KWON AND ANOR V BANK OF NEW ZEALAND HC CHCH CIV-2010-409-000380

KWON AND ANOR V BANK OF NEW ZEALAND HC CHCH CIV-2010-409-000380 15 March 2010IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV-2010-409-000380BETWEEN SOON HEE KWON NAM GEUN JO Applicants AND BANK OF NEW ZEALAND Respondent Hearing: 9 & 12 March 2010 Appearances: N G Jo in person F Hook & W Palmer for Respondent Judgment: 15 March 2010ORAL JUDGMENT OF HON. JUSTICE FRENCH Introduction[1] The applicants seek an interim injunction to stop the Bank of New Zealand exercising its power of sale as mortgagee and selling their property. [2] In November last year the applicants obtained an interim injunction to stop the bank on a previous attempt. The injunction then was obtained on the ground there was a serious question to be tried as to whether the bank's notices under s 119 of the Property Law Act 2007 had been validly served. [3] Following the issue of the injunction, the bank purported, in early December 2009, to serve another Property Law Act notice, this time under both ss 118 and 119. The notice required payment of the mortgage debt by 8 March 2010, failing which it said the bank would exercise its power of sale. The bank has found a buyer, with settlement due 31 March 2010. The purchase price is $2.05m.[4] The application to stop the sale is made on a number of grounds, some of which emerged only in the course of the hearing and which had not been formally notified: i) The notices served in December 2009 were defective because they purported to combine both a s 118 and a s 119 notice in the one document, yet made no express reference to s 119, only s 118. ii) The notices were not validly served, being delivered to an agent who only had authority to accept a s 118 notice (not a s 119 notice). iii) The applicants have a claim for misrepresentation and mistake against the bank which should be determined before the building is sold. iv) The bank has breached its duty to obtain the best price. [5] The applicants undertake to continue paying interest on the two loans at issue, pending resolution of their substantive claim against the bank. They are not, however, in a position to pay the full amount of the mortgage debt as a condition of obtaining the injunction, or at least not immediately. In this regard I note that at the previous hearing in November there was talk of refinancing, which has obviously not yet eventuated. [6] At the hearing before me, Mr Jo appeared on behalf of himself and the other applicant, who is his wife. Mr Jo is Korean, and English is his second language. In light of this, I was willing to allow considerable latitude in terms of the usual rules of procedure. Mr Jo also had the benefit of very able assistance from Mr Tee.Factual Background[7] Before turning to consider the various grounds of the application, it is necessary for me to traverse the factual background in some detail.[8] The property in question is a commercial building in Christchurch. It is owned by the applicants as trustees of a family trust. The family is actually living in the property at the moment because, as I will explain, they sold their family home at Redcliffs in September 2009. [9] The bank has made at least three loans to the applicants which are secured by a first registered mortgage over the property. Of the three loans, two are of particular relevance to this proceeding. The first was a one-year loan facility for $350,000 granted in December 2007. It was not drawn down until May 2008, and so expired in May 2009. Upon expiry, the bank defaulted the facility into what it calls an RLC (Revolving Line of Credit), and gave it an account suffix 005. As explained in the bank's evidence, RLC is essentially a temporary facility where there are no formal arrangements in place. [10] The second loan was another one-year facility, also granted in December 2007, for $600,000. It was only ever drawn down to $480,000. It was initially due for expiry in December 2008, but by agreement was extended until March 2009, at which point the bank said it was not prepared to grant any more extensions. The facility was transferred to another RLC account, this time with the suffix 006. [11] It is common ground that during this period the applicants and the bank were engaged in constructive discussions to try and make progress either by the applicants finding more tenants and/or selling the property. [12] On 7 April 2009, however, the bank notified the applicants that their application for a further facility of $500,000 to enable them to complete a proposed food court at the property had been declined:RE: Funding application for 219-233 High StreetI am sorry to have to inform you that we are unable to approve your recent loan application under the SY Trust. Although this is not an exhaustive list of the reasons behind our decision, it does provide a summary of some of the key risks that need to be addressed prior re-assessing [sic] your application:• Resource consent for ducting system is still outstanding and no quantifiable plan is available as to the costs associated with redeeming this issue• Absence of a Quantity Surveyors estimate of the project to be funded In addition there has been significant delay in expected progress following the last funding approval. We do understand that much of the funds approved in 2008 have been spent on Bank interest costs as a result of the consent issues over the "non compliant" ducting system. Until we fully understand the costs and timing involved in resolving this issue, we will find it difficult to approve funds to continue with the development of the food court.[13] The bank did, however, agree to increase the overdraft facility by an amount of $7500 per month on a 30-day rollover basis. According to the bank's evidence, the purpose was to enable the applicants to service their interest costs on other facilities and meet personal living expenses. [14] The effect of the overdraft increase was to increase the limit from $480,000 to $487,500. Unfortunately, a staff member at the bank made a mistake and instead of entering $487,500, entered $4,875,000. The applicants discovered the error and notified the bank, which then immediately corrected the mistake. The bank says this occurred on 14 April; the applicants say 15 May. It is, however, common ground that whatever day it was, the error was corrected the same day as the applicants notified the bank. [15] On 19 May 2009 the applicants obtained a printed receipt from an ATM. It appeared to show they had available funds of $500,000. The applicants say that on reading the receipt they assumed the bank had now approved the loan application after all. They further say they sought and obtained confirmation of this from a bank teller, and another Korean-speaking member of the bank staff, being unable to get hold of the bank person who was in charge of their accounts, Mr Lemon. [16] According to Mr Jo's affidavit, having received confirmation from the bank staff, he then advised the tenants of the food court that the renovation would be going ahead. His affidavit goes on to say that however, "within a few days" the applicants had occasion to obtain another printout from an ATM which showed the loan of $500,000 had been cancelled. [17] For its part, the bank has a very different version of events.[18] It says that on 18 May 2009 it had decided to grant the applicants a further $7500 increase in their overdraft facility. Steps were put in place to have the new overdraft limit formally loaded. That is a process which typically takes the bank's Lending Services department a day or two. In the meantime, Mr Jo phoned Mr Lemon seeking urgent access to the funds so his wife could buy groceries. In order to accommodate this request while the overdraft increase was still being processed, Mr Lemon arranged for a credit hold of $500,000 to be loaded on the overdraft account. A credit hold allows access to funds for a short, defined period. In this case, it was set to expire the following day. The balance on the account was then $487,500, so the practical effect of loading the credit hold was to allow immediate additional credit of $12,500. [19] As it turned out, contrary to Mr Lemon's expectations, the Lending Services department was able to load the new overdraft limit of $495,000 the same day as it was approved. The combined effect of that and the credit hold loaded by Mr Lemon resulted in the account appearing to have an available balance of over $500,000. [20] Mr Lemon says, contrary to Mr Jo's affidavit, Mr Jo did make contact with him on 19 May and that he, Mr Lemon, made the correct position very clear. [21] During June and July 2009, the facility having expired, the bank made formal demands for repayment of the 005 and 006 loans, and in August issued the first of its Property Law Act notices under s 119. [22] On 31 July the applicants entered into an agreement to sell their family home at Redcliffs, with settlement due on 4 September. Mr Jo says the price was lower than market value, but they wanted to have funds to be able to renovate the food court. [23] On 10 August the bank sent an email to the applicants' solicitors about the use of the settlement funds, advising:As discussed with Hugo, we will consider leaving some settlement proceeds to you. The Bank would sanction settlement money being spent on the ducting system being repaired to a state which is acceptable to the CCC. To that end we would release funds against costings and invoices for this work.Any additional funds required can be applied for, and must be supported by third party quotes.[24] The ducting system mentioned in the email was a major stumbling block for the applicants in being able to obtain a Code Compliance Certificate from the Christchurch City Council. [25] When the Redcliffs sale was settled in September and the proceeds paid to the bank, the bank applied all the money towards the applicants' indebtedness to the bank, including repayment of the 005 facility. The bank says the reason no funds were allowed to be retained by the applicants is because it never received the costings and invoice information it had requested in its email. [26] In October 2009 the bank issued its second s 119 Property Law Act notice, and in November, as I have said, the applicants obtained an interim injunction preventing the bank from exercising its power of sale based on the notices. [27] As I have also mentioned, the bank then issued a fresh notice under both ss 118 and 119, and entered into an agreement with a third party to sell the property for the sum of $2.05m. [28] The agreement was subject to a number of conditions, but is now conditional only on confirmation of the expiry of the December Property Law Act notice.Principles to be applied in considering an application for interim injunction[29] As noted by Panckhurst J in the previous decision in this case (Kwon & Anor v Bank of New Zealand HC Christchurch CIV-2009-409-002562, 25 November 2009), the essential issue is whether the overall justice of the case favours the granting of an interim injunction. Typically, this inquiry is undertaken by asking whether there is a serious question to be tried, and then whether the balance of convenience (or the balance of the risk of doing an injustice) favours the granting of an injunction.[30] To decide whether there is a serious question to be tried, it is convenient to consider what each party claims the facts to be, the issues which arise from these facts, the law relevant to those issues and whether there is a realistic chance that the applicants may succeed at trial.Is there a serious question to be tried?The validity of the December notice[31] On 26 November 2009 the applicants' solicitor, Mr Mulligan, wrote to the bank's solicitors advising that he was authorised to accept service of a s 118 Property Law Act notice on behalf of both applicants. [32] On 2 December 2009 a process server served Mr Mulligan personally with a document that was headed "Property Law Act Notice", and underneath that stated: "In the matter of section 118 of the Property Law Act 2007". The document actually contained both the notice under s 118 and a notice under s 119, although s 119 was not specifically mentioned. [33] In addition to the Property Law Act notice, Mr Mulligan was also served on 2 December 2009 with two guarantor notices under s 122 of the Property Law Act. [34] The first issue that arises is whether the notice was defective because it combined two notices in the one document without there being any specific reference to s 119. I am satisfied there is not a serious question to be tried on that issue. Section 118(4) of the Property Law Act expressly provides that the two notices may be combined within the one document. Further, I do not consider it reasonably arguable that the absence of any specific reference to s 119 affects the validity of the notice. The contents of the document that was served complied in every respect with the statutory requirements of a s 119 notice. Substance must prevail over form. [35] The second issue is whether a document which combined both a s 118 and a s 119 notice can be said to have been validly served on an agent where the agent hassaid he is authorised to receive a s 118 notice, but has not mentioned the s 119 notice. [36] On the face of it this would appear distinctly arguable. [37] Service of s 118 and s 119 notices are governed by ss 359 and 360 of the Property Law Act 2007. They provide:359 Manner of giving or serving notices(1) A notice, cross-notice, or other document is given to, or served on, an individual person (including an individual person referred to in section 355) when it is, either in New Zealand or elsewhere,— (a) delivered by registered post to that person or that person's agent; or (b) received by that person in accordance with section 360. (2) In this section,—agent, in relation to a person to whom an envelope or package is to be delivered (person A), means a person who has actual or ostensible authority to take delivery, on person A's behalf, of an envelope or package— (a) directed to person A by name; and (b) purporting to contain a documentregistered post includes any service that— (a) provides a system of recorded delivery; and (b) is similar in nature to a registered post service provided by a person registered as a postal operator under the Postal Services Act 1998.360 Receipt for purposes of section 359A notice, cross-notice, or other document is received by a person for the purposes of section 359 when— (a) it is handed to, and accepted by, that person; or (b) if that person does not accept it when it is handed to him or her, it is put down in that person's presence and brought to his or her attention; or (c) it is otherwise received in writing by that person.[38] It is clear from s 359 that service of an agent with ostensible authority, as distinct from actual authority, may suffice. I am satisfied that whatever may have been Mr Mulligan's actual authority, there can be no doubt he had ostensible authority to accept service of both a s 118 notice and a s 119 notice. I have come to that conclusion for the following reasons: i) The correspondence between the respective solicitors leading up to the service was in the context of a protracted and ongoing discussion about the bank's intention to sell. The reason for Mr Mulligan's focus on s 118 was because his primary concern was to ensure his clients had the benefit of s 118's longer time period before the bank could exercise its power of sale under s 119. ii) It was reasonable for the bank's solicitors, given that context, to understand Mr Mulligan's references to s 118 notices as being a convenient shorthand expression for both a s 118 and s 119 notice. iii) Having received the notice, Mr Mulligan never raised any objection to the fact he had been served with the s 119 notice, nor did he ever state that he was not authorised to accept a s 119 notice. This was in marked contrast to the previous year when, served with a s 119 notice, he had told the process server he had no authority to accept it. iv) Mr Mulligan accepted service of not only the document headed Section 118 Notice, but also the s 122 guarantor notices. He also gave written confirmation of his acceptance, emailing the bank's solicitors confirming "acceptance of service of the s 118 and guarantor notices received yesterday". In evidence, Mr Mulligan accepted that a guarantor notice would only ever be served in conjunction with a s 119 notice, and that his email indicated he considered himself asauthorised to accept service of the guarantor notices. He said he did consider himself expressly authorised to receive the guarantor notices. [39] The incontrovertible evidence also established that before Mr Mulligan sent the bank's solicitors his written confirmation, there had been an exchange of emails between Mr Mulligan and Mr Jo. In the first email, Mr Mulligan had emailed Mr Jo electronic copies of the documents he had been served with, saying:Section 118 notices and notice to guarantors were received yesterday. Attached is one copy with their covering letter. It's good that they have not tried to serve a 20 working day notice. You will see we have until 8 March 2010. Let me know if you have any queries.[40] After receiving a letter from Buddle Findlay requesting acknowledgement of receipt, Mr Mulligan sent a further email to Mr Jo:Nam, see below, I will respond to Buddle Findlay acknowledging services[41] Mr Jo replied, and his reply leaves no doubt he had received the documents. [42] Mr Jo knew Mr Mulligan had been asked to confirm acceptance of service of the documents, and he knew before acceptance was advised what documents had been served and he knew their content. At no stage, either then or in the three months that followed, did Mr Jo ever advise Mr Mulligan he was not authorised to accept service of the guarantor notice or the s 119 notice and should not have accepted them. The first time the bank was aware it was being claimed Mr Mulligan did not have authority to accept a s 119 notice, as opposed to a s 118 notice, was at the hearing before me, and even then the claim emerged only in the course of submissions. Neither the applicants' statement of claim, their application for an interim injunction, memorandum in support nor their affidavit evidence had mentioned it. On the contrary, the pleadings admit receipt of a notice of intention to sell. [43] In all the circumstances I am satisfied it cannot be said there is a serious question to be tried about service. The evidence points strongly towards there being actual authority, or alternatively that on receipt of Mr Mulligan's email to them, theapplicants had "otherwise received the documents" within the meaning of s 360(c). However, it is not necessary for the bank to rely on either of those two matters. Section 359 makes it clear that an agent with ostensible authority is sufficient, and on the evidence it is beyond question, in my view, that Mr Mulligan did have ostensible authority to take delivery.The applicants' claim for misrepresentation against the bank[44] The proposed claim against the bank is a claim for damages, and is said to arise out of: i) The bank's mistakes in May which it is alleged caused the applicants distress and exposed them to liability to their tenants. According to Mr Jo's affidavit evidence, the tenants have said they are going to cancel the leases and sue the trust because of his telling them he could go ahead and then having to resile from that because the loan was cancelled. ii) The bank's breach of its promise to apply part of the sale proceeds from the sale of the family home towards the refurbishment. Mr Jo says the reason they sold the family home at such a low price was to obtain the funds:The Trust has been cornered to the edge of the cliff by the misrepresentations and mistakes of the Respondent. We have done no wrong and have suffered both commercial and personal harms. I request that the court issue an injunction preventing the Respondent from exercising its power of sale of 219-223 High Street, Christchurch pending a determination of the Respondent's liabilities to the Trust, the proceedings for which are being prepared.[45] As far as the first mistake made by the bank is concerned (the wrong entry of $4.875m instead of 487,500), I am satisfied there is not a serious question to be tried. The undisputed evidence is that the error was detected and corrected on the same day. There is no evidence of any reliance on the mistake, and accordingly no basis for any cause of action. On their own evidence, the applicants knew it was a mistake as soon as they saw the receipt.[46] As regards the alleged second mistake (the $500,000 loan), there is a conflict in the evidence as to whether the bank explained the correct position to the applicants before they spoke to their tenants. [47] However, the mere fact of the conflict of evidence does not in itself automatically mean there is a serious question to be tried. I am satisfied the applicants have no realistic prospect of success with this alleged claim, for the following reasons: i) The claims now being made are inconsistent with Mr Jo's contemporaneous correspondence of 25 June:Application for $500,000 loanOn 7 April 2009 BNZ refused my application for $500,000 additional loan. I then provided BNZ the city council's permit to open the food court. I was told that the BNZ would consider and let me know later with regard to the loan application. There have been no clear answer and thus I could not engage any works on the food court. Therefore, I need to postpone the commencement date of leases for new tenants. Could you please let me know the $500,000 loan application?ii) As Ms Hook submitted, the bank had made it clear in its letter of 7 April that the application was unsuccessful, and also stipulated what further information would be required. The applicants knew they had not provided the required information, and in those circumstances it is difficult to see how they could have thought the bank had simply decided to grant the loan. iii) The day on which the account appeared to have available funds of over $500,000 was only one day after they had learnt from the bank it would allow them immediate access to the increased overdraft via the credit hold. In my view, it defies belief that the applicants failed to link the change in the account to the credit hold.iv) The applicants were familiar with the bank's lending procedure and would have known from previous experience that a formal loan agreement would have been required before such significant funds would be made available. v) The vagueness of the applicants' evidence as to how long they allegedly laboured under this delusion. All the affidavit says is that it was "within a few days". The ATM receipt that showed the loan had been "cancelled" has not been produced. vi) There is no evidence of any written communications to the tenants, and no evidence of any written communications from any of the tenants giving notice of cancellation or giving notice of any claims. vii) Most importantly, the leases were signed in March and the terms are such that if the applicants are under any legal liability to the tenants, it arose before May and could not have been caused by any communications arising out of the bank's mistake. [48] In short, if there was a mistake and the applicants did rely on it, their reliance was unreasonable and most importantly of all, it could not have caused them any loss.Sale of the Redcliffs home[49] This relates to the claim that the bank promised that the nett proceeds from the sale of the Redcliffs home would be used for renovating the food centre. [50] I am satisfied that there is not a serious question to be tried in respect of this claim, for the following reasons: i) The promise is alleged to be contained in the August email:As discussed with Hugo, we will consider leaving some settlement proceeds to you. The Bank would sanction settlement money being spent on the ducting system being repaired to a state which is acceptable to the CCC. To that end we would release funds against costings and invoices for this work. Any additional funds required can be applied for, and must be supported by third party quotes.However, the email does not contain a promise in such absolute terms as that pleaded. It is clear from the email that all the bank was saying was it would only consider a proposal. Further, consideration of the proposal was subject to the receipt of costing and invoices which the evidence establishes were never received by the bank. ii) The email was sent after the applicants had already committed themselves to the sale of the family home at what they say was an under value. That being the sequence of events, the email coming afterwards could not possibly have influenced the sale price. iii) There is no evidence, apart from Mr Jo's say so, that the price was in fact an under value.Breach of the bank's duty of care[51] Under s 176 of the Property Law Act the bank owed the applicants a duty of reasonable care to obtain the best price reasonably obtainable at the time of sale. [52] The evidence is that in late-September 2009 the bank instructed an independent real estate firm to conduct a tender marketing campaign in connection with the property. Advertising commenced from about 17 October and continued until 13 November. The bank received marketing reports. [53] The tender closed on 18 November 2009. The bank did not receive any offers out of the tender process at a price satisfactory to it, but expressions of interest were received from at least 19 different parties.[54] In December, shortly after the December Property Law Act notices were issued, the bank instructed the real estate firm to go back to all the parties who had expressed an interest in the property, to try and seek a better price. These parties were given approximately one week to put their best offers to the bank. The bank then engaged in further negotiations with the top three or four prospective purchasers, who were given until 23 December 2009 to submit their best final offer to the bank. The highest offer received was $2.05m, which was the price the bank accepted. [55] The bank had obtained an updated valuation for the property in December which valued the property at $2.325m and a forced sale valuation of $1.86m. Because the offer at $2.05m was obviously well above the forced sale valuation, the bank decided to accept that offer. [56] Mr Jo alleges that the bank breached its duty in three respects: 1. In marketing the property as a mortgagee sale. 2. In failing to market the property again after the December notice. 3. In failing to accept the highest offer. [57] This last allegation was made to me in submissions, Mr Jo alleging that a Mr Howard had made an offer of $2.4m which the bank had not accepted. On hearing this, I adjourned the hearing to enable further evidence to be obtained. It was a matter of obvious concern and importance. However, further affidavit evidence has established that although Mr Howard did indeed make an offer, it was significantly lower than the one the bank has accepted. Mr Howard has never made an offer of $2.4m. [58] As regards the criticism the property should not have been marketed as a mortgagee sale, in my view the bank was entitled to rely on the professional advice it received regarding this. Further, as pointed out in the decision of United BankLimited v Barron Investments Limited & Ors HC Wellington CP313/93, 22 November 1993, Master Thomson, the practice of advertising is widespread and this can have the effect of attracting a greater number of prospective purchasers. [59] Similarly, I consider it was reasonable for the bank to rely on its pre- December marketing. The applicants have not provided any evidence to suggest a better price could have been obtained, despite the fact the bank gave them the opportunity to sell the property themselves. In my view, having regard to the incontrovertible evidence of the steps taken by the bank, combined with the valuation evidence, it is not arguable that the bank has breached its duty. [60] Finally, for completeness, I should add that during submissions Mr Jo also alleged improper conduct on the part of the purchaser. However, there was absolutely no evidence to support these allegations, and I cannot therefore place any weight on them. [61] My conclusion that there is no serious question to be tried on any of the issues raised by Mr Jo means that it is not necessary for me to consider balance of convenience. [62] In my view there are no grounds on which to grant an interim injunction, and the application is accordingly declined. [63] I am acutely aware of the fact that this decision will understandably be very distressing personally for the applicants and their family. However I am, of course, duty-bound to apply the law and there is no question in my view that the bank is legally entitled to exercise its powers of sale.Costs[64] Costs are reserved, with leave reserved to the parties to file a memorandum in support of any application. [65] I direct that the Registry is to arrange a conference call with the Associate Judge for timetabling orders relating to the future conduct of the substantiveproceeding, including provision of further particulars of the statement of claim. Until then, the bank is not required to file a statement of defence.Solicitors: Buddle Findlay, Christchurch Copy to Applicants