DAVIES & CO SOLICITORS NOMINEE COMPANY LIMITED V CRAWFORD AND ANOR HC AK CIV 2007-404-7999

DAVIES & CO SOLICITORS NOMINEE COMPANY LIMITED V CRAWFORD AND ANOR HC AK CIV 2007-404-7999 23 January 2009IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2007-404-7999BETWEEN DAVIES & CO SOLICITORS NOMINEE COMPANY LIMITED Plaintiff AND CRAIG STIRLING CRAWFORD First Defendant AND LOIS JEAN YELCICH Second Defendant Hearing: 14 November 2008 and 15 December 2008 Appearances: Mr Judd for Plaintiff Mr Finnigan for Defendants Judgment: 23 January 2009 at 11 a.m.JUDGMENT OF ASSOCIATE JUDGE DOOGUEThis judgment was delivered by me on23.01.09 at 11 a.m., pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar DateCounsel: Mr S R Judd, P O Box 3320, Auckland Mr P T Finnigan, DX CP 24059, AucklandBackground[1] In December 2005 the plaintiff ("Davies") entered into deeds of guarantee with the defendants, whereby the defendants agreed to guarantee the due and punctual payment by two borrowers ("the borrowers") Church Road Corporation Limited and Sandhills Development Limited of all present and future indebtedness and other liabilities of the borrowers to the plaintiff. [2] On 5 December 2005 the parties entered into a term loan contract ("the loan") pursuant to which the plaintiff advanced the sum of $6,626,812.50 to the borrowers. The loan was due to be repaid 5 December 2006. [3] The loan was not in fact repaid on the due date but was 'rolled-over'. Pursuant to a second term loan agreement between the parties, dated 6 December 2006 the plaintiff advanced the sum of $6,626,812.50 to the borrowers. The advance under the second term loan agreement was to be repaid by 6 March 2007, but the borrowers failed to repay on that date. Pursuant to the second term loan agreement, interest at the penalty rate of 19.5% accrued from the date of default. It is claimed that as at 10 December 2007 the defendants owed the sum of $6,634,543.87 made up of principal and interest. The plaintiff has applied for summary judgment. [4] The defendants oppose the application for summary judgment on the following grounds, which I have taken verbatim from their notice of opposition dated 19 March 2008:1. 2. The plaintiff as mortgagee in the exercise of there (sic) power of sale was in breach of its common law duty to the defendants as guarantors, in that the plaintiff failed to take reasonable care to obtain the best price reasonably obtainable as at the time of sale thereby causing loss to the defendants as guarantors of the mortgagors' obligations. 3. The plaintiff as mortgagee in the exercise of its power of sale was in breach of its equitable duty of good faith in that it failed to take reasonable care to obtain the best price reasonably obtainable as at the time of sale thereby causing loss to the defendants as guarantors of the mortgagors' obligations.4. The mortgage contracts entered into between the plaintiff and the mortgagors were credit contracts which individually and or collectively are oppressive which the defendants seek to have reopened and to be granted relief as parties and guarantors of the mortgagors' obligations.[5] The loan arrangements which the defendants guaranteed included mortgage security over four separate properties. Two of the properties were at Ruawai and comprised the home title and the farm title. The Ruawai properties have been sold at mortgagee sale. It is the sale of the Ruawai properties that has given rise to these proceedings. That sale was instigated by the second mortgagee, Odin Enterprises Limited and others. There have been separate proceedings between Odin Enterprises Limited and the defendants in their capacity as guarantors of the Odin mortgage. [6] In answer to the summary judgment proceedings which Odin brought, the defendants claimed that Odin had breached the duty of good faith that in that they failed as mortgagees to take reasonable care to obtain the best price reasonably obtainable as at the time of sale of the Ruawai properties, and as a result the defendants had caused loss. They also claimed that the finance agreement between the defendants and Odin was oppressive and should be re-opened under ss 120–124 of the Credit Contracts and Consumer Finance Act 2003. The facts in summary alleged by the defendants were that Odin had undersold the Ruawai properties when it sold them for $1,200,000. The defendants allege that Odin should have obtained at least $600,000 more than that. [7] On 17th October 2008 Associate Judge Faire gave judgment on Odin's application for summary judgment in those proceedings against the present defendants. Faire AJ concluded that the defendants had no arguable defence to the application for summary judgment but that a stay of execution of part of the judgment ought to be ordered to enable the defendants to pursue a claim based on breach of the a duty which Odin owed to the defendants to observe good faith in exercising the power of sale contained in the mortgage, a duty which the defendants said was breached in that the plaintiff did not take care to obtain the best price reasonably obtainable at the time of sale. The reason why that claim was notavailable to the defendants as a defence to summary judgment was because the loan agreements and guarantees contained 'no set-off' provision. [8] It was a condition of the stay of execution which Faire AJ ordered that the mortgagors were to take prompt steps to bring substantive proceedings against Odin and the plaintiff regarding potential liability for sale of the Ruawai properties at undervalue. [9] For the purposes of the present application, Mr Judd for the plaintiff was prepared to accept that it was reasonably arguable that Odin had sold the Ruawai properties sale at undervalue. [10] I mentioned earlier that Davies did not actually, as first mortgagee, exercise its power of sale over the Ruawai properties. That was done by Odin. Nonetheless, the defendants say that the plaintiff is liable for the following reasons. They say that this is because the plaintiff 'used Odin to sell the Ruawai blocks', as it was put in Mr Finnigan's submissions, and that the plaintiff 'consented to sale and received net proceeds of sale of $1,660,019.19'.Arguable defence arising from breach of equitable duty owed by mortgagee?[11] It is clear that the defendants cannot bring any claim based upon the then s 103A of the Property Law Act 1952 (PLA) against the plaintiff because the plaintiff did not actually exercise its power of sale. That section governs the duties of a mortgagee 'who exercises a power to sell the mortgaged property'. [12] The scope of a duty owed by a mortgagee to a mortgagor was considered in the well known authority of Downsview Nominees Limited v First City Corporation, [1993] 1 NZLR 513 (PC). That decision apparently approved the principle in an English Court of Appeal decision, Cuckmere Brick Co Limited v Mutual Finance Limited [1971] Ch 949, which determined that if the mortgagee decides to sell, he orshe must take reasonable care to obtain a proper price. Cuckmere, though, is no authority for any wider proposition (see Downsview at page 524). [13] In my view it is not arguable that the limited role that the plaintiff performed in the sale of the Ruawai properties amounted to it exercising its power to sell the mortgaged properties. The party that exercised its power to sell was the second mortgagee. In order to clear the way for the second mortgagee to do that, the first mortgagee (the plaintiff) obviously had to take some steps, which included removing its mortgage from the title to the properties. In my view that is not enough to bring it within the terms of s 103A. The language of the statute does not justify such a conclusion. Nor does the policy or purpose of the section justify such a conclusion. I do not accept that the legislature intended to make all other mortgagees, who themselves took no steps to initiate a mortgagee sale, and who at most cleared the way for the selling mortgagee, liable for the defaults of the party that actually exercised its power of sale. [14] Apart from the statutory duty to take care, a mortgagee is subject to equitable duties. So far as the equitable obligation of good faith is concerned, there is simply no evidence upon which the defendants can base a reasonably arguable case that the plaintiff breached that duty. The authorities are clear that the power of sale is a power given to the mortgagee for his own benefit to enable him the better to realise his debt. If he exercises it bona fide for that purpose, without corruption, or collusion with the purchaser, the Court will not interfere even though the sale is very disadvantaged, unless the price is so low as in itself to be evidence of fraud: Corbett v Halifax Building Society [2003] 1 WLR 964, 965. [15] Before I could conclude that there is a defence based upon bad faith of the kind that I have just mentioned, it would be necessary for some evidential material to be put forward which would justify that view. The only factual basis for the alleged defence in this case would be apparent sale at undervalue coupled with a suggestion that the mortgagee facilitated a breach of duty owed by a different mortgagee, or at least refrained from preventing that other mortgagee breaching his/her obligations to the mortgagor. That is not enough to establish that there has been a breach of equitable obligation and the consequential proposition that the defendants have aresulting claim against the plaintiff which, if set-off against the plaintiff's claim, would defeat that claim.Consumer Finance and Credit Contracts Act[16] Ground four of the notice of opposition reads as follows:4. The mortgage contracts entered into between the plaintiff and mortgagors were credit contracts which individually and or collectively are oppressive which the defendants seek to have re- opened and be granted relief as parties and guarantors of the mortgagors' obligations.[17] Section 120 of the Credit Contracts and Consumer Finance Act 2003 provides as follows:120 Reopening of credit contracts, consumer leases, and buy-back transactionsThe Court may reopen a credit contract, a consumer lease, or a buy- back transaction if, in any proceedings (whether or not brought under this Act), it considers that— (a) the contract, lease, or transaction is oppressive; or (b) a party has exercised, or intends to exercise, a right or power conferred by the contract, lease, or transaction in an oppressive manner; or (c) a party has induced another party to enter into the contract, lease, or transaction by oppressive means.[18] Section 118 of the same Act defines "oppressive".118 Meaning of oppressiveIn this Act, oppressive means oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice.[19] The relevant details of the dealings between the plaintiff and the defendants are set out in the background section of this judgment. [20] Various criticisms have been made of the loans arrangements. Objectionable features are said to include:a) The arrangements included capitalised interest payments; b) What appears to have been a five percent commission was charged on the second loan (the amount in question being $331,340); c) Excessive legal fees of $58,027 were charged by the legal practice to which the plaintiff is affiliated; d) The lending arrangements were made in circumstances where the borrowers could not complete the necessary development work for the land to be divided up into sections to be sold at retail. [21] It is recognised in the authorities that it is necessary for a party that seeks to rely on s 120 to adduce evidence of reasonable standards of commercial practice, which provide the underlying commercial rationale for the earlier words and phrases contained in s 118: Greenbank NZ Limited v Haas [2000] 3 NZLR 341. [22] The approach that the Court is required to take when considering a defence based on the Credit Contracts and Consumer Finance Act 2003 was explained inGreenbank where, at paragraph [19], Tipping J said:Mr and Mrs Haas had an evidential onus to demonstrate some tenable basis upon which they might be able to resist their clear prima facie liability for the balance outstanding. In the end, in the light of such evidence as Mr and Mrs Haas produced, the Court had to decide whether Greenbank had satisfied the ultimate onus which lay upon it. In essence this meant that Greenbank had to satisfy the Master that Mr and Mrs Haas had no arguable basis for resisting judgment. Whether Greenbank could establish that depended on a consideration of the strength of the material advanced by Mr and Mrs Haas against the strength of the material Greenbank was able to advance on the issues raised.[23] The principal evidence that has been advanced by the defendants is that of Mr Robert Eades, an expert legal practitioner who from time to time gives evidence in the Courts. Mr Eades regarded it as being significant that the loans contained provision for capitalisation of interest. He said that he had not seen anything which showed that the borrowers could meet interest from their own resources and, more, that this could not have been foreseen. He drew attention to various fees that were charged and which totalled $547,668. There should perhaps be excluded from thatthe sum of $50,000 which seemed to relate to another mortgage and therefore would not seem to be relevant to the present defence of oppressiveness. Even after that deduction, total fees were in the order of $500,000. [24] Mr Eades also noted that mainstream lenders are chary of lending without the reasonable expectation of repayment at the end of the term and said:Where there is not that expectation or confidence, the lending carries an obvious risk. The cost rises generally with the risk.[25] He also said:Borrowers are entitled to accept their own risk strategy. They usually pay well for a lender to join them in the risk.[26] Mr Eades accepted that a lender was not under a duty to save a borrower from himself. What I understand this to mean is that a lender does not have any general obligation to look out for the interests of the borrower. [27] The aspect of the lending arrangements which I found noteworthy was the charging of the $331,340 on the second loan agreement. The recipient was a finance company associated with the principal of the law firm, Mr Davies. This was said to be an 'arrangement fee'. The charge appears in substance to be a commission of approximately 5%. [28] However, there is to be balanced against this arrangement fee, the fact that the interest rate charged was 12.5% with a penalty rate of 17.5%. [29] The defendants also attached significance to the fact that the loans contained provisions for capitalisation of interest. Mr Finnigan in his submissions apparently regarded it as self-evident that such an obligation is necessarily objectionable. The defendants did not adduce any evidence about whether such provisions in a loan contract bring the arrangements within s 118 of the Act. Certainly, loans providing for capitalisation of interest are not, in the Court's experience, at all uncommon particularly in the case of loans made by so-called "mezzanine" lenders. Presumably, they have attraction for borrowers who find that because of their cashflow requirements they cannot pay current interest and that there is no alternative but to seek an arrangement which capitalises all or part of the interest. [30] It is also necessary to deal with the submission that Mr Finnigan made that the lending arrangements were such that there was going to be no money left over which would enable the borrowers to complete the development and having done so onsell the land as individual lots. This is not what I would regard as a strong point. It may have been, as Mr Judd submitted, that at a time of rising land values, the borrowers were prepared to borrow even though it was not immediately clear how they were going to repay the loan. They may have been prepared to take such a risk in order to give themselves the opportunity to sell at a later date for a profit – whether subdivision of the land had been completed by then, or not. As well, for all I know, they may have hoped that another party would buy into the project as joint- venturers or that still other sources of finance would become available. There is simply not the required evidence to support the point that Mr Finnigan wanted to make. [31] There are some other features of the lending arrangements that need to be taken into account when considering if these loan arrangements arguably came within s 118. The first, and important feature, is that the borrowers were independently advised by their solicitors before they entered into the arrangements. [32] It is difficult in these circumstances to come to a conclusion as to whether it is arguable that the defendants will be able to persuade the Court (if the matter is not decided by way of summary judgment) to reopen the transactions. [33] My conclusion overall is that it is arguable that s 118 applies. [34] The next issue to determine is what consequences flow from that determination. [35] Mr Judd submitted that if the contract were to be re-opened, the consequential hearing would be restricted to considering the fees charged. The interest component of the claim would, he submitted, be beyond challenge. I believethat it is right. The only aspect of the interest that was criticised was the capitalisation and I do not regard the criticisms made as being of any force.Conclusion[36] The plaintiff shall have judgment as follows: Principal sum as at 6 March 2007 6,626,812.50 Less fees paid to Goldmark Management Limited for arranging loan and other fees -500,000.00 Amount owing before further adjustments in terms to following paragraph 6,126,812.5 [37] As well, the plaintiff is to give credit against the figure of $6,126,812.50 for the net proceeds of sale received on the sale of the Ruawai properties. The plaintiff is also entitled to interest at the contractual rate of 19.5% on the resulting balance. from the date when the second advance was due to be repaid 6 March 2007 giving credit at the appropriate date for the reduction in the balance of the liability resulting from credit for the Ruawai sales. Interest is to be calculated at the contractual rate up until the date of this judgment. The parties should consult on the form of the resulting judgment. [38] The plaintiff is entitled to solicitor/client costs in terms of the contract and I enter judgment in the sum of $79,809.71 for such costs. [39] In order to keep matters under review, the proceeding is to be listed for mention in my summary judgment list 18 February 2009 at 2.15pm._____________ J.P. Doogue Associate Judge