THE NATIONAL BANK OF NEW ZEALAND V CLEMENTS HC ROT CIV-2011-463-00001

THE NATIONAL BANK OF NEW ZEALAND V CLEMENTS HC ROT CIV-2011-463-00001 8 August 2011NOTE: THE SECOND AFFIDAVIT OF RANDAL THOMAS CLEMENTSSWORN ON 10 MAY 2011 IN THIS PROCEEDING AND THE EXHIBITSREFERRED TO SHALL NOT BE DISCLOSED TO ANY PARTY, ENTITYOR PERSON EXCEPT THE PARTIES TO THIS PROCEEDING WITHOUTAN ORDER OF THIS COURT.IN THE HIGH COURT OF NEW ZEALANDROTORUA REGISTRYCIV-2011-463-00001BETWEEN THE NATIONAL BANK OF NEWZEALANDPlaintiffAND LANCE FREDERICK CLEMENTSFirst DefendantAND RANDAL THOMAS CLEMENTS ANDCOLLEEN LORRAINE CLEMENTSSecond DefendantsAND THOMAS LEE RODEWALD ANDJENNIFER ANNE LEEFirst Counterclaim DefendantsHearing: 15 July 2011Appearances: M P Ward-Johnson for Plaintiff and Counterclaim DefendantsM J Hammond for Second DefendantsJudgment: 8 August 2011JUDGMENT OF WHATA JThis judgment was delivered by Justice Whata on8 August 2011 at 4.00 p.m., pursuant tor 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors:Harris Tate, PO Box 1147, Tauranga 3140Tompkins Wake, PO Box 258, Hamilton 3240Copy to:M P Ward-Johnson, PO Box 13561, Tauranga 3141Overview[1] This is a summary judgment application. Mr and Mrs Clements signed a limited guarantee in favour of The National Bank of New Zealand ("the bank"). The limit was $1 million. The guarantee was given on behalf of their son, Lance, to enable his company, Ormond Downs Ltd, to acquire land for farming purposes.[2] The family as a whole had a long history in farming and a long association with the bank.[3] Lance's company failed, with substantial sums owing to creditors, including the bank. The bank now seeks to enforce the guarantee against his parents.[4] The defendants say that the bank's officer, Mr Walker, misled them intothinking that there was no real risk to them, and that the guarantee would not be enforced.[5] The issue is whether there is enough in these allegations to warrant a full trial of facts.Facts[6] The background is usefully essayed in the judgment of Faire J on the application for injunction. I will deal with the background that is key to the present application for summary judgment.[7] Randal Thomas Clements and Colleen Lorraine Clements have farmed a 533 hectare property at 2590 Broadlands Road, Reporoa since 1965. The property was converted to dairy in 1997 or 1998. Their children were brought up on the farm and were involved in it. A 77 hectare block was also purchased by Mr and Mrs Clements in 1969 and converted into a dairy unit around 1979 or 1980 for Lance when he left school. In 2006 the larger farm was divided into three blocks to enable their sonsLance and Gavin to farm the property. Mr Clements was milking on the rest of the farm. Each farm was run as a separate business.[8] At about that time Lance wished to purchase more land to assist his farming operation. He sought finance from the bank to complete the purchase of a farm which consisted of approximately 53 hectares and a house block. The total purchase price was $1.8 million. The bank funded the purchase subject to the guarantee by Mr and Mrs Clements to a maximum of $1 million plus 12 months' interest. Mr andMrs Clements obtained independent advice before executing the guarantee. Anadditional seasonal overdraft funding of Lance's company, Ormond Downs Ltd, waspart of the package offered by the bank in connection with this lending facility. The purchase of the house block was settled in the early months of 2007 and the purchase of the remaining land was settled on 1 June 2007.[9] In 2008 Lance found another property worth acquiring. The bank provided funding on this purchase as well. The purchase price was $2.5 million. Mr and Mrs Clements were involved in this transaction by way of a separate loan of $1.5 million they undertook from the bank. They advanced that sum to Ormond Downs Ltd and Lance.[10] The farming enterprises failed and mortgagee sales of the two pieces of farmland were settled on 30 September 2011 and produced $2,450,000. This was insufficient to cover the significant indebtedness of Lance and his company to the bank and summary judgment was sought and obtained against Lance in the sum of $2,493,634.50, including interest, legal fees and other costs.[11] The bank now seeks to have judgment entered on the $1 million guarantee provided by Mr and Mrs Clements.[12] I set out the grounds in opposition to summary judgment asserted by the second defendants and the relevant evidence below.[13] I make a further preliminary observation that Faire J did not grant the injunction sought against the sale of the properties acquired by Lance. Faire J observed:[25] Mr Ward-Johnson, in my view, correctly put matters into perspective. He submitted that whilst the plaintiff Bank disputes that there is a serious issue to be tried, because the issues involved in the counterclaim cannot be resolved in this application, the matter should be examined on"balance of convenience" grounds. The second defendants are clearlyinsolvent. Any delay in the sale of the securities held by the Bank could cause greater harm which, clearly, could not be recovered. Further, thesecond defendants' position is such that there really is no value in the undertaking they have given as to damages in the event that an injunction were granted.[26] This is a case where no issue is taken with the validity of the mortgages that are the foundation for the mortgagee sale. Nor is any issue taken with the service of notices under the Property Law Act 2007 as pre- requisites to the exercise of the power of sale. What is apparent, on thematerial before me, is that the second defendants' financial position is suchthat irrespective of the counterclaim they cannot meet their commitments to the Bank, assuming that the principal claims in the counterclaim are found intheir favour. Law: Approach[14] The summary judgment jurisdiction is well settled. The plaintiff carries the burden of proving that the debt is established and that there is no seriously or fairly arguable defence.1 This jurisdiction is not amenable to issues of fact. But I may cast a critical eye over allegations made in affidavits. It is not enough to simply make assertions. They must have some plausible basis.2[15] I accept the plaintiff's contention that a counterclaim does not amount to adefence as a defendant can bring a counterclaim notwithstanding summary judgment.3[16] I would observe, however, that the nub of the second defendants' defence isthat the guarantee itself was flawed and therefore could not give rise to liability.1 Pemberton v Chappell [1987] 1 NZLR 1.2 Attorney-General v Rakiura Holdings Ltd (1986) 1 PRNZ 12 at 14.3 Refer Grant v NZMC Ltd [1989] 1 NZLR 8 (CA).This plainly is not a matter for counterclaim, but goes to the liability under the guarantee per se.The issues[17] I am grateful to counsel for their careful and considered argument.[18] The defendant raised three basic defences, namely that the guarantee is not enforceable as it was obtained unconscionably, by a misrepresentation and/or as a consequence of undue influence.[19] The defendant relies on the following key evidence to establish these defences:Mr R Clements:10. I asked Phil [Mr Walker] several times whether Lance could afford to buy the land and whether the budgets looked okay. Phil told me each time that the budget added up and that Lance would be able to make the payments. Our guarantee would not be called on; it was just to provide the bank with security.11. I never saw the budgets. I did not think that I could see them,because they related to Lance's business and Phil never offered to show themto us. I relied on Phil's assurance that the purchase was affordable forLance. I do not know how much Lance paid for the land or what the budgets were based on.13. Phil was my bank manager for a long time and I trusted him. I thought that he was concerned with our financial interests. When he asked us to act as guarantors, I thought that he would have satisfied himself that we could afford to pay the guarantee if we were called on without having to sell our farm. I believed him when he told me that the budgets were okay and the purchase was financially viable.Mrs C L Clements:12. Phil assured us that the budgets worked and that our guarantee would not be called on. We never saw the budgets, and Phil never offered to show them to us. We did not think that we were entitled to see Lance'sbudgets, so we relied on Phil when he said that the budgets added up.13. Phil had been our bank manager for a long time. We relied on him to look after our financial interests. We assumed that he would not recommend to us that we act as guarantors unless he was satisfied that thedeal was financially viable and that we could afford to pay the guarantee if the bank called upon us.15. We took all of the documents to our lawyer, Peter Parham, to explain to us. We relied on our lawyer to explain the legal significance of the documents to us. We did not ask our lawyer about the financial practicalities of the deal, because we believed Phil when he said that the budgets added up and that the purchase would work. We relied on Phil to look out for our financial interests, because he was our bank manager for a long time. We understood the legal significance of the guarantee, but we were not concerned, because we relied on Phil's assurances that Lance could make the payments.[20] The plaintiff denies these allegations in the following terms:Mr Walker:12. This is false. I would never make the assumption that a guarantee would never be called on. My process when dealing with clients supplying guarantees is that I inform them that a guarantee is a legal binding document and should not be treated lightly. In simple terms I inform that if the person they are guaranteeing is sold up by the Bank and the assets do not cover the borrowing, the Bank will pursue the guarantee. Further to this guarantees are only actioned once the client has obtained independent legal advice – I note the Clements took independent legal advice.18. This is false. I demonstrated client confidentiality and treated each party as if they weren't related to each other. It was the family's decision toenter into sharemilking, guarantee and loan arrangements all of which they were well experienced with. Based on discussions with Randal and Colleen held from 2005 to 2008, it is my opinion that they wished to expand theClements' family empire by obtaining more land and they chose to do this byproviding support to Lance as well as their other sons, Gavin and also Owen (financed by Westpac). They also provided significant financial support to their daughter Miriam who had several failed fashion related business. [sic]the drain of finances, particularly to Miriam as well as Miriam's influence in terminating Lance's sharemilking agreement and an under-performing dairy farm and cattle trading operation, were the reasons for their financial downfall.[21] The plaintiff further says that this was an ordinary commercial transaction between the bank and very experienced commercial dairy farmers. While it was in the context of a family business, it was at all times between persons well versed in commercial farming. The plaintiff points to the very substantial nature of the farming enterprise owned by the defendant. The plaintiff therefore contends that the facts take it well outside the class of cases relied upon by the defendant. In short the defendants were not unsophisticated, rather they were very experienced dairyfarmers with detailed understanding of the business of dairying upon which the transactions were centred.[22] The plaintiff also highlights major flaws in the defendants' evidence.Mr Clements' first affidavit tied the allegations of misrepresentation to the guarantee by referring to the 2008 purchase of land by Lance. In fact, the guarantee pre-dated this purchase by some two years. Mr Clements defendant admits that he was wrong, but says that he was confused, and that he meant the earlier, 2006/7 transaction. Theplaintiff says that this casts serious doubt on the first defendant's evidence. Theplaintiff also says that as the guarantee pre-dates the misrepresentations, it cannot be infected by them.Serious issue[23] Put at its highest, the defendants' allegations bring the requirements of Royal Bank of Scotland v Etridge4 into play. Etridge held that undue influence against the guarantor of a loan could be imputed to the bank providing the loan if the bank had failed to do all that was reasonably necessary to bring home to the guarantor the risk he or she ran in acting as surety. Lord Nicholls outlined a number of requirements ifthe bank was to have done all that was "reasonably necessary". Those requirements are usefully discussed in Burrows, where it is stated (dealing with a husband/wife relationship): 5The practice banks should adopt is therefore as follows. First, the bank should communicate directly with the wife informing her that the bank requires written confirmation from a solicitor acting for her that she understands what she is doing. Secondly, the bank should forward to the wife directly, or to her solicitor, the financial circumstances regarding herhusband's application for a loan (for example, his request and the amount ofhis existing indebtedness). Thirdly, the bank should not proceed unless it hasreceived from the wife's solicitor a confirmation that the solicitor has advised her appropriately.[24] The rationale for this is captured by the following statement by Lord Nicholls in Etridge:4 Royal Bank of Scotland v Etridge (No.2) [2001] 4 All ER 449.5 A Burrows The Law of Restitution (3rd ed, Oxford University Press, Oxford, 2010) at 290.87 These considerations point forcibly to the conclusion that there is no rational cut-off point, with certain types of relationship being susceptible to the O'Brien principle and others not. Further, if a bank is not to be required to evaluate the extent to which its customer has influence over a proposedguarantor, the only practical way forward is to regard banks as "put oninquiry" in every case where the relationship between the surety and thedebtor is non-commercial. The creditor must always take reasonable steps to bring home to the individual guarantor the risks he is running by standing as surety. As a measure of protection, this is valuable. But, in all conscience, it is a modest burden for banks and other lenders. It is no more than is reasonably to be expected of a creditor who is taking a guarantee from an individual. If the bank or other creditor does not take these steps, it is deemed to have notice of any claim the guarantor may have that the transaction was procured by undue influence or misrepresentation on the part of the debtor.88 Different considerations apply where the relationship between the debtor and guarantor is commercial, as where a guarantor is being paid a fee, or a company is guaranteeing the debts of another company in the same group. Those engaged in business can be regarded as capable of looking after themselves and understanding the risks involved in the giving of guarantees.[25] The New Zealand Court of Appeal in Hogan v Commercial Factors Ltd6appeared to qualify those requirements with the following observation:[38] This means that a surety seeking to avoid a guarantee must establish either by presumption (in the rare cases in which one is available) or by evidence that he or she gave the guarantee as a result of undue influence. This consideration was itself decisive in the case of Mrs Etridge herself (see the speeches of Lords Hobhouse and Scott in Etridge at paras [128] and [218]-[224]). In Wilkinson this Court emphasised a need for the surety to be able to establish wrongdoing by someone (see [[1998] 1 NZLR 674 at] p 691).[26] The Court of Appeal went on to observe that there is no legal presumption that a child owes a parent such a duty of trust and confidence or that undue influence is to be presumed against the child.7[27] Overall, however, the Court of Appeal did appear to accept that the Etridgeapproach as to when creditors are on inquiry will be applied in this country, at least in banking cases.86 Hogan v Commercial Factors Ltd [2006] 3 NZLR 618.7 Ibid, at [39].8 Ibid, at [44].[28] It is plain that the bank satisfied the requirement to obtain independent advice. But the evidence discloses that the bank did not present the financial position of Lance to the second defendants or their solicitors, contrary to the second step contemplated in Etridge. In fact Mr Walker deposes:13. The primary concern was the ability for R & C Clements to service their own debt including the $1.5 million they on-lent to Lance. I would have been in breach of client confidentiality if I had allowed R & C Clements to see any financial information about Lance without his written consent. Written consent was never granted by Lance.[29] I turn to examine then, in light of Hogan, whether there was any evidence of undue influence. If there is no evidence of undue influence, nothing can be imputed to the bank and the loan agreement must stand.[30] The following statement made by Mr Clements, from his affidavit in support of the interim injunction, is relevant in this regard:14. The reason I agreed to these transactions, other than the bank telling me that they were affordable, was that Lance was threatening to leave the farm and stop working for us if we did not lend him this money. Because of our age, my wife and I can no longer physically manage the farm ourselves other than on a very short-term basis. I relied on Lance to manage the farm for us. Without him, we would have needed to find a new farm manager. I was desperate for Lance to stay on the farm and eventually take it over because it is a family farm and I felt very strongly that I want to pass it down to one of my children. The bank knew how strongly we felt about keeping one of our sons on the farm and knew that Lance was trying to persuade us to enter all the arrangements the bank required.[31] Accordingly, the second defendants contend that these transactions were entered into because of a threat by Lance known to the bank, that they would be left without any practical means of managing their farm if they did not sign the guarantee.Assessment of facts[32] There is much in the evidence to support the plaintiff that this is really just a case of a large family business dealing with a bank. One factor, however, that casts doubt on that characterisation, is that there is no documentary evidence of anycommercial return whatsoever to the second defendants for their guarantee. The guarantee could then be said to be exceedingly uncommercial, especially in the absence of information about the commercial viability of Lance's proposed business.The failure or refusal by Mr Walker to provide that financial information raises an obvious alarm bell – in light of Royal Bank of Scotland v Etridge (No.2).[33] Nevertheless, the key evidence suggesting "undue influence" by Lance relates to his "threatening" to leave the farm and stop working for his parents. But it could also be said that Lance was providing valuable consideration for the guarantee, that is by offering to manage their farm. This does not bear the hallmarks of "undue"influence. Rather, it is a commercial bargain in the context of a demanding commercial farming operation. While the guarantee was large, so were the combined farming businesses. Lance was reposed with the responsibility of managing those businesses, because that is plainly what Mr and Mrs Clements wanted. In short, on the evidence of the second defendants, while Mr and Mrs Clements may have felt under pressure to support their son, the granting of the guarantee was accounted for by a commitment to manage the farms for the benefit of the family.[34] In those circumstances, there is no seriously arguable case of undue influence by Lance, and therefore there is nothing to impute to the bank.Misrepresentation[35] The relevant key statements are recorded at [19] of this judgment. In particular, Mr and Mrs Clements say that they were told that the guarantee would not be called on and that Lance's business was viable.[36] It transpires that they were wrong about the timing of these representations in their first affidavits. The initial affidavit evidence was that the relevant statements were made in connection with the second loan transaction. That transaction in fact post dated the guarantee. On that basis the representations could not have been relied upon for the purposes of the guarantee. I do not consider that confusion about timing is an adequate explanation. These allegations are serious and crucial to thedefence. However they are unsoundly based and do not provide a proper basis to defeat summary judgment. I also draw upon the fact that Mr and Mrs Clements hadmore than 40 years' experience as farmers. I find it implausible that they were not equipped to understand the risks they were confronting. Lance's proposal wassomething well within their experience to digest.[37] In any event assuming for present purposes that the representations were made prior to the guarantee, Mr and Mrs Clements face what I consider to be an insurmountable hurdle, namely that they were independently advised by a solicitor on the transaction. It is inconceivable that a solicitor would have ignored those representations as immaterial. If he or she did, then that might give rise to an action against the solicitor. It appears however that their solicitor was not told by Mr and Mrs Clements about the key representations.9 That was their election. It was an unfortunate one, because they deprived themselves of the objective clarity afforded by independent advice.[38] In my view, the bank was entitled to assume that the guarantors would receive competent advice from their solicitors about the legal risks attaching to the guarantee. Banks can reasonably assume that competent advice will inevitably involve assessment and explanation that legal liability is attached to the capacity of the borrower to repay the loan, and if the borrower does not repay the loan, then the guarantee may be called upon. If, when this advice is delivered, a guarantor withholds key information (such as the representations allegedly made by Mr Walker), then in the absence of undue influence or unconscionability the guarantor assumes the consequences of doing so, not the bank.[39] Accordingly, even assuming the representations were made prior to the guarantee (which is not accepted), I find on the facts as presented by the second defendant that the independent advice and the guarantors' conduct severed any nexus between those misrepresentations and any loss suffered.9 Refer above n [19].Unconscionability[40] I agree with the bank that the evidence does not support a finding of unconscionable conduct. While the language of threat is used, the key evidence is that the guarantors wanted Lance to run the farms. He wanted to expand at the same time. This has all the features of a then large family business expanding in the mutual interests of all family members. It is well removed from the unconscionability doctrine.10Suppression[41] I note that Faire J granted an order that the second affidavit of Randal Thomas Clements sworn on 10 May 2011 and the exhibits referred to shall not be disclosed to any party, entity or person except the parties to this proceeding without an order of the Court. I am not clear as to the basis for that order but I have made this judgment subject to it. I seek clarification as to whether that order needs to be maintained on a permanent basis. I therefore request that counsel for the plaintiff file a memorandum setting out the reasons for any continued suppression if that is, in fact sought, within 14 days.Outcome[42] Accordingly, I grant the application for summary judgment against the second defendants in the amount of $1,000,000 under the guarantee.[43] I am not clear on what interest is sought on this sum. I reserve leave to the plaintiff to file submissions on interest sought within seven days. Reply memorandum to be filed within a further seven days.10 Attorney-General for England and Wales v R [2002] 2 NZLR 9 at [88]-[89].Costs[44] I award costs to the plaintiff on a 2A basis. If quantum cannot be agreed, then memoranda should be filed within 14 days._________________________Whata J