SOUTHERN CROSS BUILDING SOCIETY V VULETIC HC AK CIV 2008-404-008684

SOUTHERN CROSS BUILDING SOCIETY V VULETIC HC AK CIV 2008-404-008684 11 August 2009IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2008-404-008684BETWEEN SOUTHERN CROSS BUILDING SOCIETY Plaintiff AND ITA VULETIC Defendant Hearing: 3 August 2009 Appearances: R J Gordon and B White for Plaintiff R B Hucker and L Yaqub for Defendant Judgment: 11 August 2009 at 3:30pm(RESERVED) JUDGMENT OF ANDREWS JThis judgment is delivered by me on 11 August 2009 at 3:30PM pursuant to r 11.5 of the High Court Rules. ..................................................... Registrar / Deputy RegistrarSolicitors: Buddle Findlay, PO Box 2694, Wellington 6140 fax (04) 499-4141 (Plaintiff) Hucker & Associates, PO Box 3843, Shortland Street, Auckland 1140 fax (09) 368-1814Introduction[1] The plaintiff, the Southern Cross Building Society ("Southern Cross"), has applied for summary judgment against the defendant, Mrs Vuletic, on its claim in respect of an outstanding debt. [2] The claim is for the shortfall following the sale of properties by mortgagee sale. The sole issue between the parties is whether Southern Cross complied with its obligation under s 176 of the Property Law Act 2007 ("the Act") to take reasonable care to obtain the best price reasonably obtainable as at the time of sale ("the duty of care").Background[3] There is no dispute that Mrs Vuletic is the sole director and shareholder of Ravita Holdings Limited ("Ravita"), Ravita Investments Limited ("RIL") and Hurstmere Limited ("Hurstmere"). [4] On 25 January 2006 Southern Cross and Ravita entered into an agreement for a loan of $4,958,000 from Southern Cross to Ravita ("the Ravita loan"). On the same day Southern Cross and Mrs Vuletic entered into an agreement for a loan of $1,020,000 from Southern Cross to Mrs Vuletic "Mrs Vuletic's loan"). Each of Ravita, RIL, Hurstmere and Mrs Vuletic were covenantors in respect of each loan. [5] Security for the loans was provided by mortgages registered over the following properties: a) 2 Anzac Street, Takapuna, North Shore, owned by Ravita ("the Anzac Street property"); b) 214 Karangahape Road, Newton, Auckland, owned by RIL ("the Karangahape Road property"); c) 97A Grafton Road, Grafton, Auckland, owned by Hurstmere ("the Grafton Road property"); andd) 19 Young Access Road, Silverdale, owned by Mrs Vuletic ("the Silverdale property"). [6] Monthly instalments of interest on the loans went into default in December 2007. Notices under ss 119 and 122 of the Act were served, requiring Mrs Vuletic and/or the companies to remedy the defaults. The notices were not complied with. [7] Southern Cross then took steps as mortgagee to sell the properties to repay the outstanding debts. It engaged Bayleys, an Auckland Real Estate agency, to advise on and (ultimately) conduct the sales. Southern Cross accepted Bayleys' recommendation that the Anzac Street and Karangahape Road properties be sold by way of a five week closed tender process, and that the Grafton Road property be sold by auction, following a five week marketing campaign. [8] Those three properties were marketed by Bayleys Central Auckland office, and sales were completed during the period from August to November 2008. The Anzac Street property was sold for $2,626,000, the Karangahape Road property for $2,100,000 (both properties being zero-rated for GST), and the Grafton Road property was sold for $850,000, plus GST (that is, $956,250, GST inclusive). [9] Southern Cross also accepted Bayleys' recommendation that the Silverdale property be sold at public auction. The sale was handled by Bayleys' Orewa office. The auction was scheduled for 15 October 2008, and the property was advertised in the NZ Herald and North Shore Property Press. [10] Over the weekend of 11/12 October 2008 the house on the Silverdale property was largely destroyed by fire. The auction was postponed until 29 October 2008. It was re-advertised prior to the new date, but then withdrawn from sale, while negotiations were entered into with the insurers of the property. [11] In March 2009 Southern Cross instructed Bayleys to recommence the sale process, on an "as is where is" basis. Bayleys then revisited their database of interested purchasers established from their original marketing campaign. Multiple offers were received, and the highest offer was ultimately accepted. The sale, at$430,000, was settled on 8 April 2009. The sum of $208,125.00 was received from the insurers. [12] As at 4 June 2009, and after the application of the net proceeds of sale of the properties, and the insurance payment, the following was owed on the two loans: a) Ravita loan: Principal and accrued interest to 4 June 2009: $409,140.05. Interest accrues from 5 June 2009 at 11.25% per annum ($126.10 per day). b) Mrs Vuletic's loan: Principal and accrued interest to 4 June 2009: $580,935.89. Interest accrues from 5 June 2009 at 11.75% per annum ($187.01 per day).Application for summary judgment[13] Pursuant to r 12.2 of the High Court Rules, summary judgment may be entered against Mrs Vuletic if Southern Cross satisfies the Court that she has no defence to the claim. The principles to be applied are well-established, and not in dispute: a) "No defence" has been expressed to mean no bona fide defence, no reasonable ground of defence or no fairly arguable defence; 1b) The onus is on the plaintiff, but the onus is not to be frustrated by a defendant raising "hypothetical possibilities in vague terms unsupported by any positive assertions or corroborative documentation"; 2c) The Court of Appeal has said that while there is a need for judicial caution, that has to be balanced against a robust and realistic judicial approach when that is called for; 3 and1 See Pemberton v Chappell [1987] 1 NZLR 1 (CA).2 See SH Locke (NZ) Limited v Oremland HC AK CP641/86, 19 August 1986, Wylie J.3 See Bilbie Dymock Corporation v Patel (1987) 1 PRNZ 84 (CA).d) As a general rule, when determining summary judgment applications, the Court will not attempt to resolve genuine conflicts of evidence, or to assess the credibility of statements in the parties' affidavits. However, the Judge is not bound to accept uncritically every statement in an affidavit. 4[14] In the present case, Southern Cross submits that this is a straight-forward and orthodox claim for the shortfall against what is owed on the loans, following the mortgagee sales. [15] In order to determine whether Southern Cross has met the onus of satisfying the Court that Mrs Vuletic has no defence, it is necessary to consider the matters that she raised. That involves a consideration of s 176 of the Act, and the process undertaken by Southern Cross in selling the properties as mortgagee.Section 176[16] Section 176 of the Act provides, as relevant, that:(1) A mortgagee who exercises a power to sell mortgaged property ... owes a duty of reasonable care to the following persons to obtain the best price reasonably obtainable as at the time of sale: (a) The current mortgagor ...[17] It is to be noted that the mortgagee's duty is to "take reasonable care ... to obtain the best price reasonably obtainable as at the time of sale". The duty is not "to obtain the best price". It is limited by being a duty "to take reasonable care" and to obtain the best price that is "reasonably obtainable as at the time of sale". [18] On behalf of Mrs Vuletic, Mr Hucker accepted that s 176 focuses on the sale process. He also accepted that "the best price reasonably obtainable at the time of sale" normally equates to the current market value of the property, as determined by the actual price achieved. As has been observed in earlier judgments, the failure to4 See Eng Mee Yong v Letchumanan [1980] AC 331, at 341.achieve an assessed market value of a property on a mortgagee sale, or to achieve the price that a mortgagor believes the property should achieve, does not give rise to an inference that the mortgagee has breached its duty to take reasonable care. 5However, Mr Hucker submitted, Mrs Vuletic had raised questions that made Southern Cross' claim inappropriate for summary judgment. [19] It is appropriate to consider the matters raised, in turn.No valuation obtained prior to mortgagee sales[20] Mr Hucker referred to the fact that Southern Cross did not obtain an independent valuation of any of the properties before it proceeded to the mortgagee sales. He submitted that this was relevant in three respects. First, each of the four properties had unique characteristics which meant, he submitted, that a tender or auction process would not necessarily result in the "real value" of the property being realised. [21] Secondly, in the absence of a valuation, Southern Cross was not able to "fall back" on an independent verification as to the realised value, for an argument that any perceived error in the process was immaterial. Thirdly, a valuation would enable a "quantitative analysis" as to how the property market had moved for the four properties. [22] Mr Gordon, on behalf of Southern Cross, submitted that a mortgagee is not obliged to obtain a valuation. Further, he submitted, the fact that a valuation was not obtained does not progress Mrs Vuletic's argument, as the "real" assessment of market value (which is what a valuation is intended to provide) is the price the properties achieved when sold in the market. Accordingly, he submitted, not obtaining a valuation did not constitute a breach of Southern Cross' duty to take reasonable care to obtain the best price reasonably obtainable as at the time of sale. [23] I accept Mr Gordon's submission. No authority was cited to the effect that to "take reasonable care" required an independent valuation to be obtained, and I did5 See Wallace v Bank of New Zealand HC AK CIV 2009-404-3534 1 July 2009, Wylie J, at [54], and the authorities referred to.not understand Mr Hucker to submit that it was. Whether the absence of a valuation impacted on any of the other respects in which Mr Hucker submitted Southern Cross breached its duty can be considered in the context of those matters.Earlier valuations[24] Mr Hucker referred to Mrs Vuletic's evidence that the Karangahape Road property had been valued at $3.7 million when she purchased it in 2005, and the Grafton Road property at $1.4 million in 2004. He submitted that the difference between these valuations and the prices achieved when the properties were sold in late 2008 (Karangahape Road $2.1 million, Grafton Road $850,000 plus GST) demonstrated that Southern Cross had not taken "reasonable care". He further submitted that as Southern Cross had not obtained an independent valuation, it could not assert that the prices obtained were "the best price reasonably obtainable as at the time of sale". [25] I do not accept that submission. First, I can put little weight on valuations prepared three and four years, respectively, prior to the mortgagee sales. Secondly, the Court is required to examine the sale process. If the Court is satisfied that in that process Southern Cross exercised reasonable care then it will not be found to be in breach of its duty. The price actually realised may have relevance as indicating a failure to take reasonable care (Mr Hucker put forward the extreme example of a property earlier valued at $1 million being sold for $1.00) but that is not the case here. As has been observed by the courts, it is not uncommon for a property to sell at a discounted price at mortgagee sale. 6[26] I also accept the evidence of Mr Haydock (the Bayleys agent principally responsible for the sale process) that the commercial property market in August 2008 was vastly different from that in 2005, or earlier. Further, I accept Mr Haydock's evidence that by the time these mortgagee sales were conducted, the "development market had all but evaporated".6 See eg Westpac v Chisholm HC AK CIV 2006-404-3230 27 April 2007, Doogue AJ.Earlier offers for the properties[27] Mr Hucker also referred to Mrs Vuletic's evidence of earlier offers to purchase the Karangahape Road and Anzac Street properties. She said that she had negotiated conditional agreements to sell the Karangahape Road property in August 2008 for $3 million, and that there were "offers of at least $3 million" for the Anzac Street property on the files of Bayleys' North Shore office. Mr Hucker submitted that Southern Cross was in breach of the duty of care in that the conditional agreements were not "resurrected" and no approach was made to people who had expressed interest in the Anzac Street property. [28] Mr Gordon submitted that there is no evidence of a breach of the duty of care. With respect to the Karangahape Road property, he accepted that there had previously been two conditional offers made to purchase it. However, he noted that the offers were conditional and had never been confirmed, so had lapsed. There was, therefore, no extant offer to be "resurrected" or adopted by Southern Cross. Further, and with respect to both the Karangahape Road and Anzac Street properties, he submitted that the properties had been widely marketed. Accordingly, it was open to any previous offeror, or other person who had expressed an interest in acquiring the property, to submit a tender. In the case of Karangahape Road, four tenders were received, while 13 tenders were received for Anzac Street. [29] Again, I do not accept that Southern Cross was in breach of its duty of care. Both properties were marketed openly, and extensively. Any previous offeror could have entered into the tender process. There was nothing to prevent anyone with a real interest in purchasing either property from submitting a tender.Actions of the agent[30] A number of matters raised by Mr Hucker may conveniently be discussed under this heading. These were: that the sale of the Anzac Street property was handled by Bayleys' Central Auckland office, and the sale of the Silverdale property was handled by Bayleys' Orewa office, rather than Bayleys' North Shore office; that the agents "talked down" the value of the properties; that Southern Cross opted tosell the Silverdale property "as is where is" (that is, as "bare land") rather than to reinstate the house; and that the Silverdale property was inadequately marketed. I consider these matters in turn.Choice of agent[31] There is nothing in the submission that it was a breach of the duty of care for the sales of the Anzac Street and Silverdale properties to be handled by Bayleys' Central Auckland office (in the case of the Anzac Street property) and Bayleys' Orewa office (in the case of the Silverdale property). [32] In each case the property was put to the open market, tenders were received, and the property was sold to the highest bidder. In relation to the Anzac Street property (on which Mr Hucker's submission on this matter focused) the marketing information referred to the particular strategic advantages and opportunities presented by the property. Provided Southern Cross engaged a reputable professional agent to conduct the sale (and I am satisfied that it did) it is not for this Court to second-guess the choice of the agent."Agents talked down the value"[33] This submission focused primarily on the Karangahape Road property. Mrs Vuletic in her affidavit was critical of Mr Haydock's reference to specific issues which, he said, affected the value of that property. Mr Haydock said these issues were: a) Signage above the property: This had earlier generated rental income for the property. Mr Haydock said buyers were aware that the sign had not been registered with the Council so had no legal standing with regard to Council's regulations, and would therefore no longer include the signage in their offer calculations. b) Resource consent: When Mrs Vuletic purchased the property in August 2005 it had a resource consent to add two more levels. Thatconsent had expired and not been renewed. A new reserve contribution scheme meant that the development opportunity associated with any successful re-application for a consent had disappeared. c) Deferred maintenance, tenant vacancies, a significant water leak, and tenancy documents for some leases that represented that car parks could be used when those car parks were not part of the property: Mr Haydock said that prospective purchasers were aware of these issues. [34] Mr Haydock said the effect of the above factors was to reduce the rental income available for the property, and its overall value. Mrs Vuletic asserted that Mr Haydock was wrong in respect of each issue. [35] Mr Hucker submitted that there was a breach of the duty of care in that "there was no evidence of Bayleys advising purchasers of the correct position in respect of these important matters". He submitted that whether the matters referred to did exist, and did impact on the properties' value, were factual disputes that could only be resolved through the normal litigation process of discovery, interrogatories, and trial. Mr Hucker also submitted that if the matters were raised by a prospective purchasers, then the duty of care required the agents to investigate and "reassure" the purchasers. [36] I do not accept that a factual dispute has been raised in respect of the matters listed at [33] above. In Mr Haydock's affidavit they are recorded as matters raised by prospective buyers. They were, therefore, matters that concerned the purchasers. Whether or not the concerns were well-founded, the fact is that they were matters that prospective purchasers were concerned about. [37] Further, I do not accept that the duty of care required the agent to investigate the issues and to "reassure" purchasers, nor do I accept Mr Hucker's alternative submission that the duty required the agent to make inquiries of Mrs Vuletic. That would go well beyond the agent's role.[38] Another respect in which it was submitted that the Bayleys agents "talked down the price" related to the Grafton Road property. Mrs Vuletic's daughter swore an affidavit in which she said that she attended the auction for this property, and that she heard a group of people "complaining that the Bayleys agent had earlier advised them when they were considering purchasing the property that they would be able to acquire it for $600,000". [39] I can put little weight on Ms Vuletic's statement as it is multiple hearsay. It does not, in any way, support a submission that Bayleys sought to depress the price achieved. In any event, if there were such an attempt, it clearly failed, as the properties sold for considerably more than $600,000.The Silverdale property[40] Mr Hucker submitted that Southern Cross was in breach of its duty of care, and its duty to preserve the security, in opting to take the cash insurance pay out and sell the property "as is where is" rather than reinstate the house. [41] There is nothing in this submission. Pursuant to Part 1 of Schedule 2 to the Act, a covenant is implied into every mortgage under which money received by the mortgagee in respect of destroyed or damaged buildings:... will be applied, at the option of the mortgagee, either in or towards: (i) rebuilding or repairing the buildings and improvements; or (ii) payment of the principal amount, interest, and other amounts for the time being secured by the mortgage. ...[42] Clearly, Southern Cross had the option, and elected to apply the insurance payment towards payment of the amount owing on the loans. Southern Cross cannot be in breach of its duty of care by electing to do what it was entitled to do, under the Act. [43] It was also submitted that the Silverdale property was not adequately marketed. It is acknowledged that it was advertised in the NZ Herald and in the North Shore Property Press, but it was submitted that there should have been a directapproach to members of a neighbouring Church group who had, it was submitted, earlier expressed interest in buying properties in the area. [44] I am satisfied that there was no breach of the duty of care with respect to marketing the Silverdale property. Details of the marketing campaign are set out in the affidavit of Mr Mann, the agent involved. Annexed to the affidavit are copies of the Property Information Memorandum prepared for the property, and copies of advertisements published both before and after the fire. Mr Mann said that after Bayleys was instructed to recommence the sale process in March 2009, they "revisited the large database of interested purchases established from the initial marketing campaign" who had been waiting for the property to re-enter the market. "Multiple offers" were received and the highest offer accepted. [45] Again, any person interested in purchasing the property had the opportunity during the course of the marketing campaign to submit an offer.Conclusion[46] I am satisfied that Southern Cross has complied with its duty of care to take reasonable steps to obtain the best price reasonably obtainable at the time of sale, in respect of each of the four properties. Southern Cross has complied with its duty by engaging reputable, professional agents, who then conducted active and open marketing campaigns, tailored specifically to each individual property, highlighting the particular features of each. The campaigns comprised signage, press advertisements, mail outs, website advertising, contact with Bayleys' databases and advertisement in Chinese media. [47] Further, the highest bid was not necessarily accepted. The highest bid for Karangahape Road was $2,005,000, but was negotiated up to $2,100,000, while the sale price for the Anzac Street property ($2,626,000) represented an increase over the highest bid.[48] In the light of my conclusion that Southern Cross is not in breach of its duty of care, it follows that I am satisfied that Mrs Vuletic does not have a defence to its claim, and that summary judgment should be entered in favour of Southern Cross. [49] Accordingly, judgment is entered in favour of Southern Cross against Mrs Vuletic as follows: a) Account 03 1783 0158211 66 (the Ravita Loan Agreement): $409,140.05, together with interest from 5 June 2009 up to the date of judgment at 11.25% per annum (daily rate $126.10). b) Account 03 1783 0357544 67 (the loan to Mrs Vuletic): $580,935.89, together with interest from 5 June 2009 up to the date of judgment at 11.75% per annum (daily rate $187.01). [50] Southern Cross is also entitled to an order for costs against Mrs Vuletic. The parties should be able to agree as to the quantum of costs. In the event that they cannot agree, memoranda may be submitted. _____________________________ Andrews J