THE NEW ZEALAND ASSOCIATION OF CREDIT UNIONS V CHRISTOPHER KING AND ORS HC WN CIV-2002-485-815

THE NEW ZEALAND ASSOCIATION OF CREDIT UNIONS V CHRISTOPHER KING AND ORS HC WN CIV-2002-485-815 4 November 2005IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2002-485-815BETWEEN THE NEW ZEALAND ASSOCIATION OF CREDIT UNIONS Plaintiff AND CHRISTOPHER KING First Defendant AND JAMES ANTHONY NELSON Second Defendant AND JOHN WILLIAM HENRY BLAKELY Third Defendant AND BRUCE MCCULLOGH AND DESMOND PRITCHARD Fourth Defendants Hearing: 5 September 2005 Appearances: G.H.J. Brant for Plaintiff D.G. Dewar for Mr Fitzgerald Judgment: 4 November 2005 In accordance with r540(4) I direct the Registrar to endorse this judgment with a delivery time of 3.00pm on the 4 th day of November 2005.JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL Introduction[1] This is an application by Mr Michael Fitzgerald ("Mr Fitzgerald"), one of the named first defendants first, for leave to apply under R.138, and then for summary judgment pursuant to R.136(2) High Court Rules against the plaintiff.[2] Both applications are opposed by the plaintiff.Background Facts[3] Mr Fitzgerald is a retired accountant. He was employed as an accountant by the Inland Revenue Department from 1958 until 1974. [4] In 1975 he joined a firm of chartered accountants and was a partner in that firm for some twenty years until he retired. [5] As general background, Mr Fitzgerald deposes in his affidavit that as a local resident he has been actively involved with the Catholic Church in Upper Hutt for many years. As such, and along with many other fellow parishioners of St. Joseph's Parish in Upper Hutt, he had in the past participated to some extent as a contributor to the predecessor of Capital Wide Credit Union ("the Credit Union"). [6] Mr Fitzgerald was asked to and joined the board of the Credit Union in mid 1999. He says that this occurred as a result of a decision by the plaintiff to endeavour to bring new members with some commercial expertise and acumen to the affairs of the Credit Union itself. Mr Fitzgerald suggests that the plaintiff must have believed at that time that the Credit Union was in serious difficulty and possibly insolvent, and as a result they wanted him and others to join the Board in the hope that it would assist. [7] On 11 May 1999 Mr Fitzgerald was made a director of the Credit Union as a result of that co-option onto the Board. He attended his first Board meeting on 28 May 1999. Whilst he was a director of the Credit Union, the plaintiff alleges that representations were made regarding the financial position of the Credit Union, namely that it was insolvent as at 30 June 1999 to the extent of $73,556.00. Monthly accounts for the Credit Union confirming a continuing insolvency were also supplied around that time. An increased stabilisation guarantee of $150,000.00 was sought from the plaintiff to meet the insolvency, i.e. stabilisation of approximately double the expected shortfall. An earlier stabilisation guarantee of $100,000.00 had been provided by the plaintiff. These were provided no doubt to ensure that a significantcredit union in this country did not "fall over" with consequential effects to investors and the credit union movement generally. [8] The plaintiff alleges that in reliance upon the representations by the Board (of which Mr Fitzgerald was a member) and as a result of a request from the Board for the increased stabilisation guarantee of $150,000.00 at the time the plaintiff: a) Provided the stabilisation guarantee of $150,000.00; and b) Agreed with Harbour City Credit Union ("Harbour City") (to whom the Credit Union's loan portfolio was being transferred) to meet any shortfall on the transfer of engagements, the plaintiff believing that this $150,000.00 would be sufficient to meet any shortfall given the representation about the solvency position of the Credit Union as at 30 June 1999 and in the monthly accounts provided thereafter. [9] On the transfer of engagements to Harbour City, apparently the shortfall of assets over liabilities (principally through loans being written off) turned out to be $344,892.12, plus the costs of the transfer of engagements, making a total of $407,587.48. This was some $257,000.00 more than the $150,000.00 increased stabilisation guarantee amount which the plaintiff believed would be all that was required. [10] In its Statement of Claim here, the plaintiff proceeds against Mr Fitzgerald as a director/member of the Board of the Credit Union. The plaintiff's case is that Mr Fitzgerald, together with other directors of the Credit Union, breached their duty of care in or about October/November 1999 when the directors made representations to the plaintiff about the Credit Union's financial position. [11] The plaintiff says that the financial position of the Credit Union was mis- stated to it in a negligent manner, in that the Board (including Mr Fitzgerald) at the time "approved" and provided to the plaintiff financial statements and reports that did not show a true and fair view of the Credit Union.[12] In turn, it is Mr Fitzgerald's position that as his appointment to the Board did not take place until 11 May 1999, and his first Board meeting attendance was not until 28 May 1999, no action or inaction on his part could possibly have caused any loss to the Credit Union. He says this bearing in mind particularly what he suggests is the plaintiff's pleading that the Credit Union was insolvent in December 1998 or earlier. [13] Mr Fitzgerald deposes that throughout he had limited participation in the affairs of the Credit Union Board, he attended minimal Board meetings and consequently had no substantial input into the accounts and statements of the Board. [14] In summary, Mr Fitzgerald's position is that he is not properly a defendant in this proceeding, as none of the actions that the plaintiff complains of are applicable to him on any basis.Counsel's Arguments and My Decision[15] The first matter for consideration is whether leave should be granted to Mr Fitzgerald pursuant to Rule 138(3) to bring this summary judgment application. [16] Rule 138(3) states:(3) An application (for summary judgment) by a defendant must be made at the time the Statement of Defence is served on the plaintiff, or later with the leave of the Court.[17] Here, the application for leave was made upon the following stated grounds: (1) The plaintiff has no reasonable cause of action against the above- named defendant pursuant to Rule 138 of the High Court Rules. (2) The Statement of Claim filed by the plaintiff does not disclose reasonable particulars in respect of the above-named defendant. (3) That it is just and equitable to make the orders sought.[18] As McGechan on Procedure at paragraph HR138.01 states:The question is clearly a discretionary one, and it will be up to the party applying for leave to show why it should be granted. If the absence of a defence has only become apparent after discovery or the exchange of briefs, this may well be an adequate reason for granting leave. In many cases, as with appeals, the leave question will be bound up with the merits, and it may be sensible to resolve the two together.[19] That said, and considering the material which is presently before the Court, in my view this is an appropriate case for leave to be granted pursuant to Rule 138(3). [20] An order is now made granting leave for Mr Fitzgerald to apply for summary judgment. [21] I turn now to the substantive application itself. [22] Mr Fitzgerald's application for summary judgment is made as a defendant pursuant to R.136(2) High Court Rules. [23] Rule 136(2) states:(2) The Court may give judgment against a plaintiff if the defendant satisfies the Court that none of the causes of action in the plaintiff's statement of claim can succeed.[24] The Court of Appeal has considered this provision in a number of cases including Westpac Banking Corporation v M M Kembla New Zealand Limited[2001] 2 NZLR 298; Bernard v Space 2000 Limited [2001] 15 PRNZ 338;Attorney-General v Jones [2001] 15 PRNZ (CA) – also considered at [2004] 1 NZLR 433 by the Privy Council. [25] The starting point in considering any such applications must be the assumption that a plaintiff has the right to have its claim determined following a fair hearing by the Court – Attorney-General v Jones. In that case the Privy Council in its decision at page 440 said:... summary judgment should not be given for the defendant unless he shows on the balance of probabilities that none of the plaintiff's claims cansucceed. That is an exacting test, and rightly so since it is a serious thing to stop a plaintiff bringing his claim to trial unless it is quite clearly hopeless.[26] Where the defendant applies for summary judgment it will have the significant burden of establishing that none of the plaintiff's causes of action can succeed. In other words the defendant must be able to undermine the plaintiff's entire claim. Furthermore, the Court should only give judgment against the plaintiff where the defendant has a clear answer to the plaintiff which cannot be contradicted – Westpac Banking Corporation v M M Kembla New Zealand Limited. [27] It is clear that to succeed a defendant has the burden of showing that none of a plaintiff's causes of action can succeed. It is not enough that the claims have weaknesses. [28] As the Privy Council stated in Jones v Attorney-General at page 439:It cannot be doubted that, properly used, Rule 136(2) can save both time and cost by permitting claims with no hope of success to be summarily dismissed at an early stage. But rarely, if ever, will the procedure be appropriate where the outcome of the action may depend on disputed issues of fact, and reliance on the rule in an inappropriate case may serve to increase both the length and the cost of proceedings.[29] For completeness, it is useful to set out in full the guidance provided by the Court of Appeal in Westpac Banking Corporation v M.M. Kembla (NZ) Limited as to the approach which is to be adopted by the Court in considering these applications. There, the Court said:[58] The applications for summary judgment were made under R 136(2) of the High Court Rules which permits the Court to give judgment against the plaintiff "if the defendant satisfies the Court that none of the causes of action in the plaintiff's statement of claim can succeed". [59] Since R 136(2) permits summary judgment only where a defendant satisfies the Court that the plaintiff cannot succeed on any of its causes of action, the procedure is not directly equivalent to the plaintiff's summary judgment provided by R 136(1). [60] Where a claim is untenable on the pleadings as a matter of law, it will not usually be necessary to have recourse to the summary judgment procedure because a defendant can apply to strike out the claim under R 186. Rather R 136(2) permits a defendant who has a clear answer to the plaintiff which cannot be contradicted to put upthe evidence which constitutes the answer so that the proceedings can be summarily dismissed. The difference between an application to strike out the claim and summary judgment is that strike-out is usually determined on the pleadings alone whereas summary judgment requires evidence. Summary judgment is a judgment between the parties on the dispute which operates as issue estoppel, whereas if a pleading is struck out as untenable as a matter of law the plaintiff is not precluded from bringing a further properly constituted claim. [61] The defendant has the onus of proving on the balance of probabilities that the plaintiff cannot succeed. Usually summary judgment for a defendant will arise where the defendant can offer evidence which is a complete defence to the plaintiff's claim. Examples, cited in McGechan on Procedure at HR 136.09A, are where the wrong party has proceeded or where the claim is clearly met by qualified privilege. [62] Application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained by the Court and cannot confidently be concluded from affidavits. It may also be inappropriate where ultimate determination turns on a judgment only able to be properly arrived at after a full hearing of the evidence. Summary judgment is suitable for cases where abbreviated procedure and affidavit evidence will sufficiently expose the facts and the legal issues. Although a legal point may be as well decided on summary judgment application as at trial if sufficiently clear (Pemberton v Chappell [1987] 1 NZLR 1), novel or developing points of law may require the context provided by trial to provide the Court with sufficient perspective. [63] Except in clear cases, such as a claim upon a simple debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff's claim. That would permit a defendant, perhaps more in possession of the facts than the plaintiff (as is not uncommon where a plaintiff is the victim of deceit), to force on the plaintiff's case prematurely before completion of discovery or other interlocutory steps and before the plaintiff's evidence can reasonably be assembled. [64] The defendant bears the onus of satisfying the Court that none of the claims can succeed. It is not necessary for the plaintiff to put up evidence at all although, if the defendant supplies evidence which would satisfy the Court that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence of its own. Even then it is perhaps unhelpful to describe the effect as one where an onus is transferred. At the end of the day, the Court must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment made by the Court on interlocutory application is not one to be arrived at on a fine balance of the available evidence, such as is appropriate at trial.[30] This passage was cited with approval by the Privy Council in Jones v Attorney-General at 437. [31] In the present case, as I have noted, the cause of action pleaded against Mr Fitzgerald is based in negligent mis-statement, in that as a member of the Credit Union's Board he owed the plaintiff a duty of care which he breached, causing it loss. [32] The stated grounds upon which Mr Fitzgerald's summary judgment application is made are: (1) Mr Fitzgerald had no involvement in the preparation of the financial statements for which the plaintiff is alleging negligent misstatement. (2) Mr Fitzgerald was asked to join the Board of the Credit Union due to the insistence of the plaintiff that the Board appoint Directors with commercial acumen. (3) Mr Fitzgerald attended only two of the Credit Union Board meetings and had no substantial input to the running of the Credit Union. The loans that are the subject of this dispute were advanced well before Mr Fitzgerald became a director. (4) Mr Fitzgerald was not a board member when the financial statements for the period ended 31 December 1998 were prepared. (5) The Deed of Guarantee facility was entered into and dated before Mr Fitzgerald became a board member. (6) Mr Fitzgerald had limited input into the accounts and statements which the plaintiff relied on. (7) Mr Fitzgerald did not breach any duty of care owed by the Board.[33] There can be no argument that in appropriate circumstances a director or employee of a company may come under a personal duty, breach of which may entail personal responsibility – Trevor Ivory v Anderson [1992] NZLR 517, Cooke P at page 520, and Morten v Douglas Homes [1984] 2 NZLR 548. [34] Although Mr Fitzgerald was not a director of a company incorporated under the Companies Act 1993, before me his counsel Mr Dewar appeared to accept that, as a director of the Board of the Credit Union which was registered under the Friendly Societies and Credit Unions Act 1982, similar principles and considerations applied here. [35] In doing so, Mr Dewar placed some reliance upon the decisions in Drillien v Tubberty (AK HC, unreported, 15 February 2005, CIV-2004-404-2873, Associate Judge Faire) and Trevor Ivory v Anderson. In Drillien v Tubberty the directors and shareholders of a building company which constructed and developed residential properties and sold one of them to the plaintiff was sued. The allegation was that the defendant director was negligent and failed to take reasonable care to ensure building work was undertaken in a reasonable manner. The issue in that case was whether or not a shareholder/director could be personally liable in tort for defects in construction. The defendant sought summary judgment. [36] The Court in Drillien examined Trevor Ivory Limited v Anderson and Rolls Royce New Zealand Limited v Carter Holt (unreported, 23 June 2004, CA259/02). The Court found that the special circumstances required to impose a duty of care upon a director in negligence cases involving his/her company based on the dicta inTrevor Ivory Limited v Anderson were not present in that case. There was no direct personal involvement by the defendant director to such an extent as to establish a duty of care, and therefore the defendant director's summary judgment application succeeded. [37] As to the Trevor Ivory decision, before me Mr Dewar argued that just as the company director there was found not to have assumed personal responsibility, in the present case similar policy considerations will apply, and on the present facts there can be no question of an assumption of personal responsibility by Mr Fitzgerald.[38] Further, Mr Dewar argued that the Court must also look initially at questions of reliance and causation, because a fundamental submission for Mr Fitzgerald is that it cannot be said that the plaintiff here relied on him in any sense, and that subsequently it can never be said that Mr Fitzgerald "caused" any loss. [39] Returning to Drillien v Tubberty, this was a leaky building case. It is important to note, however, that other recent authorities relating to strike outs and summary judgment applications by defendant directors of companies in leaky building cases similar to Drillien v Tubberty have come to the opposite conclusion. And, in particular, a number of those cases have noted the unsuitability of such cases for summary judgment applications. [40] These decisions include Body Corporate No. 187947 & Anor v E.P. Maddren & Sons Ltd & Ors (HC AK, 13 May 2005, CIV-2004-404-1149). Here, Hansen J. dismissed applications by the defendant director of a developer building company for strike out and defendant summary judgment in a leaky building situation upon the grounds that a duty of care by the director could apply, and that the matter needed to go to trial to test the disputed evidence. [41] Further, in Carter v Auckland City Council, Bawden & Ors (HC AK, CIV- 2004-404-2192, 14 October 2004) Associate Judge Christiansen refused a summary judgment application by a defendant director of a building company in similar circumstances, again requiring that the matter be fully tested at trial. [42] And in Banfield v Johnson (1994) 7 NZCLC 260/496 Thorp J refused a Rule 186 strike out application by the managing director of a building company, again in similar circumstances. [43] And in the present case, it needs to be noted that the plaintiff's claims against Mr Fitzgerald are in negligent mis-statement, and therefore akin to the situation which prevailed in Trevor Ivory v Anderson. [44] For Mr Fitzgerald to succeed in his summary judgment application here, it is not enough that the plaintiff's claims against him may have weaknesses. Mr Dewarfor Mr Fitzgerald acknowledged that the onus is on him to satisfy the Court that the claim against him cannot succeed, and in terms of Westpac Banking Corporation v M.M. Kembla NZ Ltd, it is not sufficient to show that there are merely "weaknesses". [45] This is a claim in negligence. While summary judgment for negligence causes of action is not specifically excluded by Rules 135 or 136 High Court Rules, it is clear from cases such as Economy Services Ltd v Smith (1989) 2 PRNZ 657 that circumspection is needed. In that case, the plaintiff sought summary judgment on a negligence cause of action, and McGechan J stated:Given the usual nature of negligence casesin reality the required degree of satisfaction as to absence of defence is not easily achievable. Frequently, there will be differences over matters of primary fact with decisions required upon credibility. Any motor vehicle collision case furnishes an example. Frequently, there will be disputed factual questions relevant to foreseeability, standard of care, and remoteness. Often factual questions bearing on contributory negligence will arise. In the particular professional negligence area, particularly if matters actually reach the litigation stage, there may well be a sharp conflict as to both the events which occurred and the professional standards involved. In the residue of cases which pass through these barriers, there will of course remain the question of ultimate discretion under r 136. Particularly in the professional negligence field, there may sometimes be discretionary considerations arising from the desire of one or other party for trial by jury, and questions of professional reputation. I certainly will not attempt to lay down any definitive guidelines on questions of ultimate discretion, but it may not be overlooked.[46] In my view, the same considerations will generally apply in a defendant's summary judgment application. Further, in Tojan Investments (NZ) Limited v Durney Construction Limited (HC AK, unreported, 29 July 1998, CP327/87, Master Gambrill) (quoted in Economy Services Ltd v Smith) the Master noted that:Prima facie there are very few cases in which claims for negligence can be entertained without a full trial of the action.[47] With those matters firmly in mind and taking into account the exhortation inBernard v Space 2000 Limited (2000) 15 PRNZ 338 at paragraph 20 that for a defendant to succeed on a summary judgment application the Court must insist on a:clear answer which cannot be contradicted and a complete defence to the plaintiff's claim, that is, a "king hit"I am satisfied here on the material before the Court that Mr Fitzgerald has not done sufficient to show a "king hit" in the sense that none of the plaintiff's claims against him could succeed. [48] That said, some sympathy must be expressed for the position in which Mr Fitzgerald finds himself. It is clear that he joined the Board of the Credit Union as a volunteer. He did so it seems to bring some accounting expertise to the Board given the plight in which the Credit Union found itself at the time. He attended only a small number of Board meetings (it seems somewhere between four and six meetings) and thus had a relatively short history with the organisation. [49] Further, as Mr Dewar has noted, the plaintiff itself at the time was involved to some degree in a relatively hands-on role in considering the difficult financial position of the Credit Union. [50] Notwithstanding that, Mr Fitzgerald as an experienced accountant clearly played some significant role as a director of the Board, and it seems he attended crucial meetings, it is agreed including one of significance on 28 October 1999. At certain of these meetings it is suggested accounts were presented and approved for the purposes of being put to the plaintiff to obtain an increased in the stabilisation guarantee to $150,000.00 (provided in or about November 1999) together with the transfer of engagements to Harbour City. In the present application itself Mr Fitzgerald acknowledges at paragraph 6 that he had input into the accounts and statements which the plaintiff relied on, albeit limited input. In addition, correspondence from Mr Fitzgerald to the plaintiff dated 21 June 1999 appears to confirm that he may have known the risk he was taking in becoming a director of the Credit Union. [51] These matters of course will all require an intense factual enquiry at ultimate trial. In my view, that is the appropriate course to take here. [52] Applying all the requirements for the entry of summary judgment in favour of a defendant referred to in Westpac Bank and outlined at paragraph [29] hereof to the present circumstances, I find, therefore, that Mr Fitzgerald has not discharged theonus upon him of establishing that none of the plaintiff's causes of action here could succeed. As the Privy Council stated in Attorney-General v Jones at page 440, this is:an exacting test, and rightly so, since it is a serious thing to stop a plaintiff bringing his claim to trial unless it is quite clearly hopeless.Conclusion[53] For the reasons I have outlined above, Mr Fitzgerald's application for summary judgment fails. [54] As to costs, in terms of Rule 48E(3), it is appropriate that they be reserved. [55] Costs are reserved. __________________________Associate Judge D.I. GendallSolicitors:Stace Hammond, Hamilton for Plaintiff Thomas Dewar Sziranyi Letts, Lower Hutt for Mr Fitzgerald