COMMISSIONER OF POLICE v BAYLIS [2023] NZHC 3014

COMMISSIONER OF POLICE v BAYLIS [2023] NZHC 3014 [10 November 2023]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV-2017-409-393[2023] NZHC 3014BETWEEN COMMISSIONER OF POLICEApplicantAND DARRIN STEPHEN BAYLISFirst RespondentAND DARRIN STEPHEN BAYLIS andCAMBRIDGE TRUSTEES NO. 2 LTDSecond RespondentsAND MORTGAGE HOLDING TRUSTCOMPANY LIMITEDFirst Interested PartyAND KATHY EMILY CRIBBETSecond Interested PartyHearing: 10 October 2023Appearances: K South and K A Courteney for the ApplicantJ D Lucas for the RespondentInterim Judgment: 27 October 2023Reissued: 10 November 2023JUDGMENT OF HARLAND JApplication for early sale ordersIntroduction[1] The Commissioner of Police (the Commissioner) applies for early sale ordersin relation to two properties owned by the first respondent, Mr Baylis, situated at 76and 76A Frankleigh Street, Somerfield, Christchurch. The application also sought anorder for sale in respect of another property owned by the second respondents who arethe trustees of the Baylis Family Trust. This property is situated at 77 Ensign Street,Halswell, Christchurch, but the application for an early sale order in respect of it wasnot pursued at the hearing.[2] The application for early sale orders in respect of the Frankleigh Streetproperties is opposed by Mr Baylis because he contends they are not justified orrequired.[3] The first interested party, Mortgage Holding Trust Company Ltd (MHTCL), asubsidiary of ASB Bank Ltd (ASB) which holds a mortgage over the three properties,provided certain information to the Court by way of memorandum.1 MHTCL abidesthe decision of the Court but submits that any orders for sale should provide that theproceeds of sale will first be applied in satisfaction of the total debt owing to it; that isthe debt owed over all three properties.[4] The second interested party and the previous partner of the first respondent,Ms Cribbett, supports the application for early sale orders but did not appear at thehearing.Background[5] On 27 April 2022, the Commissioner applied for assets and profit forfeitureorders against the first and second respondents. This application is due to be heard inthe Christchurch High Court on 4 December 2023 as it is opposed.[6] The assets forfeiture order is sought in relation to all property owned by thefirst and second respondents on the basis that it is tainted property. The basis for theprofit forfeiture order is that Mr Baylis, on his own admission, has derived an unlawfulbenefit of not less than $1,034,177.30 from significant criminal activity undertaken byhim between 2010 and October 2023.[7] The alleged significant criminal activity comprises:1 Dated 22 June 2022 and 17 July 2023 (tabs 5 and 9 of the common bundle).(a) trading in motor vehicles while an unlicensed dealer in breach of s 95(1)(a)of the Motor Vehicle Sales Act 2003, to the value of at least $291,068.49;(b) selling methamphetamine, in breach of s 6 of the Misuse of Drugs Act1975, to the value of at least $496,899;(c) carrying out repossession activities while unlicensed to do so in breach ofs 23(2) of the Private Security Personnel and Private Investigators Act2010 to the value of at least $65,589.04;(d) using a document to obtain a pecuniary advantage in breach of s 228 ofthe Crimes Act 1961 and/or obtaining by deception in breach of s 240 ofthe Crimes Act 1961 in relation to eligibility for an unemployment benefitduring 2018 and 2019 in the sum of $15,620.77; and(e) engaging in otherwise lawful activities in respect of which no income taxwas paid resulting in income tax evasion of at least $165,000 in breach ofs 143B of the Tax Administration Act 1994.The application for early sale orders and opposition to it[8] The following properties are the subject of the present application:(a) 76 Frankleigh Street, registered in the name of Mr Baylis;(b) 76A Frankleigh Street, registered in the name of Mr Baylis; and(c) a jet ski and trailer found in the possession of Mr Baylis on 6 December2016 and which he claims ownership of. The Commissioner cannotidentify any transactions from Mr Baylis' bank accounts that support thelegitimate acquisition of these items and contends they must be the resultof cash purchases funded by significant criminal activity.The real estate[9] The Frankleigh Street properties, together with the property at Ensign Street,are subject to cross-collateralised mortgages with the first interested party MHTCL.All of the properties are tenanted with the second interested party, Ms Cribbett,occupying a granny flat attached to 76A Frankleigh Street.[10] The evidence establishes that the Ensign and Frankleigh Street properties weretogether valued at $1,320,000 at the date of restraint in August 2017. Valuations ofthese properties obtained in early 2022 by the Official Assignee established their valueat $2,165,000. The increase in value is due to market forces. However, a very recentvaluation shows a slight decrease in value. These properties are now valued at$1,945,000. The capital gain accumulated since the properties became allegedlytainted amounts to $910,000.[11] Currently the properties are estimated to have the following values:(a) 76 Frankleigh Street − $645,000-$685,000;(b) 76A Frankleigh Street − $645,000-$685,000; and(c) 77 Ensign Street − $625,000-$645,000.[12] The total estimated value of all three properties is therefore $1,915,000 to$2,015,000.[13] Mr Lucas advised that he received the updated valuations on Friday 6 October2023 and, as a result, he had had insufficient time to consider them and discuss themwith Mr Baylis. He submitted that the evidence about the current value of theproperties should be put to one side for this reason and because it is not provided inan affidavit sworn by a person who has the expertise to provide that evidence. Despitethis, Mr Lucas accepted as a general proposition that property prices have recentlydecreased as a result of market forces.[14] For the purposes of this hearing, I do not consider this evidence should be putto one side. The critical issue relates to the arrears, not the value of the properties, andthe earlier evidence about the value of the properties establishes that there is sufficientequity to repay the debt owing and the arrears.[15] The rental income received in respect of all properties does not cover themortgage. For some time, Mr Baylis has been topping up the mortgage with additionalfunds but, when Mr Baylis was remanded in custody between March and November2021, the mortgage fell into arrears.[16] Ms South presented a spreadsheet as part of her submissions which outlinedthat the mortgage balance in respect of all properties (including Ensign Street) is$682,070.26. She also advised that the mortgage arrears as at 19 September 2023amount to $52,686.06. The affidavit of Mr Forrest, filed in support of theCommissioner's application, was that, at 26 July 2023, the mortgage arrears amountedto $45,598.68 whereas, on 26 August 2022, the arrears were $33,744.25. The arrearshave no doubt increased as a result of the increased cost of borrowing, due again tomarket forces.[17] The Commissioner submits that orders for sale are required not only becausethe property values are declining but, more particularly, because the mortgage arrearsare increasing.[18] Ms South referred to two Property Law Act 2007 notices which have beenissued by MHTCL in respect of the properties and the additional interest, includingpenalty interest, and the legal costs that will be associated with them. MHTCL hastaken no steps under the Property Law Act notices, largely because, as counsel forMHTCL outlined in their memorandum of 13 July 2023, ordinarily, MHTCL wouldnot proceed with a mortgagee sale if another appropriate sale process, which accountsto it as mortgagee, is being progressed. That is the situation in this case. Ms South'spoint is that this does not prevent further expenses being incurred in relation to them,thereby diminishing the potential value of the assets.[19] Further, Ms South submitted that, as Mr Baylis is not employed, there is noprospect of him raising the kind of funds necessary to reduce the arrears. Shehighlighted that the Commissioner has been prepared to adjourn these proceedings onseveral occasions to allow Mr Baylis time to pay, but the mortgage arrears have notbeen reduced, rather, they have increased.[20] The argument for Mr Baylis was succinctly put by Mr Lucas. He submitted itis not necessary to grant the application because the substantive hearing is a very shorttime away and it is unlikely that the assets concerned will depreciate significantlybetween now and then. Mr Baylis wishes to preserve the properties for the benefit ofhis family in the future. He is also concerned about what will happen to the tenantsshould the properties be sold.[21] Mr Lucas submitted that there can be no finding that the property is tainteduntil the hearing in eight weeks time.[22] Tainted property is property that has, wholly or in part, been acquired ordirectly or indirectly derived from significant criminal activity.2 To determine whetheran assets forfeiture order should be granted, as is the purpose of the hearing set for 4December 2023, the Judge must be satisfied on the balance of probabilities that theasset is tainted property.3[23] Mr Lucas is correct that a definitive finding cannot be made prior to thathearing. However, for the reasons I outline later in this judgment, I do not think thatis necessary.The jet ski and trailer[24] As well as this, the Commissioner seeks an order that the Yamaha jet ski andtrailer, referred to above, be sold. When the initial restraining order was made in 2016,the jet ski and trailer were valued at $13,500 by Turners Auctions. However, asubsequent valuation on 26 August 2022 assessed them to be worth $12,000. Theadvice given to the Official Assignee at the time of the 2022 valuation by TurnersAuctions was that further depreciation on this asset would be minimal, approximately$250 per year.[25] Mr Lucas submitted that there is no necessity for an early sale order to be madein respect of the jet ski and trailer.2 Criminal Proceeds (Recovery) Act 2009, s 5.3 Section 50(1).Discussion[26] The jurisdiction for an early sale order is found in s 35 of the Criminal Proceeds(Recovery) Act 2009 (the Act). It provides:35 Types of further orderWithout limiting the generality of section 34(1), a court may, on an applicationunder section 33(1), make 1 or more of the following further orders in relationto restrained property:(e) an order relating to the Official Assignee that—(v) directs the Official Assignee to sell restrained property (including,without limitation, a business) in order to preserve the value of therestrained property:(emphasis added)[27] Although the making of an early sale order is discretionary, s 35(e)(v) requiressuch an order to be for the purpose of preserving the value of the restrained property.[28] I agree with the following observations by Cull J in Commissioner of Police vSiloata where she said:4[25] Dealing with early sale orders in general, the Court in Commissionerof Police v Chen observed:5The underlying purpose of the restraining order is to preserve thesubject property because it represents a monetary value of the partiesconcerned. The legislature can be taken to have appreciated thatproperty may be subject to a restraining order for a considerable timeand that circumstances may change over the life of the order so as toput the property at risk. Some risks may be of a kind that actionincluding disposition of the property itself, may be needed to preservethe value that the property represents. If there were no mechanism forresponding to such risks the rational for the scheme would besignificantly undermined.Section 35(e)(v) specifically recognises the need to preserve the valueof the restrained property through the sale of it. There are manyforeseeable circumstances that might justify such an order. Theseinclude a significant drop in the property market, the risk of a mortgagee4 Commissioner of Police v Siloata [2022] NZHC 1830 at [25]−[26].5 Commissioner of Police v Chen [2013] NZHC 2259 at [30]−[31].sale and the reduction in value cause by a lack of funds to maintain theproperty.[26] However, sale orders will not automatically be made where restrainedassets are depreciating in value. This Court must consider the nature and valueof the asset(s), the length of time before the substantive proceeding will bedetermined, the extent to which the asset(s) may depreciate during that periodand the wishes of the owner of the asset(s) and any other person who mayhave an interest in it.6[29] I also refer to the observations of Venning J in Commissioner of Police vCavanagh where he noted that sale orders are typically pursued where the restrainedassets are likely to have a high depreciation rate combined with costs of storage andinsurance, which ultimately decrease the potential return to the Commissioner and/orthe parties who claim an interest in the asset.7 That is not the situation here.[30] The Commissioner's case is that all of the real estate properties are taintedproperties because Mr Baylis made cash deposits (derived from significant criminalactivity) to bank accounts which had then partially funded the purchase of theproperties or contributed to the mortgage repayments and/or property expenses. I amnot persuaded that I need to finally determine whether all or any of the properties aretainted. First, because, as a prerequisite to the making of the restraining order over theproperties, the Court was satisfied that there was sufficient evidence to establish areasonable belief that it is tainted. Second, the issue I need to address is whether it isnecessary for me to grant the application to preserve the value of the properties inissue. In other words, the argument that the property is not tainted is still one open tothe respondents. All that would change if this application is granted is that the propertyconcerned will have been converted to cash and held in an interest-bearing depositrather than presenting itself as an asset in the form of real estate.[31] Despite this observation, Mr Lucas' point is a powerful one, namely that MrBaylis' objective is to try to retain the real properties for the benefit of his family inthe future, hoping no doubt that property prices will further increase as the spreadsheetwould seem to indicate they have so far. If, for example, the Court was to accept thattainted funds were not used to purchase and/or increase the value of all or any of the6 Commissioner of Police v Drummond [2018] NZHC 1730. See also Commissioner of Police vFarrell [2022] NZHC 310.7 Commissioner of Police v Cavanagh [2014] NZHC 2978 at [7].properties, Mr Baylis' mortgage arrears would still remain but he would have morechoice about how to address them. For example, he may choose to sell one of theproperties to reduce the mortgage but not others, which would enable him to retaintwo properties rather than one.[32] On the other hand, the arrears are increasing and there seems little prospectthat they can be reduced without the sale of at least one of the properties. If Mr Bayliscontinues to do nothing and the arrears increase, there is every likelihood that the bankwill act on their Property Law Act notices. My understanding is that this has beenheld in abeyance by the bank until the outcome of the application for civil forfeitureorders is known.[33] Ms South submitted that waiting until the outcome of the application for civilforfeiture orders will simply delay the inevitable and will cause further arrears toaccrue, including the further costs by way of penalty interest and the like, which I havereferred to above. This does not affect the value of the properties in question but itdoes affect the equity in them, which is likely the same thing for the purposes of theseproceedings.[34] I am persuaded on balance that there is justification for one of the properties tobe sold to reduce the mortgage arrears. There is nothing to suggest Mr Baylis is ableto pay the arrears or penalty interest and other costs in any other way. I invite theparties to consider which property that ought to be in light of the fact that there willneed to be a discussion with the bank about this.[35] I am not persuaded an order for sale is necessary for the jet ski and trailer topreserve its value.Result[36] I am inclined to make an order for early sale for one of the properties, either76 or 76A Frankleigh Street. Counsel are to confer and file a joint memorandum, orseparate memoranda if that is not possible, no later than 3 November 2023, advisingthe Court which property is to be sold and suggesting the conditions that should attachto the order.[37] I will require confirmation from MHTCL about any orders they seek but myintention would be for the entire proceeds to be applied to the cross-collateralmortgages and the bank's costs. Should there be a shortfall, the bank's view will alsobe required. For example, any shortfall may be resolved by retaining a mortgage forthat amount over one of the other properties which would then be able to be met byrental income.[38] I direct a copy of this judgment be served on MHTCL and Ms Cribbett.[39] Any memorandum by MHTCL is also to be filed and served no later than 3November 2023.Addendum[40] Following memoranda being filed from counsel for the applicant, firstrespondent and first interested party, I am persuaded that an order for early sale shouldbe made in relation to 76A Frankleigh Street, Christchurch. Accordingly, I make thefollowing orders:(a) the Official Assignee is directed to sell 76A Frankleigh Street, Somerfield,Christchurch with a legal description of Lot 2 Deposited Plan 350452 andtitle of 206385 (the property);(b) the Official Assignee is appointed to execute any deed or instrument in thename of the first respondent being the registered proprietor of the property,for the purpose of effecting the sale of the property, if required; and(c) the Official Assignee is directed to apply the proceeds of the sale of theproperty as follows:(i) payment of the costs of, and associated with, the sale of the propertyby the Official Assignee, or persons nominated by the OfficialAssignee, including any real estate agent fees, marketing andconveyancing fees;(ii) repayment of the loans owed to MHTCL (now, followingamalgamation, ASB Bank Ltd) secured by a mortgage registered inrespect of the property and the properties at 76 Frankleigh Street and77 Ensign Street or, if repayment of such loans in full is not possible,from the net sale proceeds, all remaining net sale proceeds after thededuction of costs specified in (c)(i) above; and(iii) any remaining net proceeds of the sale of the property are to be heldin the custody and control of the Official Assignee in an interest-bearing deposit account under the existing restraining order untilfurther order of the Court.[41] Nothing in this order affects the rights, title and interest of MHTCL (now ASBBank Ltd) under the registered mortgage number 9956928.3 over the property or itsrights under the now expired notices issued to the first respondent on or around 1 June2023, under s 119 of the Property Law Act 2007, including to exercise its rights to sellany of the properties subject to the mortgage as mortgagee.[42] Costs should follow the event. Counsel are invited to submit memoranda inrelation to costs sequentially, with any memorandum on behalf of the applicant to befiled and served by 17 November 2023 and any response by the first respondent to befiled by 24 November 2023. Thereafter, costs will be dealt with on the papers.____________________Harland JSolicitors:Crown Solicitor, ChristchurchTavendale and Partners, Christchurch.