STRATEGIC FINANCE LIMITED V ELLINGTON EAST LIMITED HC CHCH CIV-2005-409-002829

STRATEGIC FINANCE LIMITED V ELLINGTON EAST LIMITED HC CHCH CIV-2005-409-002829 3 February 2006IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV-2005-409-002829BETWEEN STRATEGIC FINANCE LIMITED Applicant AND ELLINGTON EAST LIMITED Respondent AND PETER JOHNSTON AND DEBORAH GORE Second Respondents Hearing: 2 February 2006 Counsel: S C Price for Applicant S J Shamy for First Respondent Judgment: 3 February 2006JUDGMENT OF PANCKHURST J Introduction[1] Strategic Finance Limited is the first mortgagee of land which is the subject of a subdivision in Christchurch. Its mortgage fell into default. Strategic has sold part of the land and wishes to settle the relevant sales. Very shortly before it effected the sales of multiple sections in the exercise of its power of sale as first mortgagee a second mortgagee purported to sell the same land to Ellington East Limited, the first respondent and now intending appellant. Ellington East registered caveats to protect its interest as purchaser from the second mortgagee. [2] Strategic applied to the court for the removal of such caveats and in a decision dated 27 January 2006 Christiansen AJ ordered their removal. Subsequently on 31 January the Associate Judge declined to grant a stay in relation to his earlier decision. This is a review of the Associate Judge's stay decision. Itwas heard yesterday afternoon in haste since the Associate Judge had allowed 48 hours for the review to be heard after which an interim stay which he had ordered was to lapse.The background facts[3] The background situation is reasonably complicated. However I consider that an abbreviated summary of the facts is sufficient for present purposes. [4] The registered proprietor of the subject land is Colorado Investments Limited. On 11 December 2003 Colorado mortgaged the land to Strategic in order to secure finance to cover subdivisional expenses. On 2 March 2004 the first mortgage granted to Strategic was registered. That same day a second mortgage was also registered against the relevant titles to secure a lesser sum which had also been borrowed by Colorado. There are about a dozen contributors to the second mortgage one of whom is Hills Road Investments Limited, which had advanced a contribution slightly in excess of $237,000. This represented approximately a 19% share of the second mortgage. [5] I note that both the first and second mortgages were registered against three titles. These might be termed the parent titles, because following the subdivisional development they produced 47 separate titles in relation to residential size sections and further titles which relate to another block of land of about 5.7 hectares (hereafter referred to as the stage 2 land) which is yet to be subdivided. In all there are now a total of 53 titles. I note in passing that these were not issued until late last year and it is the delay in the obtaining of those titles which, as I understand it, gave rise to problems from Colorado's point of view leading to default in relation to Strategic's mortgage. In short this was a situation where the subdivider was dependent upon a staged sale of the sections in order to make the development work. [6] On 23 December 2004 Strategic issued a Property Law Act notice. The default under the mortgage remained unremedied. As of last month, with accrued penalty interest, the first mortgage debt was of the order of $6.9m. Interest accrues at the rate of about $4,700 per day.[7] In October 2005 Strategic proceeded to exercise its right of sale. This was by tender. The tender closure date was 2 November 2005 with acceptance of the tenders to be notified by 18 November. [8] It was on 3 November 2005 that Hills Road Investments, as one of several second mortgagees, purported to sell the subject land to Ellington East. Three agreements for sale and purchase were concluded between these two entities. One related to the sale of 30 of the residential sections for a sum of about $6m. A second agreement related to the other 17 residential sections which were sold for about $3.4m. The final and third agreement related to what I have termed the stage 2 land which was sold for $2.9m, or $3.9m, if subdivisional consent was obtained before the settlement date. The settlement dates were 13 February in relation to the sections and 18 February in relation to the stage 2 land. [9] It is convenient to pause at this point in the narrative to note the ownership and management of the three of the companies which I have already mentioned. Colorado, Hills Road Investments and Ellington East Limited are all owned by Mr T J B Whimp, who is also the sole director of each of these companies. [10] Between 15 and 23 November last Ellington East lodged the subject caveats against the titles, as I have already noted, to protect its interest as purchaser under the three agreements for sale and purchase. [11] With regard to Strategic's sale process 24 of the sections were sold by tender as was the stage 2 land. Generally the prices achieved in relation to the residential sections have not been questioned in the context of this proceeding, but the same cannot be said in relation to the price achieved for the stage 2 land. That price is $2.5m which does not of course measure up to the prices of $2.9m, or $3.9m with subdivisional consent, which are contained in the Ellington East agreement. [12] The Strategic sales were to be variously settled between 29 November and 6 January, but such has not occurred on account of the caveats lodged by Ellington East.[13] Hence on 14 December Strategic applied pursuant to s143 of the Land Transfer Act for an order removing the caveats. On 27 January the Associate Judge delivered the caveat decision in which he ordered removal and four days later, on 31 January, he declined to grant Ellington East's application for a stay of that decision pending appeal.The caveat decision[14] To my mind the essence of the Associate Judge's decision ordering removal of the caveats is found at para [32] of the judgment. What he said was this:In my judgment, even if the second mortgagee sale was valid at most it must be a sale which is subject to the first mortgagee's rights. Even if EEL (Ellington East) has a caveatable interest it does not prevent Strategic's sale. EEL did not by its purchase receive title. Even if HRIL (Hills Road Investments) has purported to sell land which is unsold by Strategic it can only sell subject to Strategic's interest in that land. HRIL was never at liberty to deal with the mortgaged land without taking into account Strategic's'mortgage.[15] In addition the Associate Judge was sceptical in relation to the ability of Ellington East to settle in terms of the three agreements into which it had entered. This reflected an absence of evidence before him concerning how an amount of over $13m would be raised in order to achieve settlement. Further, the Associate Judge feared that the sales to Ellington East represented an attempt by Mr Whimp to "control the sale process and directly thereby frustrate the efforts of Strategic to exercise its power of mortgagee sale". He added that in his view Mr Whimp's motivation appeared to be a belief that better prices were obtainable for the land, in particular for the stage 2 land. However the Judge doubted that there was a real basis for optimism in relation to the prospect of a better return for the five hectare block.The stay decision[16] The judgment of the Associate Judge contains reference to a number of factors which were the subject of argument (some of which I shall mention shortly when I consider the merits of the present application for review). But reading the decision as a whole I think that the Associate Judge refused the stay on the basis thatthe appeal prospects of Ellington East were forlorn. He considered it inescapable that the Strategic sales enjoyed priority over those purported to have been effected by Hills Road Investments to Ellington East. He also remained sceptical as to whether there was any prospect that the three sale agreements to Ellington East would be settled and sceptical as to whether the sale of the stage 2 land for $2.5m (by Strategic) was light in terms of price.Grounds of review[17] At the outset of his submissions Mr Shamy refocused the ambit of the stay application. Previously before the Associate Judge a general stay had been sought, that is a stay referable to all of the certificates of title. Now, however, the ambit of the application has been narrowed to exclude the 16 remaining residential sections which have been sold but remain unsettled. I should note that eight of the section sales effected by Strategic have already been settled, hence reducing the number to the 16 I have just mentioned. There is no longer objection to these sales proceeding. [18] The new focus of the stay application is therefore the 22 sections which Strategic failed to sell through the tender process and the stage 2 land which Strategic did sell but which Hills Road Investments also purported to sell to Ellington East. [19] In light of this reduced focus of the stay application Mr Shamy questioned whether this was strictly a review of the Associate Judge's decision or whether the case rather called for a de novo approach by me at this point. [20] With reference to the merits counsel's basic argument was that the Associate Judge had failed to address a range of factors which normally inform a stay decision. Rather, Mr Shamy contended, he had simply reiterated the reasons for ordering removal of the caveats in the first place. Or, put another way, it was suggested that the Associate Judge had effectively expressed himself satisfied that the reasons he had given for his substantive decision were right and that therefore it was appropriate to refuse a stay. Thereby, said Mr Shamy, irrelevant considerations were brought to bear while relevant ones were ignored.[21] He identified amongst conventional considerations which inform a stay decision whether the refusal to grant a stay would render the appeal right nugatory, whether Strategic would be injuriously affected by the grant of a stay, whether this was a bona fide appeal by the would-be appellant, Ellington East, whether the grant of a stay would have an affect on third parties and finally, where the balance of convenience lay upon a review of the competing considerations. [22] With reference to that check list Mr Shamy submitted that Ellington East's right of appeal would effectively be rendered nugatory were a stay refused. He continued that there would be no harm to Strategic in the grant of a stay. Payment of its principal and interest is guaranteed given the sales which have already been effected. Counsel pointed out that that the stay which is sought is effectively a staged one. In the first instance it is a stay until 18 February to enable Ellington East to demonstrate that it has the ability to complete the purchase of the stage 2 land under that agreement for sale and purchase. If not, then the caveats could lapse. Otherwise the stay would need to enure until an appeal decision is obtained. [23] Attention was also drawn to a proposal from Mr Whimp that a fund of $100,000 be held in a solicitor's trust account to meet Strategic's interest requirements until at least 18 February and indeed a little beyond. An argument was also addressed to the effect that Strategic would not be at risk if the Ellington East sales contract were to proceed and the sale of the stage 2 land effected by Strategic was cancelled. This argument was based upon special condition 18 in the Strategic sale agreement by which it may cancel such agreements if an "impediment" remains on the title. By definition an impediment includes a caveat and hence, said Mr Shamy, it would be competent of Strategic to cancel such agreements on the basis that it was unable to achieve the removal of the caveats on terms acceptable to the company. [24] By contrast to Strategic's protected position Mr Shamy also argued that there would be significant adverse consequences for third parties were a stay not granted. This is particularly so with reference to second mortgagees. Obviously there will be less available for them if, absent a stay, the Strategic sale of the stage 2 land for $2.5m proceeds. Mr Whimp remains confident that subdivisional consent will beforthcoming in relation to this land and hence that it will be sold for $3.9m, indeed perhaps more, and with certain other attendant savings in relation to that sale as compared to the sale of that land by Strategic. In conclusion Mr Shamy contended that the balance of convenience and the balance of the various considerations was clearly in favour of a grant of a stay, not its refusal. [25] Without going into detail Mr Price did not accept many of these contentions. For example in relation to the argument concerning special condition 18 he doubted that Strategic could any longer trigger the escape clause with impunity. This reflected the fact that the present situation is one in which Strategic has successfully obtained a decision from the Associate Judge ordering removal of the caveats. How could it, counsel suggested, in those circumstances rely upon the impediment clause when effectively the impediment was removed by order of the court. But more fundamentally Mr Price argued that the Associate Judge was right to refuse the stay simply because the merits of an appeal, or rather their absence, dictated as much.Discussion[26] I am not persuaded that the Associate Judge was wrong and that the justice of the case requires intervention on review in order to grant a stay. The judgment under review may not contain a conventional or traditional consideration and balancing of the factors which normally inform a stay decision, but that I think reflects the Associate Judge's conclusion that the merits of the intended appeal are such as to be the determinative factor. I suspect that this explains the form of the judgment in this particular case. [27] In my view the priority argument advanced on behalf of Strategic is unanswerable. For present purposes I can record that argument quite briefly. For completeness it begins with reference to s81(1) of the Property Law Act 1952 which defines the equity of redemption whereby a mortgagor is entitled to redeem the mortgaged land at any time before such land has been actually sold by the mortgagee under its power of sale. Redemption of course is to be achieved by payment of all money which is due and owing under the mortgage at the time of payment.[28] But even more in point are sections 104 and 105 of the Land Transfer Act 1952. Under the sub-heading "Sale of mortgaged land" the former section provides for the application of the purchase monies achieved following a mortgagee sale. These are to be applied to meet the expenses of sale, repayment of the mortgagee, repayment of subsequent mortgagees and with any surplus then to be paid to the mortgagor. Section 105 states:Transfer by mortgageeUpon the registration of any transfer executed by a mortgagee for the purpose of any such sale as aforesaid, 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.[29] The implication of this section is that a first mortgagee in exercising the power of sale has a prior right to do so. That power cannot be defeated by another sale, even one prior in time, unless of course the first mortgagee has consented to the sale either expressly or by conduct. This priority right of the first mortgagee is recognised I think in a line of cases not dissimilar from the present one. [30] Such cases, interestingly, have a number of common features. In each of them the mortgagor has defaulted in relation to his mortgage obligations to the first mortgagee. The first mortgagee has commenced to exercise the power of sale. Then, often at the eleventh hour, there has been a sale of the land, typically to an associated party, in what might be termed other than an arms length transaction. These sales, however, (and this is the one difference in the present case) have in the previous cases been effected by the registered proprietor of the land. In this case that is, of course, Colorado whereas the sales to Ellington East were effected by Hills Road Investments in its capacity as a second mortgagee. [31] The first in the line of cases is the decision of the Court of Appeal in Jenssen v Jenssen, Charles Ashton Ltd & Anor CA 246/90 13 December 1990. This is a caveat case. The caveat, as here, was lodged by purchasers (being the mortgagor's son and daughter-in-law) and removal of the caveat had been ordered at the suit of the first mortgagee. The purported sale to the son and daughter-in-law had occurredprior to a sale effected by the first mortgagee, who therefore sought removal of the caveat in order to facilitate settlement of its sale transaction. In the High Court removal of the caveat was ordered. That decision was upheld in the Court of Appeal. Richardson J, in delivering the decision of the Court, said this at p 7:The claim by the appellants to an interest as purchasers is dependent on the existence of an interest in the property remaining in Mr Jenseen Senior, (registered proprietor) and through him in the appellants. But any rights the appellants had in respect of the land were extinguished by the exercise of the power of sale, see s.81(1) of the Property Law Act, ss.104 and 105 of the Land Transfer Act and McDiarmid v Burton (1980) 1 NZCPR 238. In that case, as Bisson J observed, another situation in which the Court might order removal of a Caveat is that the estate or interest protected by the Caveat no longer exists in the sense that it has been sold by a mortgagee in the exercise of his power of sale, the caveator's interest in such land being subject to that power of sale. All that exists after a mortgagee's sale are the proceeds of sale which must be applied in accordance with the statutory provisions. On the limited argument we have heard today we have formed the clear view that the appeal must fail for this reason.[32] Other similar cases are National Mutual Finance 1988 Ltd v BerrymanWellington M 451/91, a decision of McGechan J given on 2 October 1991 andCanterbury Finance Ltd v Sagar Trust Ltd (1997) 3 NZ ConvC 192,571. The latter is a decision of Master Venning in which he followed the two earlier judgments to which I have just referred. It is of interest to note that Mr Whimp was the director and shareholder of the mortgagor company which purported to sell the land to Sagar Trust Limited which was also, I note, an associated entity at least in a general sense. [33] A fourth decision in the line of cases is Westpac Banking Corporation v Famularo Auckland M 1092/98, a decision of Master Faire given on 23 December 1998. [34] In all of these cases the registered proprietor of the land (or mortgagor) purported to sell the land. Here, of course, there is the one difference that it was a second mortgagee, Hills Road Investments, which entered into the subject agreements for sale and purchase with Ellington East. However I do not see any basis for the view that this point of difference affects the general principle. Mr Shamy did not suggest as much when I referred to one of the relevant decisions yesterday afternoon.[35] It follows in my view that the intended appeal has no prospect of success and that there is, therefore, no point in this instance in granting a stay. For what it is worth I also share the Associate Judge's concerns as to whether there is any realistic prospect of Ellington East settling the purchase agreements into which it has entered, but that is very much a secondary consideration by comparison to the priority point to which I have just referred.Result[36] For these reasons the application to review the decision of the Associate Judge is refused. In my view costs must follow the event and are awarded on a 2B basis for a half day hearing, although I rather apprehend that Strategic will have an entitlement to indemnity costs under its mortgage in any event. [37] Ms Noonan, who appeared for Ellington East today for delivery of this oral decision, has applied for an extension of the stay until Tuesday, 7 February 2006 at 5.00 pm (Monday being Waitangi Day), to enable consideration to be given to an appeal to the Court of Appeal seeking a stay from that Court. There is a difficulty to the extent that Strategic is unrepresented, I having granted leave to counsel who argued the matter yesterday not to be present at the time of delivery of the decision. [38] That said, I am satisfied that it is appropriate to grant a limited stay in the terms sought. In light of the arguments that I have already heard, I feel it is appropriate to venture to the grant of a limited stay because I am satisfied that no great harm will be done to Strategic's position by such a limited extension. I am also, of course, influenced by the knowledge that I am by no means infallible and that it is appropriate for the intending appellant to have a proper opportunity to consider the terms of this decision. For that reason I grant the application for a limited stay in the terms indicated._________________________________________________________________________________ Solicitors: Bell Gully, Auckland for Applicant Kearney & Co, Christchurch for First Respondent (Counsel: S J Shamy)