JADIE TRUSTEE LIMITED V RABOBANK NEW ZEALAND LTD HC TAU CIV 2012-470-271

JADIE TRUSTEE LIMITED V RABOBANK NEW ZEALAND LTD HC TAU CIV 2012-470-271 [24 April 2012]IN THE HIGH COURT OF NEW ZEALANDTAURANGA REGISTRYCIV 2012-470-271[2012] NZHC 773BETWEEN JADIE TRUSTEE LIMITEDPlaintiffAND RABOBANK NEW ZEALAND LTDDefendantHearing: 24 April 2012Counsel: W T Nabney and D M Simpson for PlaintiffG J Toebes for DefendantJudgment: 24 April 2012(ORAL) JUDGMENT OF HEATH JSolicitors:Simpson Aspen Law, PO Box 13-537, TaurangaJT Law, PO Box 25443, WellingtonCounsel:W T Nabney, PO Box 13007, TaurangaThe application[1] Jadie Trustee Ltd (JTL) seeks an interim injunction to prevent a mortgagee sale of land at 341 Rea Road, Katikati. The sale is scheduled to take place, by way of auction, at 1pm on Thursday 26 April 2012. The application is opposed by the mortgagee, Rabobank New Zealand Ltd (Rabobank).Background[2] JTL owns land at Rea Road, Katikati. It was originally the home farm for the Tye family. Mr and Mrs Tye are directors of JTL which, in turn, is trustee of both the Ed Tye Family Trust and the Jan Tye Family Trust. Together the two trusts, albeit it through the one entity as trustee, carry on business activities as the Ed and Jan Tye Family Trust Partnership (the Partnership).[3] As a result of a partial subdivision of the land, the Rea Road property is currently comprised of seven titles. Six of those are for sale to third parties. The remaining property is a dairy farm operated by the Tyes. It is a working dairy farm and has associated with it various improvements, farm chattels and shares in Fonterra.[4] Rabobank lent money to JTL to allow it to subdivide the land. Initially, the amount of the facility advanced was $5,000,000. The loan was secured by a first mortgage over the (then) single title to the Rea Road property and another property at Mangawhero Road, Patetonga that has since been sold. The Mangawhero Roadproperty was used as a run off for Mr and Mrs Tye's dairy farm. The original loanagreement was entered into in October 2007. The principal was advanced on 31 October 2007.[5] Rabobank contends that JTL has defaulted on its obligations to repay the loan and interest due under it. A notice was issued under ss 119 and 128 of the Property Law Act 2007 on 12 July 2011. That notice was subsequently served on JTL. Under the notice JTL was required to pay a total sum of $3,841,000 plus accruing interest toremedy the default. That amount has not been paid. The notice made clear that if the default were not remedied by 21 October 2011 all amounts secured would become repayable and powers of sale exercisable.[6] There is no dispute about compliance with procedural requirements in relation to the mortgagee sale. The issues are whether there is a serious question to be tried on a claim for economic duress and whether, otherwise, the balance of convenience favours JTL or Rabobank.The loan agreements[7] The original loan recorded in a Letter of Offer dated 16 October 2007 was to expire on 30 November 2022. The date of advance was 31 October 2007. The terms of repayment reflected the intention of the parties that the moneys borrowed would be used to fund a subdivision. Interest was to be paid on monthly rests, on the last day of each month. What were described as "permanent repayments" werescheduled for dates in the future. In that original loan agreement those repayments were to be made on 31 May 2009 ($600,000), 2010 ($800,000), 2011 ($600,000) and 2012 ($500,000). Usual terms were provided for the Partnership to provide quarterly management accounts for review purposes.[8] The terms offered by Rabobank were accepted on 18 October 2007. The loan as anticipated was advanced on 31 October 2007.[9] A mortgage was prepared and registered as a first mortgage over the two properties. The mortgage set out the circumstances in which Rabobank was entitled to enforce the security. Relevantly, cl 17.1(a), 17.2, 18.1, 18.2 and 18.3 provided:17 DEFAULT17.1 The following shall each constitute Enforcement Events under this mortgage:(a) the Mortgagor fails to pay any Moneys Secured on its due date for payment or on demand if payable on demand; or...17.2 Any failure to act, delay or acquiescence by the Bank after acquiring knowledge of any of the Enforcement Events will not prejudice, or operate as a waiver of, the power of the Bank under this clause 17 unless the Bank agrees in writing to a particular event. In that case that agreement will relate only to the particular event and will not prejudice the rights of the Bank to exercise any of the powers provided in this mortgage in the future.18 BANK'S POWERS ON ENFORCEMENT18.1 Without prejudice to any of the other rights powers or remedies the Bank may have under this mortgage or t law the Bank may at any time after the occurrence of an Enforcement Event:(a) terminate without notice any obligations the Bank may have to provide financial accommodation or other services to the Mortgagor; and(b) declare the whole of the Moneys Secured to be due and payable, so that it will immediately become due and payable; and(c) exercise its rights under clauses 18.2 to 18.5.18.2 The Bank may exercise the power of sale and other powers conferred on mortgagees by the Property Law Act 1952 as if:(a) the default required by that Act had been made and continued, and the notice required by that Act had been given; and(b) the period of two months and one month mentioned in clause (8) of the Fourth Schedule of that Act had elapsed.This is subject however to the provisions of section 92 of the Property Law Act 1952 and section 94 of the Land Act 1948.References to the "principal sum" in the Fourth Schedule to the Property Law Act 1952 are deemed to be references to the Moneys Secured.18.3 In the event that the Bank decides to exercise its power of sale, it may sub-divide (as defined in the Resource Management Act 1991) the Land and sell any resulting allotments either together or separately. If the Bank decides to exercise its power of sale and to sub-divide it will not be liable for any loss the Mortgagor may suffer arising out of the sub-division or sale.[10] On 22 December 2008, the parties agreed to vary their arrangement. The loan limit was reduced to $4,800,000, to expire on 30 November 2022. Permanent repayments were rescheduled. The sum of $1,200,000 was due on 31 May 2009, with three payments of $750,000 to be made, on 31 May 2010, 2011 and 2012 respectively. A new special condition was inserted requiring the Mangawhero Roadproperty to be sold and the loan limit to be reduced by $1,200,000, by a payment to be made on 31 May 2009. That variation was signed by Mr and Mrs Tye, as directors of JTL, on 22 December 2008.[11] Mr Tye in his affidavit in support of the application, describes theMangawhero Road property as a "cashflow property". Cash was generated from theproduction of maize. That property was sold on 28 April 2010 and the sum of $1,416,428.31 was credited to the partnership's account with Rabobank on that day.Mr Tye believes that, if there had been proper time for marketing, the run off property should have fetched at least $1,800,000 on the open market.[12] Mr Tye believed that, during the sale process, Rabobank was becomingnervous about JTL's ability to meet its principal repayment obligations. He refers to a "further variation of contract" being tendered on 12 November 2009. Thatdocument increased the loan limit to $5,150,000. Mr Tye annexed to his affidavit an unsigned copy of that document, adding:20. ... I have no recollection of signing this agreement but cannot say categorically. I can see no reason why I would have signed it in that the sale process was under way and I was confident of achieving the sale of the said run off property post the maize harvest with full repayment of the permanent payments required taking place before 31 May 2010.[13] A signed acceptance of this offer is exhibited to an affidavit sworn by Mr Whitelock, a senior manager with Rabobank with knowledge of the Partnership'saccount. In an affidavit in reply, Mr Tye accepts that his original recollection was inaccurate and confirms that he and his wife signed the document to accept the offer.[14] Mr Tye refers to receipt of a further variation document in July 2010. This is the critical document for the purpose of the present application. Mr Tye deposes that:21. Within 3 months of the sale of the run off property [Rabobank] (without any dialogue with ourselves) posted to us a further variation of the original contract terms under cover of a letter of offer dated 20 July 2010. A copy of that letter is attached and marked with theletter "O". The variation agreement is attached hereto and markedwith the letter "P".22. I could not believe this letter which completely and utterly altered the agreement already in place, particularly taking into account that I was in full compliance with the agreement having sold my run-off, and thereby meeting the permanent payment reductions. Having not missed a single interest payment over the term of the agreement, I did not see that the loan agreement was in default in any way whatsoever.23. What was unbelievable and totally unacceptable to myself was that this new variation required me to place my farm, my home and my entire investment in the rural residential subdivision on the market by the 31st of July 2010 with the marketing agreement to be supplied to [Rabobank] by 31 August 2010 with full repayment of the totality of the facility by 31 January 2011. The covering letter provided that the offer expired on the 20th of August 2010.24. To put this further into perspective I had invested some $1,500,000.00 in the subdivision and had not yet reached the point where I was able to obtain Titles for Stage 1. I had two unconditional sales of sections awaiting issue of Title and both of which Sale & Purchase Agreements had sunset clauses due to expire, at the end of August 2010.25. There was no way that I was prepared to sign this variation which was financial suicide for myself and family and flew in the face of all previous arrangements with [Rabobank] who were not due a further repayment until 31 May 2011 under the head agreement.26. This variation effectively cancelled everything agreed and destroyed any hope of completing the subdivision. It was the subdivision and the costs required to complete which was the primary motivation for the loan agreement in the first place. [Rabobank] was attempting to renege on its agreement.[15] The Partnership's solicitors negotiated with Rabobank. As a result a furthersum of $142,000 was advanced to enable titles for Stage 1 of the subdivision to beissued. Everything was done except for obtaining the mortgagee's consents todischarge on the old title to the Rea Road property and registration on the new titles that were to issue. Mr Tye effectively contends that Rabobank used this situation as an illegitimate bargaining chip, with the result that the Partnership had to find $420,000 from the sale of two sections to meet outstanding moneys. On 12 August2010, the Partnership's solicitors advised Rabobank that this approach could bedetrimental.[16] Mr Tye explains the Partnership's position at this time in some detail:31. Therefore at this point in time I was in a position as follows:(i) I had two Sale & Purchase Agreements with sunset clauses that would expire by 31 August 2010;(ii) [Rabobank] had cut off our ability to access any funds for day to day living;(iii) I was unable to pay my farm workers or any essential farm outgoings such as vets bills32. My solicitor's emailed [Rabobank] (exhibit R) on the 12th of August 2010 advising that the sales would gross $500,000.00 and requesting the necessary consents to complete the subdivision and obtain the 9 new Titles in Stage 1. No response was received.33. This stalemate continued into the following week and on Monday, 16 August 2010 my wife, Janet, emailed [Rabobank] advising that they had not paid the weekly agreed sum of $500.00 living expenses and withdrawn all our facilities to transfer moneys. Attached heretoand marked with the letter "S" is a true copy of the said email dated16 August 2010.34. On the same day [Rabobank] replied and advised that they appreciated the position but the account was in excess by $313,231.00 and that [Rabobank] would not process any transactions until the increase in limits is formalised via the letter dated 21 July.Attached hereto and marked with the letter "T" is a true copy of thesaid email dated 16 August 2010.35. My wife, Janet, responded to this email at 7:04am the next day being 17 August 2010 advising that she currently had $3.00 only in heraccount to live on and querying [Rabobank's] position. Attachedhereto and marked with the letter "U" is a true copy of the said emaildated 17 August 2010.36. In response to this situation [Rabobank] in an email dated 17 August 2010 simply repeated its earlier mantra that there would be no facility whatsoever unless the agreement was signed. Attachedhereto and marked with the letter "V" is a true copy of the said emaildated 17 August 2010.37. I approached my solicitors who advised me that under these circumstances that my wife and I really had no option but to sign the agreement. I was not happy with this advice and approached an old friend who is an investment banker, namely Neil Craig of Craig Investments. My wife and I and solicitor, David Simpson, sat down with Neil who advised also that in the circumstances we had no option but to sign the agreement but suggested we also seek a second legal opinion from his own solicitor (at his expense) due to the fundamental importance of the position we found ourselves in. We sought a second opinion from Simon Collett of Holland Beckett, Barristers & Solicitors of Tauranga, who also advised that in all of these circumstances we had no option but to sign otherwise we would not be able to honour the Sale & Purchase Agreements andwe would not achieve our subdivision. Achieving the subdivision is of course the primary thrust of our borrowing and to that point in time we had spent on the subdivision some $1,500,000.00.38. We signed this documentation under duress and my solicitors, on forwarding it back to [Rabobank], provided a covering letter advising [Rabobank] that the documentation was being executedunder duress. Attached hereto and marked with the letter "W" is acopy of the covering letter dated 127 August 2010 returning the agreement to [Rabobank] advising that it was executed under duress.39. I, for my own part, went a step further and if [Rabobank] produces its copy of this agreement it will be seen that whilst I have signed it, I have written after my signature "signed under duress".[17] Ultimately, the July 2010 variation was accepted. The whole of the advance became owing on 31 January 2011. As a result, that was a significant change from the contract as originally formulated. The July 2010 variation records an increase in $445,000 for the purpose of working capital to cover an excess as at 9 July 2010 and final funding to complete Stage 1 of the subdivision. Accordingly, Rabobank advanced further funds in consideration of the variation being agreed.[18] The repayment of principal was not made by 31 January 2011, as contracted. Out of fairness, Mr Tye had previously made it clear that that was not an achievable goal and he protested signing the July 2010 variation on the basis that it was entered into through economic duress.[19] The act of default and the steps required to be taken to remedy it was set out in the Property Law Act notice of 12 July 2011:1DefaultAs at the date of this notice, each of you is in default under the mortgage ... in that each of you have failed to pay.1. TO THE MORTGAGEE(a) The debit balance of the All In One Account which was due to be repaid in one sum of 31 January 2011; which as at that date amounted to: $4,088,492.601 The Property Law Act Notice refers also to breach of a General Security Agreement. For presentpurposes, it is unnecessary to refer to that aspect of the financial arrangements between theparties.ACTION REQUIRED TO REMEDY THE DEFAULTEach of you is required to remedy the specified default(s) or to cause the default(s) to be remedied, by making payment of the following amounts:TO THE MORTGAGEETo the Mortgagee at Level 23, Vodafone Building, Lambton Quay, Wellington:(a) The debit balance of the All in One Account as at the date of full repayment (for example, the total debit balance as at 11 July 2011 was $3,841,000 plus accrued interest to that date of $9,484.52). You should contact Rabobank New Zealand Limited to obtain a repayment amount for full repayment of the debit balance in the All In One Account for the date of intended repayment; plus(b) Interest on the said debit balance until the date of full repayment at the rate of 8.20% per annum;(c) The sum of ONE THOUSAND DOLLARS ($1,000.00) being the reasonable costs and disbursements of the mortgagee in preparing and serving this notice.CONSEQUENCE IF DEFUALT NOT REMEDIEDIf each default has not been, or cannot be, remedied on or before 21 OCTOBER 2011, all amounts secured by the mortgage ... will become payable (to the extent that they are not already).The following powers of the mortgagee and the secured party will become exercisable:(i) the mortgagee's power to enter into possession of the mortgagedland;(ii) the mortgagee's power to sell the mortgaged and;(iii) the secured party's power to take goods into possession; and thesecured party's power to sell goods.Interim injunction – legal principles[20] The present position is that Rabobank contends that the Partnership has not remedied its default. It has taken steps to arrange a mortgagee sale on 26 April 2012.The Partnership's position is that the 20 July 2010 variation has no legal effect as it was brought about by economic duress. There is no challenge to procedural aspects related to the proposed mortgagee sale.[21] The principles to be applied in determining whether an interim injunction should be granted were re-stated in Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd.2 Delivering the judgment of the Court of Appeal, Cooke J referred to the need to demonstrate a serious question to be tried and the balance of convenience as being an aid to the marshalling of relevant factors to determine where the interests of justice lie. Ultimately, the question turns on whether the interests of justice require an interim injunction to issue. In some cases findings in relation to either serious question to be tried or balance of convenience may determine the result of an application.Is there a serious question to be tried?[22] The first issue is whether there is a serious question to be tried on the economic duress argument.[23] The circumstances in which economic duress may be used to render unenforceable an otherwise valid contract were reconsidered by the Court of Appeal in McIntyre v Nemesis DBK Ltd.3 The Court, in a judgment delivered by O'Regan J, made it clear that there were two elements to the test. The first was whether there has been an illegitimate threat or the exertion of illegitimate pressures. The second is whether, if such illegitimate conduct is found to exist, it resulted in compulsion or coercion.4[24] I consider first whether there was any illegitimate pressure of the type described by the Court of Appeal in this case. Mr Nabney, for JTL, submittedstrongly that Rabobank's refusal to discharge the mortgage over the original title andto re-register over the seven new titles amounted to illegitimate pressure in terms ofMcIntyre. He contended that Rabobank was not entitled to refuse to discharge simply because it was in a strong bargaining position and able to use commercial leverage to obtain better terms for itself. It is accepted that the loan was in arrears at the time which the July 2010 variation came to be considered. Nevertheless, Mr2 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (HC and CA) at142.3 McIntyre v Nemesis DBK Ltd [2010] 1 NZLR 463 (CA).4 Ibid, at paras [25] and [26].Nabney submits that Rabobank's conduct moved across the line from commercialleverage to economic duress.[25] Mr Toebes, for Rabobank, responds simply to that proposition. He submits that Rabobank was under no obligation to advance further funds. These were commercial dealings between commercial players. Each had their own agenda to pursue. Ultimately, a deal was done from which JTL ought not to be allowed to extract itself. No economic duress occurred in the course of the negotiations. Mr Toebes' point is that everything that was done by Rabobank resulted from propercommercial conduct.[26] It is clear that Rabobank was not prepared to continue the existing arrangement or to advance further money without a variation to the existing contract. On the other hand, JTL needed additional money to complete the subdivision. Terms are likely to be more harsh for a borrower that finds itself in a weak bargaining position. JTL, unhappily for it, was in a position whereby Rabobank would only advance further funds if the repayment date was accelerated to 31 January 2011.[27] Further, Mr and Mrs Tye personally were in a difficult position as Rabobank was not going to continue advancing living expenses to them without some additional comfort through a variation.[28] The Partnership took steps to obtain independent advice before determining whether to enter into the variation. Advice was sought from two different firms of solicitors and an investment banker.5 Mr and Mrs Tye well understood the consequences of accepting or not accepting the variation offered. While they protested, the position was that the facility had been drawn down and Rabobank had no contractual obligation to advance more funds.[29] Rabobank was a lender. It makes its profit out of the interest payable. It was not a co-venturer that would profit from completion of the subdivision. Rabobank had its own commercial interests to protect. In my view, it was legitimate for it to do so in the way it did.5 See para 37 of Mr Tye's affidavit, set out at para [16] above.[30] Taking the case for JTL based solely on the evidence of Mr Tye, I am not satisfied that there is a serious question to be tried on the economic duress claim.Balance of convenience[31] In any event, there are a number of factors that militate against granting relief on balance of convenience grounds. They, to my mind, exceed those relating to the inability of JTL to complete the subdivision if sale is allowed to proceed. I recognise that that situation will also require the dairy farm to be sold. The counter to that, however, is the ability for Mr and Mrs Tye, or some entity controlled by them, to bid for the farm property at the auction.[32] The factors to which I referred that militate against granting relief are these:(a) First, the application has been made almost nine months after the Property Law Act notice was issued. In my view, there is no adequate explanation for delay.(b) Second, delay has resulted in an application being filed and an urgent hearing being allocated in a period just short of one week before the proposed sale, taking account of a public holiday tomorrow, Anzac Day.(c) Third, the undertaking as to damages is not supported by any ability to pay the type of loss that might be suffered by Rabobank if the auctiondid not proceed. Rabobank is reliant, given JTL's lack of cash, on thefunds it will obtain from a mortgagee sale. There is no doubt thatdelay and the increasing level of Rabobank's debt would eat into theequity of the property and probably prejudice both Rabobank and the Partnership.[33] Taking account of those factors and my view on whether a seriously arguable case exists, I hold that the interests of justice do not require an interim injunction to issue.Result[34] For those reasons, the application for an interim injunction is dismissed.[35] The substantive claim shall be listed for a case management conference before an Associate Judge, on the first available date. No doubt JTL will want to consider whether to proceed with that claim in light of the comments I have made.[36] The costs incurred by Rabobank will be covered by the mortgage. In those circumstances, there is no need for me to make an order for costs.[37] I thank all counsel for their assistance on this application, at short notice.__________________________P R Heath J