ELLIS V RED EAGLE CORPORATION LIMITED CA CA713/2008

ELLIS V RED EAGLE CORPORATION LIMITED CA CA713/2008 24 July 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA713/2008 [2009] NZCA 320BETWEEN RICHARD JOHN OTLEY ELLIS Appellant AND RED EAGLE CORPORATION LIMITED Respondent Hearing: 18 May 2009 Court: Baragwanath, Hugh Williams and Winkelmann JJ Counsel: P J Dale for the Appellant L Hertzog for Respondent Judgment: 24 July 2009 at 2.30pmJUDGMENT OF THE COURT A The appeal is allowed and the High Court judgment in favour of Red Eagle and against Mr Ellis is set aside. B Red Eagle must pay Mr Ellis' costs on a standard band A basis, together with the usual disbursements. C The appeal is remitted to the High Court for the fixing of costs in that Court. ____________________________________________________________________ REASONS OF THE COURT(Given by Hugh Williams J)Introduction[1] On 1 August 2005 the respondent, Red Eagle Corporation Limited, lent $250,000 to a Ms Black. She defaulted. Red Eagle obtained judgment against her and bankrupted her but no part of the loan has been recovered. [2] In 2008 Red Eagle sued Ms Black's former business partner, the appellant Mr Ellis, under s 9 of the Fair Trading Act 1986. Red Eagle claimed it was induced to enter into the loan to Ms Black because of representations made by Mr Ellis to Red Eagle's director, a Mr Falkenstein, in an email exchange on 29 and 30 July 2005. The amount sought was the amount of the judgment against Ms Black, $274,582 (being the $250,000 plus interest) together with continuing interest at $1,199 p.w. from 10 November 2006. There was a second cause of action brought in negligent mis-statement on the basis of the same representations. A third cause of action based in deceit was not pursued in the High Court. [3] In a reserved judgment delivered on 30 July 2008, Dobson J found for Red Eagle on the Fair Trading Act cause of action but dismissed that based on negligent mis-statement. The Judge held half the sum claimed was recoverable by Red Eagle on the basis that Mr Falkenstein was equally responsible with Mr Ellis for the loss. [4] Judgment was accordingly entered for Red Eagle against Mr Ellis for $125,000 plus interest under the Judicature Act 1908 from the date the proceedings were commenced, plus costs. [5] Mr Ellis has now appealed to this Court on the basis the Judge erred in law and fact in finding for Red Eagle.Facts[6] Messrs Ellis and Falkenstein have known each other for over 30 years. Throughout that time, they have both been involved in various businesses, investments and share trading.[7] From about 2002, Mr Ellis was one of a number of investment advisors who submitted proposals to Mr Falkenstein. Mr Falkenstein accepted none of Mr Ellis's recommendations. [8] Mr Falkenstein met Ms Black in about 2002. She, too, was involved in investment banking. When she ceased business with her then partner, Mr Falkenstein introduced her to Mr Ellis. They went into business together as investment bankers and project managers under the name Ellis Black Limited. [9] One of the investment projects on which Ms Black worked prior to joining Mr Ellis was a system run by a company called Aqua Systems Ltd ("ASL") to grow paua and abalone for the Asian market off-shore in Singapore using innovative technology. Ellis Black continued to work on that project following its formation. [10] On 29 July 2005, Mr Ellis emailed Mr Falkenstein seeking "$150k bridging finance required – carry an annual interest rate @ 25%" saying the loan was "required for between 14-45 days" with security over either or both of ASL's shares or personal guarantee from Ms Black who "has net property assets in Syd approx $2mil". The email said the "London bombing has delayed the uplifting of a US$8 mil funding package", and that:Essentially, we're caught between the rock and hard place after all the large resources we've spent on this venture which is poised to take off. anything you can do over the next few days Tony would be hugely appreciated.[11] A minute later a second email followed. Amongst laudatory comments about the project it said:We are 'caught short' of $150k of interim funding in order for Annette to complete an US$8mil deal with a consortium in London in 10-30 days. Rick & Annette's resources are very tight currently but have funded this forseveral years now. Both are obviously 110% committed and totally confident that the lion share of operational building blocks are now in place to get the job done in accordance with the very thorough business plan. ...[12] A third email followed, again one minute later. It relevantly said:'ASL' represents an outstanding business opportunity and there are exceptional & sustainable returns. ... This project is now operationally 'market ready' after years of planning. ...[13] The proposal interested Mr Falkenstein. He emailed Mr Ellis on Saturday, 30 July saying:I don't think there is a problem with the bridging finance at that rate!!! Personal guarantee in letter format would be sufficient, to avoid legal costs, with interest being paid weekly in advance.[14] Mr Ellis responded later that day. [15] On Monday, 1 August 2005, Mr Ellis telephoned Mr Falkenstein about 9am asking if the loan could be increased to $250,000. Mr Falkenstein agreed because of the security offered. At about 11:43am he received a document completed and signed by Ms Black setting out what she said was her financial position. Her assets totalled $4,312,800 including two named properties in Sydney said to be worth $1.34m and $1.8m respectively. A mortgage of $1.23m was the major liability. [16] A term loan contract prepared by Mr Falkenstein was signed by Ms Black when she and Mr Ellis attended Red Eagle's offices at about 12:45 pm on 1 August 2005. Mr Ellis left before it was signed. Apart from signing the document as borrower, for some reason Ms Black also signed it as guarantor. The financial statement position was attached. Mr Falkenstein handed Ms Black a cheque for $250,000. [17] Mr Ellis said all his quoted statements were, as far as he knew, accurate. Ms Black was the source of what he told Mr Falkenstein about ASL and about her financial position. At the time he had no reason to doubt the accuracy of what she told him. [18] The loan immediately fell into arrears. Ms Black gave a series of excuses for her failure to pay interest. Mr Falkenstein, on Red Eagle's behalf, finally required repayment of the loan and interest on 16 December 2005. Nothing was paid. Red Eagle obtained judgment against Ms Black on 10 November 2006. Againnothing was paid. She was adjudicated bankrupt on Red Eagle's petition on 18 July 2007. There were no assets in her bankrupt estate. She never owned property in Australia. [19] It remains to add, first, that Mr Falkenstein said Red Eagle would never have made the advance had he not received Ms Black's statement of personal financial position and, secondly that, although the advance was urgent, he could have obtained searches to the titles purporting to be in her name within a day or so.Judgment under appeal[20] After recounting the pleaded representations – the email statements cited earlier – and reviewing the facts, the Judge said it was not seriously contested that at the time of the advance Mr Ellis was misled by Ms Black: At [28] he noted Mr Ellis' admission that he was "in trade" for the purpose of s 9 and his denial that any of the email representations were or could be false or misleading. He went on at [29] to say that, apart from the representation that Ms Black had "net property assets in Sydney of approximately $2 million", it was difficult for Red Eagle to prove the untruthfulness of the remainder. They were expressions of opinion or hyperbole. The Judge noted Mr Ellis' assertion that Red Eagle did not rely on his email describing the Sydney assets because Ms Black's statement of financial position was received before the loan was advanced: at [29]. [21] The Judge accepted Mr Ellis' reputation with Mr Falkenstein was material to the latter's evaluation of the loan request, coupled with Mr Ellis' acceptance that in his email he was lending his weight to both the ASL Project and the prudence of the advance – including the increase – he requested on Ms Black's behalf: at [31] - [33]. [22] The Judge then said he considered that the reliance on Ms Black's statement of financial position did not deprive the preceding representations of "materially misleading effect": at [35]. He noted Mr Falkenstein's provisional agreement to the advance and his agreement to increase it both were before receipt of the statement of financial position. The statement, the Judge held, was "confirmation of the assurances Mr Ellis had already given": at [35].[23] Mr Ellis' representation and his checks with Ms Black took him, the Judge held, "out of the category of 'mere conduit' where someone does no more than pass on information received and may avoid liability on the grounds that he has, in effect, not made the relevant representation": at [36]. That led the Judge to conclude:[37] I accordingly find that the representation made by Mr Ellis in relation to Ms Black's property assets did, or was likely to mislead or deceive Mr Falkenstein, and that the context contributed by the remaining representations added to the prospects of Mr Falkenstein being misled or deceived.[24] Included in the discussion of the defences was the observation that proof of reliance on the representations was unnecessary under s 9; it was relevant to assessing remedies under s 43. [25] The Judge turned to the assertion of contributory negligence and held, in reliance on this Court's decision in Goldsbro v Walker [1993] 1 NZLR 394 (CA) at 403-404, that because of his experience in business, though Mr Falkenstein had relied on Mr Ellis' recommendations he was "careless in a number of material respects in neglecting to protect his position as the lender": at [42]. That largely arose because of his failure to obtain title searches, his drafting of the security documents including the ineffectual guarantee and his failure to question a budget which had been provided. Merely accepting the emails and other documents provided before the advance meant, in the Judge's view, that despite Mr Falkenstein being misled or deceived he should be "treated as equally responsible for the loss that ensued by virtue of his own contribution": at [48]. Thus the amount recoverable was halved. [26] The Judge then proceeded to consider and dismiss the cause of action based on negligent mis-statement. There is no appeal from that dismissal and that aspect of the matter is put to one side.Submissions[27] For Mr Ellis, Mr Dale submitted Mr Falkenstein's acknowledgement that Red Eagle would probably not have made the advance had he not been givenMs Black's statement of financial position beforehand and that he "relied totally on the assets" of Ms Black were determinative of the appeal in Mr Ellis' favour. It was, Mr Dale said, Ms Black and not Mr Ellis who made the representations which led to the advance. The appeal should be allowed on that score alone. [28] He also pointed to what he submitted was the unlikelihood of Mr Falkenstein's evidence when compared with evidence he or his interests had earlier lost some $700,000 by investing in another project of Ms Black's. He also pointed to Mr Ellis' withdrawal from contact with Mr Falkenstein concerning the advance after his telephone call seeking the increase. All subsequent contact, including executing of the loan agreement, was between Mr Falkenstein and Ms Black alone. [29] Mr Dale also submitted that because the High Court judgment was not based on findings of credibility between the two witnesses, Messrs Falkenstein and Ellis, this Court was free to reach different conclusions from those of the trial Judge.[30] Mr Dale submitted Red Eagle's evidence in the High Court fell short of satisfying the three step test for s 9 claims appearing in AMP Finance NZ Ltd v Heaven (1997) 8 TCLR 144 at 152 (CA). Mr Dale suggested the pleaded conduct was incapable of being misleading because it was Ms Black's information, not that of Mr Ellis, which led to the advance and there was a lack of the required nexus between the inaccurate information and the loss suffered: see Securities Registry Ltd v Gomes [2008] NZCA 567 at [60]. Further, despite Mr Ellis' reputation with Mr Falkenstein, it was unreasonable for the latter to have relied on Ms Black's information as forwarded by an informant. The Judge accordingly fell into error when he said Mr Falkenstein could not have relied on Ms Black's representation as to her asset position when it was tendered before the loan was made. If that was intended to refer to Mr Ellis' first email that Ms Black had "net property assets in Syd approx $2mil", whatever effect that might otherwise have had was wholly supplanted by Ms Black later supplying the statement of her personal position.[31] Mr Dale also submitted that, having regard to Mr Falkenstein's financial experience and the readily available ability for him to check the correctness of theinformation supplied there was no principled basis for the Judge's conclusion that Mr Falkenstein was fifty per cent contributorily responsible for Red Eagle's loss.[32] For Red Eagle, Mr Hertzog submitted the Judge's conclusions were fully supported by the evidence he heard and the submissions made at trial, submissions which he effectively repeated before us.Discussion and decision[33] In terms of the analysis in AMP Finance, the first question is whether the pleaded conduct was capable of being misleading. That is an objective test, to be applied in the circumstances that existed. [34] In that respect, we regard a number of factors as being of importance. [35] The first is that an objective assessor would have placed weight on the fact that the three participants in these negotiations and the advance were all experienced investors, well capable of assessing information provided and deciding whether to act upon it. [36] The second important point relates to the emails. [37] They were plainly replete with puffery by Mr Ellis. The significance of puffery will vary according to the circumstances. It may be misleading. We find it unnecessary to determine whether in the present circumstances it was actually capable of misleading. That is because our assessment leads us to differ from the Judge as to the answers to the second and third questions. [38] As far as the second step is concerned, whilst it is not difficult to accept the Judge's finding that Mr Falkenstein was misled by the information as to Ms Black's purported financial position, that, in our view, is not something which can be laid at Mr Ellis' door.[39] Thirdly, we also take the view it was not reasonable in all the circumstances for Mr Falkenstein to have been misled in the sense of the Judge's finding he was misled by Mr Ellis. He was misled by Ms Black's persuasive, but, ultimately, erroneous provision of the statement of her financial position. In that regard, it is notable that, although Mr Falkenstein had clearly been attracted by the information derived from Ms Black and given him by Mr Ellis, it was not until he actually received Ms Black's statement of her personal financial position that he authorised Red Eagle's loan – and the increase - prepared the documents, had them signed and made the advance directly to Ms Black. [40] What we have called puffery should have induced an air of caution on Mr Falkenstein's part, particularly when there was a belated request for the loan to be increased by two-thirds. He notably did not appear to exercise such caution, probably because the loan was intended to be short-term, the interest return was very high and the borrower's purported affluence was significant even when measured against the increased advance. [41] A further point concerning the emails is that Mr Ellis' phrasing made plain the information he was passing on was neither generated nor confirmed by him. That particularly applied to Ms Black's purported circumstances. The emails contained no hint Mr Ellis had checked or was capable of checking the correctness of the information given him by Ms Black. [42] For these reasons we take, with respect, a different view from the trial Judge on whether Mr Ellis passing on the information meant he was not a "mere conduit" of the data. Put shortly, even putting aside Mr Ellis' hyperbole about ASL, the information central to Mr Falkenstein's decision to lend – Ms Black's financial information – was clearly information Mr Ellis was only passing on. It was not his information. He was the author of the emails only because of his rather longer association with Mr Falkenstein (and, perhaps, because Mr Falkenstein's previous history with Ms Black might otherwise have made an advance less likely).[43] For all those reasons, again with respect to his views, we differ from the trial Judge on his conclusions. We take the view he fell into error and that Red Eagle's claim should have been dismissed in the High Court. [44] We, therefore, allow the appeal. [45] In light of that decision, it is unnecessary for us to consider the question of a reduction in the sum for which judgment was entered on account of Mr Falkenstein's contributory conduct, though we observe that, in terms of s 43(1) it is difficult to see any loss suffered by Red Eagle being caused by Mr Ellis' conduct. The nexus between the conduct complained of and the loss suffered is a nexus between Ms Black and Red Eagle, not Mr Ellis and Red Eagle, something Red Eagle would appear to have acknowledged by first taking action against Ms Black and pursuing her to judgment and then to adjudication.Result[46] In the result: (a) The appeal is allowed and the High Court judgment in favour of Red Eagle and against Mr Ellis is set aside. (b) Red Eagle must pay Mr Ellis' costs on a standard band A basis together with usual disbursements. (c) The appeal is remitted to the High Court for the fixing of costs in that Court.Solicitors: Martelli McKegg Wells & Cormack, Auckland for Applicant