HERRON V WESTPAC NEW ZEALAND LIMITED COA CA505/2010

HERRON V WESTPAC NEW ZEALAND LIMITED COA CA505/2010 27 October 2011IN THE COURT OF APPEAL OF NEW ZEALANDCA505/2010[2011] NZCA 544BETWEEN CHRISTINE MARY HERRONFirst AppellantAND CHRISTINE MARY HERRON ASTRUSTEE OF THE HERRON TRUSTSecond AppellantAND WESTPAC NEW ZEALAND LIMITEDRespondentHearing: 10 October 2011Court: Chambers, Ronald Young and Andrews JJCounsel: E J Grove for AppellantsG M Sandelin and M D Pascariu for RespondentJudgment: 27 October 2011 at 4:00 PMJUDGMENT OF THE COURTA The appeal is dismissed.B The appellants are to pay the respondents costs for a standard appeal on a band A basis, together with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Andrews J)Introduction[1] The first and second appellants (Mrs Herron in her personal capacity, and as trustee of the Herron Trust), provided guarantees on two loans by the respondent, Westpac Banking Corporation (Westpac) to a company Lakov Limited, now inliquidation (Lakov). Both loans were secured by mortgages over residential properties.[2] During 2008, Lakov defaulted on its loans and Westpac exercised its power of sale. In August 2009, Westpac issued proceedings against Mrs Herron and Lakov, seeking summary judgment in the sum of $709,177.25, being the outstanding balance of the two loans after application of the proceeds of sale. The application for summary judgment was opposed. In a judgment delivered on 9 July 2010, Associate Judge Christiansen granted summary judgment against Mrs Herron in the sum sought, together with interest and costs.1[3] Mrs Herron appeals against the entry of summary judgment. Her case in this Court is that there was insufficient evidence before the Associate Judge for him tofind that she had no defence to Westpac's claim. In particular, it was submitted that the Associate Judge should have found that she had an arguable defence, being that Westpac had agreed to release her from her guarantees, such that summary judgment should not have been entered.Background factsWestpac loans[4] Mrs Herron's husband, Mr Stuart Herron, was the sole director andshareholder of Lakov. Lakov, the Herron Trust, Mr and Mrs Herron, and two othertrusts formed a "borrowing group" known as the Herron group. Westpac advancedloans to the various entities in the group, which were secured by interlinked mortgages and guarantees. As Mr Grove put it in his submissions on behalf of Mrs Herron, the loan agreements covered all borrowings, the guarantee obligations applied to all loan agreements, and each mortgage supported each guarantee.[5] In late 2007 Lakov entered into two loan agreements, of the type just described, with Westpac. The first was entered into on 27 September 2007 and was for $1.2 million. It was secured by a registered mortgage over a property at1 Westpac New Zealand Ltd v Lakov Ltd HC Auckland CIV-2009-404-5046, 9 July 2010.Devonport. The second loan agreement was entered into on 19 October 2007 andwas for $350,000. Lakov's borrowing under the second loan agreement was securedby a registered mortgage over a property at Whangaparaoa. Mr Herron and Mrs Herron (in her personal capacity) and as trustee of the Herron Trust, provided unlimited personal guarantees in respect of both loans.[6] Mrs Herron's signatures on the guarantee were witnessed by a solicitor, whocertified that he had explained to her, and she had confirmed that she understood, the general nature and effect of the guarantee, and the obligations and risks involved. Atthe same time, Mrs Herron signed a "waiver of independent legal advice" and "acknowledgement of guarantor". By signing these, she acknowledged that she had reviewed the guarantee document with the certifying solicitor, had been informed of the rights and obligations in the guarantee, and had been recommended to take independent legal advice. Specifically, she acknowledged that she understood the nature and extent of her obligations under the guarantee, that she declined to take independent legal advice, and that she had signed the guarantee and the acknowledgement voluntarily.[7] Relevant to Mrs Herron's submissions in this appeal is that on 27 September 2007 Westpac also lent $503,000 to the Herron Trust. That loan was secured by amortgage over a property at Waiheke. On 13 March 2008, the Herrons' solicitorwrote to Westpac seeking to repay that mortgage. The mortgage was discharged upon payment of the amount outstanding under the loan to the Herron Trust, and a partial repayment of $111,000 of the amount outstanding under the first loan to Lakov. At the same time, a deed of variation of mortgage was executed, whereby Westpac increased its priority amount over the Devonport property to $1.53 million.[8] Lakov, however, began to default on its obligations to Westpace, and in September 2008, Lakov was in default in the sum of $40,580.94. On 22 September 2008 Westpac issued notices pursuant to ss 119, 121, and 122 of the Property Law Act 2007 in respect of each mortgage, addressed to Lakov (as borrower) and Mr and Mrs Herron (as guarantors). Each notice stated that if the default was not remedied by 31 October 2008, the full amount secured by each mortgage would become payable, and Westpac would be able to exercise its powers to enter into possessionand sell the mortgaged properties. The notices addressed to Mr and Mrs Herron alsorecorded Westpac's intention to commence action against them as guarantors for any deficiency, should the amount realised from such sale be less than the amount required to repay the mortgage in full.[9] The defaults were not remedied by 31 October 2008, and on 12 November 2008 Westpac (through its solicitors) advised Lakov that it was exercising its power of sale. The Devonport and Whangaparaoa properties were then sold by mortgagee sale. Following application of the sale proceeds, $709,177.25 remained outstandingon Lakov's two loans.Application for summary judgment[10] Westpac applied for summary judgment to recover the outstanding amount. Ms Anne Madden, a senior manager in the Asset Management Division of Westpac, swore an affidavit in support of the application for summary judgment. She set outthe facts of Lakov's borrowing and default, and the steps taken by Westpac, as outlined above.[11] Mrs Herron opposed the application for summary judgment on the groundthat she had an arguable defence to Westpac's claim, as follows:(a) Westpac agreed at the time of Lakov's first loan that she would not be a guarantor, either personally or as trustee of the Herron Trust;(b) she executed the guarantee documents without appreciating that she was entering into a guarantee;(c) in or about March 2008 Westpac agreed to release her from the guarantee; and(d) pursuant to the agreement to release her from the guarantee, the loanto the Herron Trust was repaid, $111,000 was paid to reduce Lakov's liability, and Westpac's priority amount was increased.[12] Mr and Mrs Herron swore affidavits in support of the opposition to theapplication for summary judgment. Mr Herron's affidavit was brief. After stating that he is Mrs Herron's husband, and was the sole director and shareholder of Lakov,and confirming the assertions made in the notice of opposition, he said:3. I negotiated the September 2007 loan with Westpac, and the subsequent re-financing in March 2008. Christine was never intended to be a guarantor. However, when we received the September 2007 loan documentation it did have her named as a guarantor. Up until just after Christmas 2007/January 2008 I had been dealing with Phillippa Shaw of Westpac exclusively. Subsequently she left, and I cannot recall with certainty the names of those I dealt with at Westpac. I had certainly discussed with Phillippa that one of the main purposes of the refinancing was to remove Christine as a guarantor and that that would be achieved as part of the refinancing – this was definitely also the basis I discussedand agreed with Phillippa's replacement(s).[13] In her affidavit, Mrs Herron said that all negotiations with Westpac were undertaken by her husband. She said that when she executed documentation in March 2008, it was never explained to her that she was not being removed as a guarantor.[14] A second affidavit sworn by Ms Madden was filed in response to Mr and MrsHerron's affidavits. Ms Madden said:4. I have read the notice of opposition and affidavits in support. [MrsHerron] and [the Herron Trust] allege that a "refinancing" occurred in March2008 under which Westpac agreed to release the guarantees of Mrs Herron and the Herron Trust in relation to the debts of [Lakov]. I have searched thefiles in Westpac's control and can confirm that no record of any suchagreement is contained in those files.[15] Ms Madden then set out details of the Herron Group's borrowings. Referring to the Herron Trust's loan, she said that in March 2008, the Herron group hadrequested a release of the mortgage over the Waiheke property. That mortgage wasdischarged when the Herron Trust's loan was repaid on 20 March 2008. At the sametime, $111,000 was paid in partial repayment of Lakov's first loan and there was anincrease in the priority amount in respect of the Devonport property. Ms Madden went on to say:13. There is no documentation or any offer record or any mention at all of any agreement to release Mrs Herron or the Herron Trust from theirguarantee liability. I would have expected to see such an agreement recorded in correspondence if indeed such an agreement had been reached. This is particularly so given that [Mrs Herron and the Herron Trust] had lawyers acting for them throughout all these transactions including therefinancing in March 2008. Annexed and marked "H" is a copy of a letterfrom Quay Law acting for the Herron Trust. There is no mention in this letter or any other correspondence or record on the files subsequently that any agreement has been made to release [Mrs Herron and the Herron Trust from their] guarantee liability.The High Court judgment[16] After setting out the factual background, and referring to the relevant legal principles, the Associate Judge recorded that there was only one factual issue. This was whether Westpac had agreed to release Mrs Herron from the guarantee. His Honour went on to outline the submission made on behalf of Mrs Herron; that Westpac had failed to establish that she had no defence. The Associate Judge then reviewed the terms of the guarantee and concluded:2The net effect of the words used in the guarantee establishes that followingLakov's default the guarantee imposes a clear obligation on Mrs Herron andthe Herron Trust to pay on demand the amounts outstanding under the loan agreements. The release of the guarantee requires precise actions to be completed by Mrs Herron and/or the Herron Trust but there is no evidence in this case of any appropriate steps taken to release them from the guarantee.The claim of a release relies upon Mr Herron's claim and upon a submissionthat Mrs Herron and the Herron Trust had no responsibilities beyond its mortgage obligations in relation to the Waiheke property.[17] The Associate Judge rejected Mrs Herron's assertion that she had notappreciated that she was providing a guarantee. His Honour observed that it was plain that the guarantee was executed by her in the presence of her solicitor. Without more, a claim of lack of understanding would not succeed, and nothing more had been provided.[18] Regarding the assertion that Westpac had agreed to release Mrs Herron, his Honour observed that there was no evidence that Westpac had represented to Mrs Herron that she would be released from the guarantee. To the contrary, the letter from her solicitors seeking discharge of the mortgage over the Waiheke property had2 At [21].not mentioned Mrs Herron being released from the guarantee, and Mrs Herron had executed the mortgage documents in March 2008 in the presence of her solicitor.[19] The Associate Judge concluded:[34] Claims of mortgage and security variation agreements are unsupported by reference to contemporary written documents. Marginally only are they supported by claims that it is commercially wrong and unlawful for Westpac to have required additional security/payment in consideration of its agreement to discharge a property mortgage for the amount then owing under that mortgage. By that mortgage the mortgagee'sobligations extended well beyond the property for which security was provided. It extended to accomplish the obligations to guarantee related companies borrowings for which security was also provided over two properties owned by that company. Claims that Mrs Herron or the Herron Trust were released from their guarantees are not reasonably supportablebecause Westpac's file makes no reference to same and nor does correspondence from the defendant's independent solicitor who provided advice throughout.[35] In that result the Court is entitled to deal with the claims raised by or on behalf of Mrs Herron and the Herron Trust as no more than unsubstantiated assertions. This is a proper case for the Court to act robustly to grant Westpac the judgment it is entitled to.Submissions on appealMrs Herron[20] Mr Grove submitted that Mr Herron's affidavit evidence had raised "a fairlystraight-forward factual assertion" – that he and the Westpac employee (or employees) who had succeeded Ms Shaw had actually agreed that Mrs Herron would be released from her guarantee when Westpac discharged the mortgage over theWaiheke property. He submitted that the onus was on Westpac to rebut Mr Herron'sevidence, or establish that it was equivocal, lacking in precision, inconsistent with contemporary documents, or inherently implausible. He submitted that Westpac had not met this onus, and should have done so in order for the summary judgment application to be granted in its favour.[21] Mr Grove submitted that in order to meet the onus, Westpac could have obtained evidence from Ms Shaw and her successor, and could have produced itsentire file relating to the Herron group's borrowings. As Westpac had done neither,and as Mrs Herron had raised a "clearly arguable defence based on unequivocal sworn assertions of fact", he submitted that the Associate Judge should haveconcluded that the factual dispute could only be resolved by a substantive hearing, giving Mrs Herron the opportunity to obtain discovery of Westpac's file, and tocross-examine Westpac employees.Westpac[22] Regarding the claim that Westpac had agreed to release Mrs Herron from herguarantee, Mr Sandelin submitted that Mr Herron's bald assertions did not establishan agreement with Westpac to release Mrs Herron from her guarantee. On this basis, he submitted that the Associate Judge was entitled to conclude that no agreement had been reached to release her from her guarantee.[23] He submitted, first, that the guarantee signed by Mrs Herron in her personal capacity, and as trustee of the Herron Trust, had been witnessed by her solicitor, whosigned the appropriate solicitor's certificate. In addition, there had been no challengeto the guarantee up until the time proceedings were issued seeking summaryjudgment. Specifically, there was no evidence, either on Westpac's files, or putforward by Mrs Herron, that any challenge was made at the time the Property Law Act notices were sent to her as guarantor, to the effect that she had been released from her guarantee.[24] Secondly, Mr Sandelin submitted that Mr Herron's assertion that there wassuch an agreement was inconsistent with contemporary documents. He referred tothe fact that the letter from the Herrons' solicitors requesting discharge of the mortgage over the Waiheke property made no reference to any request that Mrs Herron be released from her guarantee, or to any agreement having been made to that effect. He also referred to an internal Westpac document annexed to Ms Madden's second affidavit, which appears to be an overview of the Herron Group'sborrowing. This document records the request for the mortgage over the Waiheke property to be discharged, but also records that the unlimited guarantees by Mr Herron, Mrs Herron, Lakov and the Herron Trust are "existing".[25] Thirdly, Mr Sandelin submitted that the terms of the guarantee include the steps to be taken in order for a person to be released from a guarantee. None of those steps were taken.[26] In response to Mr Grove's submission that there was insufficient evidence on which the Associate Judge could be satisfied that Mrs Herron did not have anarguable defence to Westpac's claim, Mr Sandelin submitted that Westpac was notrequired to go further in its response to Mr and Mrs Herron's affidavits than it did.He submitted that Westpac had been presented with a vague reference to an agreement with an unknown person or persons. In the circumstances, it wasappropriate for Ms Madden to review Westpac's file to search for any reference to an agreement. He also submitted that the Associate Judge was entitled to accept MsMadden's evidence that the file contained no reference to an agreement.[27] Finally, Mr Sandelin submitted that the Associate Judge was entitled to reject Mr and Mrs Herron's evidence as being insufficient to suggest any arguable defence.Discussion[28] There was no challenge to the Associate Judge's outline of the principles to be applied when considering a plaintiff's application for summary judgment. TheAssociate Judge said:[10] Westpac needs to prove there is no defence to its claim. Whereashere Westpac's evidence is prima facie sufficient to show there is no defence,Mrs Herron and the Herron Trust need to respond if the summary judgment application is to be defended.[11] Usually the Court will not resolve material conflicts of evidence or assess the credibility of deponents but will be wary of claims of a defence when such are inconsistent with undisputed contemporary documents, or where such are inherently improbable.(footnotes omitted)[29] Westpac had the onus of satisfying the Court that Mrs Herron had no defence. In Pemberton v Chappell,3 Somers J explained "no defence" as referring to theabsence of any real question to be tried, and observed that the notion of "no defence"3 Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3.had been expressed as "no bona fide defence", "no reasonable ground of defence", and "no fairly arguable defence".4 In its judgment in MacLean v Stewart, this Court stressed that the onus remains on the plaintiff throughout, and continues to apply even if the defendant (in this case, Mrs Herron) asserts a defence and adduces evidence directed at showing such.5[30] However, as Lord Diplock said in his judgment in Eng Mee Yong v Letchumanan:6Although in the normal way it is not appropriate for a judge to attempt to resolve conflicts of evidence on affidavit, this does not mean that he is bound to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement on an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself it maybe. In making such order on the application as he "may think just" the judgeis vested with a discretion which he must exercise judicially. It is for him to determine in the first instance whether statements contained in affidavits that are relied on as raising a conflict of evidence upon a relevant fact have sufficient prima facie plausibility to merit further investigation as to their truth.[31] In the context of considering applications for summary judgment, LordDiplock's words have been cited in countless judgments, from Attorney-General v Rakiura Holdings Ltd7 and Pemberton v Chappell, up to the present day, includingMitchell v Trustees Executors Ltd8 and the Associate Judge in the present case. InPemberton v Chappell Somers J said:9Where the defence raises questions of fact upon which the outcome of the case may turn it will not often be right to enter summary judgment. There may however be cases in which the Court can be confident – that is to say, satisfied – that the defendant's statements as to matters of fact are baseless.The need to scrutinise affidavits, to see that they pass the threshold of credibility, is referred to in Eng Mee Yong v Letchumanan ... and in the judgment of Greig J in Attorney-General v Rakiura Holdings Ltd ...(citations omitted)4 At 3.5 MacLean v Stewart (1997) 11 PRNZ 66 (CA) at 69.6 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341.7 Attorney-General v Rakiura Holdings Ltd (1986) 1 PRNZ 12 (HC) at 14.8 Mitchell v Trustees Executors Ltd [2011] NZCA 519 at [52].9 At 4.[32] This Court is required to decide whether the Associate Judge was entitled to reject the defence raised by Mrs Herron as no more than "unsubstantiated assertions", and to conclude that Westpac had satisfied its onus of proving that shedid not have an arguable defence. We are satisfied that the Associate Judge did not err in his conclusion that Mr and Mrs Herron's unsubstantiated assertions had not passed "the threshold of credibility", for a number of reasons.[33] The only evidence put forward in support of the claimed agreement to releaseMrs Herron from the guarantee was Mr Herron's affidavit. Mrs Herron said that allnegotiations with Westpac were undertaken by Mr Herron. When Mr Herron'saffidavit is scrutinised, it plainly does not pass the threshold of credibility.[34] First, Mr Herron said that "Christine was never intended to be a guarantor.However, when we received the September 2007 loan documentation it did have hernamed as a guarantor". In the words of Lord Diplock in Eng Mee Yong, that statement is inherently improbable. Not only did Mrs Herron herself sign an"acknowledgment of guarantor" document, but there was also a solicitor's certificateas to her execution of the guarantee. These two things are evidence that Mrs Herron received advice on what she was signing, and understood her obligations as a guarantor. Her signature and the acknowledgements accompanying it indicate her intention to be a guarantor. Neither Mr Herron nor Mrs Herron asserts that eitherraised any objection at the time to Mrs Herron's being a guarantor. Mrs Herron does not now dispute the solicitor's certificate, or the fact that she willingly signed the"acknowledgement of guarantor" document.[35] Secondly, Mr Herron referred to dealing with Ms Shaw of Westpac, anddiscussing with her "that one of the main purposes of the refinancing was to removeChristine as a guarantor". He did not say that any agreement was reached with Ms Shaw. Mr Herron then said that he "cannot recall with certainty the names of those I dealt with at Westpac", but went on to say that the condition of removingMrs Herron as a guarantor "was definitely also the basis I discussed and agreed with[Ms Shaw's] replacement(s)". Mr Herron did not say how many people he "agreed" with, or their names, or even their gender. His statements are, to use Lord Diplock's words, "equivocal" and "lacking in precision". Neither Mr Herron nor Mrs Herronasserts that either made any attempt to follow up the alleged "agreement". Such afollow-up might have been expected, were a release from the guarantee to be the outcome of it.[36] Thirdly, Mr Herron's assertion of an agreement is inconsistent with contemporary documents. There was no mention of Mrs Herron being released fromher guarantee in the letter from the Herrons' solicitors seeking discharge of themortgage over the Waiheke property. If Mr Herron had indeed reached agreement torelease Mrs Herron from the guarantee with Ms Shaw's "replacement(s)", he couldbe expected to have instructed his solicitors accordingly, and the matter would have been raised in the correspondence with Westpac.[37] Fourthly, it is also telling that the guarantees of Mr and Mrs Herron, theHerron Trust, and Lakov were noted as "existing" and "interlocking" in the Westpacinternal document in which the bank recorded the request for discharge of the mortgage over the Waiheke property. Again, there was no mention in Westpac'sdocuments of a request to release Mrs Herron, let alone any agreement to do so.[38] Fifthly, when Mrs Herron (as guarantor) was served with the Property LawAct notices recording Lakov's default, she did not raise any challenge on the basis of an asserted agreement that she had been released from her guarantee. This isnotwithstanding that the notices served on her recorded Westpac's intention, if thedefaults were not remedied, to exercise its power of sale and to commence action against her personally for any deficiency should the amount realised be less than the amount required to repay the mortgage. No challenge was raised at any time after that, until Mrs Herron was served with the application for summary judgment. We note that there was a gap of more than a year between service of the Property Law Act notices on Mrs Herron and her affidavit in opposition to the summary judgment application. At no stage in that period did she ever raise with Westpac that the Property Law Act notice had been wrongly served on her as she had been released as a guarantor.[39] We reject Mr Grove's submission that once Mr and Mrs Herron's affidavitswere filed, it was incumbent on Westpac to file affidavits sworn by Ms Shaw and her"replacement(s)" or, at least, to disclose its entire file concerning the Herron group'sborrowing, and that in the absence of such evidence, summary judgment should not have been entered. While it would no doubt have been possible for Westpac to do one or other of those things, the Associate Judge was required to assess the application on the basis of what was before him. This Court is also required to assess the matter on the basis of what is before us.[40] The Associate Judge concluded that the defence claimed on behalf of MrsHerron and the Herron Trust was "no more than unsubstantiated assertions". We arenot persuaded that he was wrong to do so. Having assessed the evidence that was before the Associate Judge, we are satisfied that he was right to conclude thatWestpac had, by Ms Madden's second affidavit, met its onus of proving that MrsHerron and the Herron Trust had no defence.Result[41] The appeal is dismissed.[42] In the High Court, the respondent was awarded costs on a solicitor/client basis. Costs were not sought on that basis in this Court. Accordingly, the appellants are to pay the respondents costs for a standard appeal, on a band 2 basis, together with usual disbursements.Solicitors:Graeme Skeates Law, Auckland for AppellantsMinter Ellison Rudd Watts, Auckland for Respondent