MAO V BANK OF NEW ZEALAND HC AK CIV-2012-404-4218

MAO V BANK OF NEW ZEALAND HC AK CIV-2012-404-4218 [7 May 2013]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2012-404-4218[2013] NZHC 998UNDER The Land Transfer Act 1952IN THE MATTER OF an application to sustain caveat no.9009363.2BETWEEN LIANSEN MAOApplicantAND BANK OF NEW ZEALANDRespondentHearing: 25 October 2012Counsel: D Singh for ApplicantT Allan for RespondentJudgment: 7 May 2013RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON(Costs on caveat application)This judgment was delivered by me on 7 May 2013 at 4.30 pm pursuant toRule 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate ..........................Solicitors:Shean Singh, PO Box 10018, Dominion Road, Mt Eden, AucklandGrove Darlow & Partners, PO Box 2882, Auckland[1] On 23 July 2012 Liansen Mao filed an application seeking an order pursuant to s 145A Land Transfer Act 1952 that a caveat he had lodged against the title to the property at 55 Gibraltar Crescent, Parnell not lapse.1[2] The need for the application arose when Bank of New Zealand, the holder of a first mortgage registered against the property that secured a $3 million advance, applied to the Registrar-General of Land under s145A for the caveat to lapse. The Registrar notified Mr Mao that his caveat would lapse unless he obtained an order of the court to the contrary within the relevant statutory time limit. The interest Mr Mao had in the property, and wished to protect, was pursuant to an unregistered mortgage that secured an advance of $6 million. In his affidavit evidence in support of his application Mr Mao drew attention to his willingness to provide a withdrawal of his caveat as to part of the land affected. The bank however wanted the caveat removed in its entirety and it filed a notice of opposition.[3] On 1 August 2012, when Mr Mao's application was first called in court,Associate Judge Abbott made an interim order that the caveat not lapse pending further order. His Honour set timetable directions and allocated a fixture for a defended hearing.[4] Mr Mao's application was withdrawn shortly before the defended hearing was to take place. Materially, the registered proprietor of the property, Lewis JInvestments Limited, had by then repaid the bank's and Mr Mao's advances.[5] The remaining issues are as to costs. Each side seeks an order for costs against the other. Mr Mao seeks costs on a 2B basis and Bank of New Zealand seeks indemnity costs.[6] For reasons that I will come to presently, I am satisfied Mr Mao has made outa case for an order for scale costs and that the bank's application for costs should be dismissed.1 The caveat was caveat 9009363.9.[7] I begin by expanding on the background.Background[8] With the notable exception of the motivation that Mr Mao is said to have had for lodging his caveat, much of the relevant background is not disputed:(a) In late 2010 Bank of New Zealand advanced $3 million to Lewis for the purpose of enabling Lewis to subdivide the Gibralter Crescent property into twelve new lots. The advance was secured by a registered first mortgage.(b) The agreed terms included that Lewis had equity of $5 million in theproperty and that the bank's advance of $3 million would provide thefunding required to complete the subdivision. It was also agreed thatthere would be no further borrowing and the property's title would notbe encumbered further without the bank's consent.(c) Lewis in fact required an additional $6 million to complete the subdivision and in June 2011 Mr Mao made an advance in that amount for a one year term, to be secured by a second mortgage. In breach of its obligations to the bank, Lewis did not disclose or seek the bank'sapproval for this advance.(d) Lewis entered into agreements for sale and purchase on a number of the proposed lots. It anticipated that the proceeds of sale of four of the lots would be sufficient to enable it to repay the bank's mortgage plus all associated costs by 31 June 2012 when the bank's facility was due toexpire.(e) The subdivision and the sales did not proceed as planned due to a dispute between Lewis and a company called City Construction Ltd over a proposed right of way easement. City Construction lodged acaveat in February 2012 against the title to Lewis's property to preservethe right it claimed. Lewis was unwilling to agree to the proposed terms for the removal of the caveat. The result was that Lewis was unable to uplift titles for the four lots or to proceed to settlement with its purchasers.(f) Lewis protested to the bank that it had improperly consented to CityConstruction's caveat. Lewis advised it would not make any furtherpayments under the bank's mortgage unless the bank secured removalof the caveat.(g) When the bank did not so, Lewis refused to pay the loan instalment due to the bank in June 2012, and the bank served Lewis with notice under s 119 of the Property Law Act 2007, requiring payment. The bank warned Lewis that it would exercise its power of sale unless the default was remedied.(h) In the meantime, the bank learned of Mr Mao's advance. His mortgagehad not been registered and it was only after 14 March 2012, when he lodged his caveat, that the bank was put on notice about the advance. The bank failed to persuade Mr Mao to withdraw the caveat from all of the affected land. Anticipating the need to use its power of sale under its mortgage, the bank made application to the Registrar-General to remove the caveat.(i) Before expiry of the bank's s 119 notice Lewis paid the outstandingloan instalment but declined to pay other associated costs claimed by the bank.[9] At the hearing, counsel expanded on subsequent developments about which there is also no material dispute. It seems that the bank and City Construction hadreached an accord resulting in the removal of the latter's caveat. Additionally, Mr Mao's caveat was withdrawn. Lewis uplifted titles for all twelve lots in thesubdivision, which it sold (some to Mr Mao in satisfaction of the debt owed to him)and from the proceeds of sale it cleared the whole of the bank's debt save for adisputed sum of $35,000. Lewis has provided a cash security to the bank for that sum. As a result of these developments there was no mortgagee sale. The point where such sale proved necessary was not reached.[10] It is common ground that throughout the duration of the dispute between Lewis and the bank, Mr Mao and Lewis had the same firm of lawyers acting for them. This representation lies at the heart of the dispute over costs. It is the basis onwhich the bank relies to characterise Mr Mao's behaviour as unreasonable anduntrustworthy and to counter the claim he makes for costs, which he bases on his prima facie entitlement to caveat the property.Relevant principles - costs[11] The fundamental principle governing costs is set out in r 14.1. Costs are at the discretion of the Court.[12] There is however a presumption that a party who discontinues a proceeding will pay costs to the other party up to the discontinuance: r 15.23. That presumption may be displaced should the circumstances indicate that a different outcome would be just and equitable: Kroma Colour Prints v Tridonicatio NZ [2008] NZCA 150.[13] Generally speaking the court will not speculate on the merits of a case that ithas never heard. The merits of a case will only influence the Court's decision inrelation to costs upon discontinuance in exceptional cases where the merits are clear. However, the reasonableness of the stance of both parties to be considered: North Shore City Council v Local Government Commission (1995) 9 PRNZ 182.[14] Indemnity costs can be awarded in certain circumstances under r 14.6:The court may order a party to pay indemnity costs if—(a) the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or...(f) some other reason exists which justifies the court making an order for indemnity costs despite the principle that the determination of costs should be predictable and expeditious.Issue[15] It is not in dispute that if the presumption in r 15.23 is applied, Mr Mao would have to pay costs to the bank as he withdrew his application.2 The issue is whether there are circumstances that indicate a different outcome is called for in theinterests of justice and if so whether the circumstances support Mr Mao's claim for scale costs or the bank's claim for indemnity costs. Consideration of suchcircumstances requires an analysis of whether as a matter of fact Mr Mao acted reasonably. The answer largely turns on an assessment as to whether on the evidencethe Bank's claim of complicity has real substance or is speculative.Submissions[16] The effect of Mr Mao's advance and his caveat was to place Lewis in breachof the terms governing the bank's advance. It is the bank's contention that becausethe same firm of lawyers was acting for Mr Mao as Lewis was likely the case thatMr Mao was implicated in Lewis' breaches and other suspicious conduct. It contends:(a) It had a reasonable suspicion that Mr Mao chose not register hismortgage so as to avoid putting the bank on notice about Lewis'breaches, and later used his caveat for the ulterior purpose of assisting Lewis to pressure the bank to take steps to have City's caveat removed.(b) The indications were that a mortgagee sale was going to be necessary and it could not reasonably have been expected to rely on Mr Mao and to accept the genuineness of his stated willingness to remove the caveat over part of the land or his stated intention not to stand in the way if a mortgagee sale did eventuate.2 Rule 15.23 states that unless the defendant otherwise agrees or the court otherwise orders, a plaintiff who discontinues a proceeding against a defendant must pay costs to the defendant of and incidental to the proceeding up to and including the discontinuance.(c) These are strong countervailing factors that plainly justified itsinsistence that Mr Mao's caveat be removed and would have warrantedthe exercise of the court's discretion to order the immediate removal ofthe caveat in the face of his refusal despite his prima facie entitlementto maintain the caveat until the actual exercise of the bank's power ofsale.[17] The bank says that it was not until Lewis agreed to pay the outstanding instalment, to go ahead and uplift the titles, and to proceed with its sales, that it had any other option than to step in as mortgagee.[18] Additionally, the bank argues that no claim could have been brought by Mr Mao for an interest adverse to or in priority to the bank's interest if it had proved necessary to proceed to a mortgagee sale, and that in any event, Mr Mao'sapplication was ill founded as the bank had an indefeasible right, under the terms of its first mortgage, to an unencumbered security pursuant to which it was entitled to demand that the caveat be removed. On this basis, from the outset, Mr Mao never really had a proper basis for resisting the removal of the caveat.[19] Counsel for Mr Mao accepts that Mr Mao lodged his caveat when he learnedof City's caveat but he takes issue with the inferences that the bank claims. Though acknowledging that the caveat demonstrates a concern on Mr Mao's part to ensurehis loan advance was secured, counsel submits it cannot reasonably be inferred thatMr Mao's decision to lodge the caveat and prior inaction somehow amounted to doing Lewis's bidding. He contends that there is no proper basis to infer Mr Mao acted to protect anyone's interests other than his own.[20] Counsel points out that Mr Mao had made clear when making his application that he was willing to accommodate the bank by partial removal of caveat, and had no intention of interfering with its power of sale. Counsel points out that in evidence Mr Mao states that because he had a good relationship with Lewis he was content initially not to register his mortgage. He submits that the statement cannot be takenas confirmation that he was somehow complicit in Lewis' breach, rather the contrary.Analysis[21] As was plain from the discussion that I had with both counsel at the hearing, it is not in dispute that:(a) Mr Mao's claim to a caveatable interest was supported by a securityinterest in the property pursuant to his second mortgage. He had a prima facie entitlement to caveat the title to the property under s 137 Land Transfer Act.3(b) Ordinarily the holder of such interest could reasonably anticipate that his or her caveat would be maintained unless and until the holder of a prior registered mortgage sells the security pursuant to the power of sale.4 Until such sale, the caveat would serve a legitimate purpose in protecting the interest claimed in the caveat. Counsel for the bank concedes that given the terms of s105,5 such purpose may endure until presentation for registration of the transfer to the bank's purchaser. 6[22] The bank's indefeasibility argument is therefore misconceived. Though Iaccept its interest in the land as mortgagee is protected by the indefeasibilityprovisions of the Act so as to afford priority to the bank's rights as first registered mortgagee, such provisions do not mean Mr Mao was not entitled to caveat the titleto the property pending the bank's exercise of the power of sale. Pending the3 Land Transfer Act 1952, s 137 states that any person may lodge a caveat against dealings in any land or estate or interest under this Act if the person claims to be entitled to, or to be beneficially interested in, the land or estate or interest by virtue of any unregistered agreement.4 Land Transfer Act, s 141(3), (4) states that if a caveat protects an unregistered mortgage later in date than the date of the registration of the mortgage under which the sale occurred, there is an automatic lapse of caveat when the transfer is registered.5 Land Transfer Act, s 105 provides that upon the registration of any transfer executed by a mortgagee for the purpose of exercising a power of sale over any land, the estate or interest of the mortgagor therein expressed to be transferred shall pass to and vest in the purchaser, freed and discharged from all liability on account of the mortgage, or of any estate or interest except an estate or interest created by any instrument which has priority over the mortgage or which by reason of the consent of the mortgagee is binding on him.6 MacDiarmid v Burton (1980) 1 NZCPR 238. In this case it was held that the applicants, who had a caveat protecting an unregistered second mortgage, were entitled to the protection of the caveat until the mortgagee sale occurred.exercise of that power, the bank's mortgage acts only as a security and does noteffect a transfer of the registered proprietor's interest: see s100.7[23] Counsel's submission to the contrary relies essentially on the contractual obligations imposed on Lewis by the terms of the bank's mortgage. I accept that thebank had a contractual right to an unencumbered security and to insist, as against Lewis, that the caveat be removed in its entirety, but Mr Mao was not a party to that mortgage and it did not bind him.[24] The real issue is whether there are discretionary factors that would have been sufficient to warrant the immediate removal of the caveat. It is well established that even if the caveator establishes an arguable case for the interest in the land claimed, the Court retains the discretion to make an order removing the caveat. It will however be exercised cautiously.8 The need for caution will be greater where the interest claimed is plainly caveatable, as in this case.[25] Turning to the difficult position the bank says it found itself in I can well accept that for a time Lewis's conduct gave the bank reason for the belief that it would be compelled to step in as mortgagee. Though the bank's stated preferencewas for the four or more sales to be completed so that it could be paid from the proceeds of sale, such outcome was largely dependent upon Lewis's cooperation (agreeing to uplift the titles and proceed with its sales). Additionally, Lewis'breaches entitled the bank to use its power of sale.[26] Central to the bank's case on costs, however, is that Mr Mao's conduct wassufficient to justify the Court exercising its discretion and depriving Mr Mao of theprotection of a caveat. I am unable to accept the bank's contention that I should drawthe inferences it urges about his conduct:7 Land Transfer Act, s 100 provides that a mortgage under the Act shall have effect as security, but shall not operate as a transfer of the estate or interest charged8 See Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd [1996] 2 NZLR 652 at p. 656 (CA).(a) I am not satisfied that the bank's suspicions about Lewis' conduct is asufficient basis on which to find Mr Mao was complicit or to doubt the genuineness of his willingness to act co-operatively with the bank.(b) I do not see that Lewis's conduct should be sheeted home to Mr Maobecause they shared the same firm of solicitors. Putting that relationship aside, there is nothing in the evidence that is determinativeof the claim that Mr Mao colluded in Lewis's conduct.(c) Against the bank's suspicions is Mr Mao's offer to remove his caveatfrom part of property to allow titles to issue and sales to proceed. The offer on its face does not seem disingenuous.(d) I attach no significance to the fact that Mr Mao did not register his mortgage. It was open to Mr Mao to protect his interest by registering his mortgage as an alternative to the protection of the caveat.9 But, the fact that he did not was a choice open to him, and his explanation for not doing so is plausible.[27] A further material consideration is Mr Mao's offer to remove his caveat frompart of property so as to allow titles to issue and sales to proceed. Such an offer is in accordance with s 147.10 If Mr Mao's offer to withdraw the caveat from part of theland had been accepted, it is common ground that the proceeds of sale from the four lots would have been sufficient to repay the bank's advance. This suggests Mr Mao was endeavouring to accommodate the bank's interests as well as his own. Thepossibility of that he could not be trusted to honour the offer is merely speculative.[28] The bank's insistence that the proper course was to withdraw the caveat and to re-lodge is difficult to follow in the circumstances.9 MacDiarmid v Burton, above n 6; this case establishes that a viable alternative to an applicant with a caveatable interest as a result of an unregistered second mortgage is to register the mortgage, allowing the applicant to receive any surplus money from the sales.10 Land Transfer Act, s 147.Conclusion[29] Overall it can be seen that Mr Mao had a caveatable interest. It was not unreasonable that he should take steps to maintain it or to anticipate the real possibility that its removal would not be required until a transfer was registered by the registered mortgagee. His offer to partially withdraw the caveat in the meantime to allow for the sale of the properties was not unreasonable and would have weighedagainst the exercise of the Court's discretion to order the immediate removal of the caveat. There is no evidence to support the Bank's claim that Mr Mao's actions were a result of complicity in Lewis's breaches and thus were unreasonable.[30] I am satisfied on the basis of with Kroma Colour Prints, that in all the circumstances it would not be just and equitable for the presumption under 15.23 to apply. It follows that this is a case where an order for indemnity costs against Mr Mao would not be justified.[31] To the contrary, I accept that it is reasonable that Mr Mao should have some compensation for the costs he has incurred.Result[32] Mr Mao is entitled to costs on a 2B basis plus disbursements. If there is any dispute as to the calculation of those costs then memoranda are to be filed within 10 working days of the date of this judgment for referral to me. If need be I will allocate a telephone conference to hear from counsel on any remaining issues.___________________________Associate Judge Sargisson