invited to confer as to costs but, if necessary, the Bank can file an affidavit as to its costs with supporting memorandum. Mr Carey is to be given the opportunity to comment on those. __________________________ R M Bell Associate Judge