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High Court of New Zealand Decisions |
Last Updated: 30 August 2019
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
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CIV-2019-404-616
[2019] NZHC 1646 |
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BETWEEN
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LEPIONKA & COMPANY INVESTMENTS LIMITED
Applicant
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AND
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NALDAPAT LIMITED
First Respondent
LW354 LIMITED
Second Respondent
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Hearing:
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27 June 2019 at 10:00am
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Appearances:
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M D O’Brien QC with M G Colson for the Applicant No appearance for
the First Respondent
K P Sullivan for the Second Respondent
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Judgment:
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15 July 2019
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JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 15 July 2019 at 4:00pm
pursuant to Rule 11.5 of the High Court Rules.
.......................................
Deputy Registrar
Solicitors:
Bell Gully (Jennifer H Stevens/S J Leslie), Wellington, for the Applicant WCM Legal, Wellington (Michael G Bale), for the Second Respondent Copy for:
Mark O’Brien QC and Mike Colson, Wellington, for the Applicant
Kevin P Sullivan, Wellington, for the Second Respondent
LEPIONKA & COMPANY INVESTMENTS LIMITED v NALDAPAT LIMITED [2019] NZHC 1646 [15 July 2019]
[1] Lepionka & Company Investments Ltd (“the Lepionka mortgagee”) applies to set aside two caveats lodged against the title to a 24 hectare property in Kahuranaki Road, Havelock North, Hawkes Bay beside the Tukituki River described in identifier 716653. One caveat was lodged by Naldapat Ltd and the other by LW354 Ltd. Naldapat Ltd withdrew its caveat before the hearing. Accordingly, I was required to consider only the caveat by LW354 Ltd. The interest claimed under its caveat is:
The abovenamed caveator claims an interest in the land contained in the above certificate of title 716653 as beneficial and/or equitable owner of the freehold estate and the fee simple, pursuant to a cestui que trust agreement as per the deed of appointment and retirement of trustee dated 13 November 2018 as successor pursuant to a deed of appointment of trustee dated 20 July 2017 between the registered owner GLW Group Limited and Naldapat Limited.
[2] GLW Group Ltd is the registered proprietor of the property. The man behind the company is Mr Garth Paterson. The company undertook a subdivision development of the property but ran into financial difficulties and did not complete it. Mr Paterson is now a current bankrupt. (He was also bankrupted in Australia but is now discharged.) People associated with Mr Paterson are his former wife, Ms Elizabeth O’Neil, and his current partner, Ms Nadia Dapas. Ms O’Neil lives in Australia. She is now the sole director and shareholder of GLW Group Ltd, now in liquidation. She is also the sole director and shareholder of LW 354 Ltd. Ms Dapas is the director and shareholder of Naldapat Ltd.
[3] The Lepionka mortgagee holds a registered first mortgage over the property. It has standing to apply for removal of the caveat under s 142 of the Land Transfer Act 2017, as it has an estate or interest affected by the caveat. It says that the caveat prevents it from completing sales of the property in the exercise of its powers as mortgagee.
[4] At the end of the hearing, I said that LW354 Ltd’s caveat should be removed. I now give my reasons. In summary, LW354 Ltd claims that GLW Group Ltd owns the property as a trustee under a trust established in 2009. It resigned as trustee in July 2018 and LW354 Ltd has become a new trustee (after a short spell when Naldapat Ltd was trustee). While GLW Group Ltd still holds legal title, LW354 Ltd has a beneficial interest as the new trustee. LW354 Ltd wants to continue claims against the Lepionka mortgagee which GLW Group Ltd had made while it was trustee. LW354 Ltd’s
interest does not, however, prevail over the Lepionka mortgagee’s, whose right to sell the property under its mortgage has been upheld under a decision of Fitzgerald J of December 2017. Her decision did not resolve all issues. GLW Group Ltd appealed against that decision, but her judgment can now safely be regarded as final. GLW Group Ltd went into liquidation. The liquidator and the Lepionka mortgagee made a settlement under which GLW Group Ltd discontinued its claim in this court and abandoned its appeal. LW354 Ltd has no reasonable prospect of reviving that proceeding. The Lepionka mortgagee remains free to complete its sales as mortgagee not restrained by the caveat. Moreover, as a matter of discretion, the caveat should be removed because it was lodged in breach of a court order and an undertaking to the court.
General principles on caveat applications
[5] In Holt v Anchorage Management Ltd, McMullin J stated the purpose of a caveat against dealings under the Land Transfer Act 1952:1
Once lodged, a caveat is notice to all who search the title to the land against which it is registered and to the registered proprietor of the land (to whom notice of its receipt is given pursuant to s 142) that the caveator claims the estate or interest the subject of the caveat. It is both a warning to the persons mentioned that the caveator asserts rights against the land and a protection of those rights. (Section 143(1) uses the phrase "protected by the caveat"). Once the caveat is lodged the Registrar is prohibited from making any entry on the register which has the effect of charging or transferring or otherwise affecting the estate or interest protected by the caveat (s 141).
[6] Although Holt was heard under the Land Transfer Act 1952, McMullin J’s statement equally applies to caveats under the Land Transfer Act 2017. The 2017 Act, which repealed the 1952 Act, applies here as it came into force in November 2018. LW354 Ltd lodged its caveat in January 2019. The Lepionka mortgagee began its application in March 2019. The jurisdiction of associate judges to decide caveat applications has been continued under the new Act.2
1 Holt v Anchorage Management Ltd [1987] NZCA 5; [1987] 1 NZLR 108 (CA) at 10–11.
[7] In caveat applications under ss 142 and 143 of the Land Transfer Act 2017, the caveator generally has the onus of showing a reasonably arguable case for the interest claimed. The interest must come within s 138(1):
138 Caveats against dealings with land
(1) A person may lodge a caveat against dealings with an estate or interest in land (a caveat against dealings) on the basis that the person—
(a) claims an estate or interest in the land, whether capable of registration or not; or
(b) has a beneficial estate or interest in the land under an express, implied, resulting, or constructive trust; or
(c) is transferring the estate or interest in the land to another person to be held on trust; or
(d) is the registered owner of the estate or interest in the land and—
(i) has an interest that is distinct from that of registered owner; or
(ii) establishes to the satisfaction of the Registrar that at the time the caveat is lodged there is a risk that the estate or interest may be lost through fraud.
[8] A personal or contractual right is not enough. The caveator must show an entitlement to a beneficial interest in the land under the caveat.3 Something more than a potential or future interest is required. An interest in the proceeds of sale of a property is not an interest in the property and cannot be protected by a caveat.4
[9] A caveat must contain the “prescribed information”, which includes:5
A description of the nature of the estate or interest claimed by the caveator (which must be stated with sufficient certainty) ...
Details of how the estate or interest claimed is derived from the registered owner
[10] Caveat applications are summary and are therefore not suitable for deciding disputed questions of fact. On the other hand, the court is not required to accept
3 Guardian Trust & Executors New Zealand Ltd v Paul (No.2) [1938] NZLR 1020 (CA) at 1025;
Philpott v NZI Bank Ltd (1989) 1 NZConvC 190 at 246.
4 Castle Hill Run Ltd v NZI Finance Ltd [1985] 2 NZLR 104 (CA).
5 Land Transfer Act 2017, s 138(3) and Land Transfer Regulations 2018, Schedule 2.
uncritically as raising a dispute of fact which calls for further investigation every statement in an affidavit, however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent or inherently improbable it may be. To establish a reasonably arguable case, there must be evidence tending to prove the facts relied on. Assertion, whether in pleadings or affidavits, is not enough. The evidence need not be as extensive as that given in a hearing on the substantive merits. It may be circumstantial. But if there is no evidence to prove the facts contended for, the caveator will not have made out a reasonably arguable case for those facts. As a qualification to the reasonably arguable standard, where there are allegations of fraud or other reprehensible conduct, it is necessary to show a prima facie case.6
[11] For a caveat to be removed, it must be patently clear that the caveat cannot stand either because there was no ground for lodging it at the outset or because any such ground no longer exists. The court has a residual discretion not to uphold a caveat but that is exercised cautiously, as when the caveat could serve no useful purpose or alternative safeguards are available. In Pacific Homes Ltd (In Receivership) v Consolidated Joineries Ltd, the Court of Appeal said:7
We are of the view that in the dictum in Sims v Low, Somers and Gallen JJ were concerned with the situation which was then before the Court and were not putting their minds to a situation in which there is no practical advantage in maintaining a caveat lodged by someone who could properly claim a caveatable interest. In such circumstances, the Court retains a discretion to make an order removing a caveat though it will be exercised cautiously. An order will be made for removal only where the Court is completely satisfied that the legitimate interests of the caveator will not thereby be prejudiced. If, on the facts of a case, it can be seen that the caveator can have no reasonable expectation of obtaining benefit from continuance of the caveat in the form of the recovery of money secured over the land while specific performance of an agreement or if the caveator’s interest can be reasonably accommodated in some other way, such as by substituting a fund of money under the control of the Court then it may be appropriate for the caveat to be removed notwithstanding that the right to a claimed interest is undoubted.
[12] On the exercise of a power of sale by a mortgagee, the court may order the removal of a caveat, even though the caveator has a reasonably arguable case for the
6 Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15].
interest claimed in the caveat.8 The caveat is removed, not because there is not an interest in land under s 138, but because the mortgagee takes priority over that interest and the interest claimed under the caveat will be extinguished under s 103 of the Land Transfer Act on the transfer of title:
103 Transfer of mortgaged land by mortgagee sale
(1) The estate or interest of a mortgagor in land vests in the purchaser of the land on registration of a transfer instrument executed by a mortgagee for the purpose of exercising a power of sale under a mortgage.
(2) The estate or interest transferred vests in the purchaser freed of and discharged from—
(a) liability under the mortgage; and
(b) any other mortgage or interest that does not have priority over the mortgage or that is not binding on the mortgagee.
[13] The Land Transfer Act 2017 introduced a shortcut for the removal of some caveats when a mortgagee transfers title under a power of sale. Under s 141, when a mortgagee transfers title under a power of sale in a registered mortgage and there is a caveat against the same interest to which the mortgage relates, on registration of the transfer the caveat lapses without the need for a court order or the consent of the caveator and the purchaser takes title free of the interest claimed in the mortgage. But that applies only to caveats protecting unregistered mortgages or agreements to mortgage dated later than the registration of the registered mortgage.9 The Lepionka mortgagee cannot, however, use that shortcut because the interest claimed by LW354 Ltd does not arise under a mortgage or agreement to mortgage.
Background
[14] The Lepionka mortgagee says that any rights claimed by LW354 Ltd cannot prevail over its powers as mortgagee to sell the property and give a title cleared of all subordinate interests. The Paterson interests have strongly contested that claim. It is necessary to go into the background.
8 Jenssen v Jenssen CA 246/90, 13 December 1990.
9 Land Transfer Act 2017, s 141(1)(c).
[15] GLW Group Ltd bought the Kahuranaki Road property in 2009 in part with funds borrowed from Westpac Bank which took a registered first mortgage over the property. GLW Group began developing the property to subdivide it into lifestyle blocks for sale. There is a complex history about the development and sales of proposed lots, but for this case it is not necessary to go into the details. They are described in other judgments. I deal only with matters required as background for this case. Mr Andrew Coltart, who was given an option to purchase a lot, is peripheral but will be referred to.
[16] In January 2014, GLW Group Ltd made separate agreements to sell proposed lots in the subdivision to Lepionka & Company Ltd and to the trustees of the SJ Lepionka Family Trust. These are the “Lepionka purchasers”. Mr Stefan Lepionka is behind them. The Lepionka purchasers paid deposits. AFI Management Pty Ltd lent funds to GLW Group Ltd, which gave an unregistered second mortgage over the property (and other securities). The loan was required because GLW Group Ltd had cash-flow problems. Its financial position deteriorated. It used the funds from AFI to pay its monthly interest to Westpac. By early 2015, Westpac had issued default notices to GLW Group Ltd under its mortgage.
[17] Mr Lepionka began discussions with Westpac with a view to acquiring its mortgage. The Lepionka mortgagee was incorporated in March 2015. In early April 2015 it took an assignment from Westpac of the GLW Group Ltd debt and first mortgage. As mortgagee, it adopted the Lepionka purchase contracts under s 179 of the Property Law Act 2007 and entered into a “completion agreement” with the Lepionka purchasers, under which it committed to complete the development of the property and to pay substantial compensation to the Lepionka purchasers (if that did not occur by reason of GLW Group Ltd redeeming the mortgage). In response, GLW Group Ltd said that it wanted to redeem the first mortgage. There were other offers to buy the property, including by Mr Coltart. The Lepionka mortgagee did not accept any of these offers, primarily because it said that it had already exercised its power of sale by adopting the Lepionka purchase contracts.
[18] As mortgagee in possession, the Lepionka mortgagee has continued the development of the property. It has sold two of the lots and has been paid on those
sales. It says that titles for other lots in the subdivision will issue soon, once the current caveat is off the title. It has charged very substantial legal costs against the first mortgage.
[19] GLW Group Ltd and AFI Management Pty Ltd took issue with the action taken by the Lepionka mortgagee in taking the assignment of the mortgage from Westpac, refusing redemption offers, in carrying out the subdivision as mortgagee in possession and in selling the property. The exercise of its powers was reviewed in an important hearing before Fitzgerald J – AFI Management Pty Ltd v Lepionka & Company Investments, the “December 2017” decision.10 They sued in separate proceedings, which Fitzgerald J heard together. In her December 2017 decision, she held:11
(a) A mortgagee’s adoption of an existing sale and purchase agreement under s 179 of the Property Law Act 2007 is the exercise of a mortgagee’s power of sale.
(b) The Lepionka mortgagee’s adoption of the Lepionka purchase contracts was effective on 7 April 2015.
(c) The Lepionka mortgagee did not wrongfully refuse to permit GLW Group Ltd to redeem the first mortgage in April 2015.
(d) The Lepionka mortgagee breached its equitable duties as mortgagee in exercising its power of sale for an improper purpose. It did not, however, breach its duty by failing to accept an offer by Mr Colthart of 1 May 2015 or an offer by Tukituki Land Ltd made in November 2015.
(e) The Lepionka mortgagee was not required to account to AFI on the basis that it was in “wilful default”.
(f) The Lepionka mortgagee had not taken reasonable precautions to obtain the best price reasonably obtainable at the time of sale, but
10 AFI Management Pty Ltd v Lepionka & Company Investments [2017] NZHC 3116.
11 At [494].
Fitzgerald J could not decide whether there had been a breach of the duty under s 176 of the Property Law Act 2007. That would turn on an assessment of the final price achieved by the Lepionka mortgagee from the sale of the property, compared to the best price reasonably obtainable for the property in April 2015.
(g) The best price readily obtainable in April 2015 was $4.3 million.
(h) It would be inequitable to set aside the Lepionka purchase contracts. GLW Group Ltd’s only remedy was in damages. Any such damages would be considered in the taking of accounts by the Lepionka mortgagee. There would be a final assessment of damages after the subdivision was completed.
(i) There would be a general account taken by the Lepionka mortgagee in relation to the costs charged and claimed against the first mortgage, including legal costs.
(j) The AFI Management Pty mortgage secured not only funds advanced directly to GLW Group Ltd but also advances to other Paterson entities. Fitzgerald J recorded that the amount advanced under the loan agreement was AU$4,109,280.12
[20] Her decision was interim as more steps were required. Titles would have to issue. Sale and purchase agreements would have to be completed. There would be a taking of accounts, and that would not be straightforward. A taking of accounts by a mortgagee in possession is exacting.13 In this case it would also be contentious. GLW Group Ltd did not accept that the Lepionka mortgagee should have run up all the costs it had incurred in completing the subdivision. It was suspicious that it had preferred the interests of the Lepionka purchasers. The Lepionka mortgagee had also charged very high legal fees against the mortgage. A hearing on the taking of accounts would require significant hearing time and would be costly.
12 St [489].
13 See for example Couzens v Francis [1948] NZGazLawRp 18; [1948] NZLR 567.
[21] For this case Fitzgerald J’s refusal to set aside the Lepionka purchase contracts is important. It meant that they could be completed as effective exercises of a mortgagee’s power of sale. On transfer to the purchasers, s 103 of the Land Transfer Act would operate and all subordinate and unregistered interests in the property would be extinguished. The owners of those extinguished interests would instead have a claim to be paid from the proceeds of sale under s 185 of the Property Law Act 2007. And that would turn on the outcome of a contentious taking of accounts. But the point to note here is that, so long as her decision stands, no lower-ranking registered interest and no unregistered interest will survive the transfer of title and no caveat relying on such an interest should block the transfer of title.
[22] The Lepionka mortgagee has also had to deal with caveats which have slowed it. This is the seventh. The others are:
(a) Two caveats lodged in February and May 2013 respectively by Mr Coltart to protect his interests as purchaser under an agreement of August 2012 with GLW Group Ltd. In 2015 Associate Judge Smith ordered their removal,14 but the Court of Appeal upheld the caveats.15 There are no ongoing matters with Mr Coltart requiring resolution.16 He is independent of the people behind GLW Group Ltd.
(b) In March 2016 Horseshoe Bend Hawkes Bay Ltd, of which Ms O’Neil is a shareholder and Ms Dapas director, lodged a caveat claiming that it was the company which was to own a “common property” lot under the subdivision. Associate Judge Sargisson ordered the removal of the caveat.17 She held that Horseshoe Bend Hawkes Bay Ltd did not have a caveatable interest and that the Lepionka mortgagee’s rights took priority.
(c) On 23 September 2016, GLW Group Ltd lodged a caveat claiming an equitable lien as unpaid vendor. It later withdrew the caveat.
14 Lepionka & Company Investments Ltd v Coltart [2015] NZHC 2849.
15 Coltart v Lepionka & Company Investments Ltd [2016] NZCA 102, [2016] 3 NZLR 36.
16 There was a settlement under a deed of March 2016.
17 Lepionka & Company Investments Ltd v Horseshoe Bend Hawkes Bay Ltd [2016] NZHC 2318
(d) On 31 January 2018 Mr Paterson lodged a caveat claiming under a “cestui que trust” agreement. In July 2018 Fitzgerald J ordered its removal.18
(e) In November 2018 Naldapat Ltd lodged its caveat claiming an interest as purchaser under an agreement with GLW Group Ltd as vendor. As noted above, Naldapat Ltd withdrew the caveat before the hearing.
Apart from the Coltart caveats, all the caveats were lodged by Mr Paterson and his associates after the Lepionka mortgagee purported to exercise its rights as mortgagee.
Events since December 2017
[23] If matters had stayed as they were at the time of Fitzgerald J’s decision, an order could be made for the removal of any caveat relying on an unregistered interest. But matters have moved on. The inquiry here is whether those changes mean that her decision no longer stands.
[24] GLW Group Ltd appealed against her decision.
[25] AFI Management Pty Ltd served a statutory demand on GLW Group Ltd for AU$4.1 million as unpaid principal (leaving out interest). GLW Group Ltd applied to set aside the statutory demand. In a decision of 19 June 2018 Fitzgerald J declined to set aside the statutory demand.19 She found that GLW Group Ltd was insolvent. She did not make an immediate order for liquidation but gave GLW Group Ltd five working days in which to pay the amount in the statutory demand. It did not pay.
[26] In CIV-2015-404-2168, one of the proceedings Fitzgerald J had decided in December 2017, GLW Group Ltd applied for a stay of judgment pending appeal. At the same time in CIV-2018-404-690 the Lepionka mortgagee applied to remove Mr Paterson’s caveat.20 In her decision of 6 July 2018 on both matters, Fitzgerald J declined the stay in the light of undertakings offered by the Lepionka mortgagee and
18 GLW Group Ltd v Lepionka & Company Investments Ltd [2018] NZHC 1658.
19 GLW Group Ltd v AFI Management Pty Ltd [2018] NZHC 1460.
20 In [16](d) above.
the Lepionka purchasers.21 Under these undertakings, the mortgagee and the purchasers undertook to unwind any sale and to retransfer the lots if the Court of Appeal allowed GLW Group Ltd’s appeal and set aside the Lepionka sale and purchase agreements. They would hold the lots in the names of the Lepionka purchasers and would not encumber the lots except as provided in the sale and purchase agreements; they would not build on the lots and would return the lots to GWL Group Ltd if the Court of Appeal so ordered. Any sale proceeds would also be repaid.
[27] In the same decision, Fitzgerald J ordered the removal of the caveat Mr Paterson had lodged on 31 January 2018 claiming under a trust agreement. She rejected the caveat for a number of reasons, including that there was no evidence to support the alleged caveatable interest22 and that the Lepionka purchase contracts did not establish any trust.23 Mr Paterson failed to persuade Fitzgerald J that he had an arguable interest in the land as a beneficiary under any trust or as trustee: “His claim to hold contractual rights on trust for his family is hollow, unsupported by evidence”.24 It was clarified in the hearing that GLW Group Ltd did not claim a caveatable interest in the land.25
[28] The respondents to the caveat application were not only Mr Paterson but also GLW Group Ltd (second respondent), Ms O’Neill (fourth respondent) and Ms Dapas. The Lepionka mortgagee sought orders restraining them from lodging further caveats. Fitzgerald J was satisfied that Mr Paterson should be restrained from lodging any caveats without leave of the court.26 GLW Group Ltd consented to the same order.27
[29] She did not, however, make similar orders against Ms O’Neil and Ms Dapas, because they offered undertakings to the court. The undertaking by Ms O’Neill is important because she is the director of LW354 Ltd:
The fourth respondent undertakes not to lodge, attempt to lodge or cause a caveat to be lodged against the land in any capacity, including in her capacity
21 GLW Group Ltd v Lepionka [2018] NZHC 1658.
22 At [45].
23 At [46].
24 At [68].
25 At [16].
26 At [66]-[73].
27 At [16] and [64].
as director, trustee or otherwise lawful caveatable interest of the second respondent without first obtaining leave of the court save for:
(a) any caveat to protect the interest of the second respondent as beneficiary of an institutional constructive trust created by the applicant when it sold lots 2 and 6 and received net proceeds of approximately $3.5 million (being a subsequent exercise of the power of sale of the applicant, the initial exercise being when it purportedly adopted the Lepionka purchase contracts pursuant to section 179 of the Property Law Act 2007 on 7 April 2015); and
(b) where an entity or trust controlled by the fourth respondent takes an assignment of, or pays out in whole or in part, the second mortgage described in the application.
After referring to the undertakings, Fitzgerald J said:28
... Nevertheless, each of Ms O’Neil and Ms Dapas will no doubt:
(a) seek appropriate legal advice before taking steps to lodge a caveat, including in relation to a caveat in respect of the purported “carve out” for payment in whole or in part of AFI’s second mortgage over the Land, including in circumstances where AFI already has a caveat over the Land; and
(b) take a responsible approach generally to any future purported caveatable interest, given the issues that have arisen in relation to caveats in the HBHB and these proceedings.
[30] Fitzgerald J’s decision does not give rise to an issue estoppel as to absence of a caveatable interest in the land. In that I am following Joseph Lynch Land Co Ltd v Lynch.29 The reservation of leave to apply to lodge a caveat shows that this was not a final decision on that issue.
[31] Sometime in 2018, AFI Management Pty Ltd assigned the debt owed by GLW Group Ltd and the related securities to K R Mortgage Company Ltd, another Lepionka company. The assignment has not been put in evidence nor the amount paid to AFI Management Pty Ltd for the assignment, but it is not disputed that the assignment was made.
28 At [74].
29 Joseph Lynch Land Co Ltd v Lynch [1995] 1 NZLR 37 (CA).
[32] On 27 July 2018, Ms O’Neil as sole shareholder of GLW Group Ltd passed a resolution putting the company into liquidation under s 241(2)(a) of the Companies Act 1993. She appointed Mr Damien Grant as liquidator.
[33] Mr Grant’s second report, dated 15 May 2019, records that 12 unsecured creditors had made claims totalling $222,549.79. GLW Group Ltd had entered into a legal settlement with the Lepionka interests under which GLW Group Ltd was to be paid $100,000. With that settlement, GLW Group Ltd discontinued its claim against the Lepionka mortgagee in CIV-2015-404-2168 and abandoned its appeal.
[34] The day before the notice of abandonment of the appeal was filed, Mr Paterson filed in the Court of Appeal a memorandum which the Court treated as an application to be added as an appellant. While he had been a party in the case before Fitzgerald J (CIV-2015-404-2168), he had not appealed against her decision. Later, LW354 Ltd filed a memorandum asking to be added to the appeal. The Court of Appeal dismissed the applications of Mr Paterson and LW354 Ltd to be added as appellants.30 I will come back to that decision.31
[35] The Lepionka mortgagee says that with the discontinuance of CIV-2015-404- 2168 in this court and the abandonment of the appeal, Fitzgerald J’s decision in AFI Management Pty Ltd v Lepionka is no longer under appeal and is now final. The lots in GLW Group Ltd’s subdivision can now be sold. Two sales (lots 2 and 6) have already been completed with the proceeds applied in debt reduction. The Lepionka purchases have still to be completed. Lots 10 and 11 have still to sell. It accepts that it will have to account under s 185 of the Property Law Act 2007, but says that there will be nothing left for unsecured creditors or GLW Group Ltd. It says that the amount owing under the first mortgage is $8.5 million with interest, which accrues at 10.5 per cent per annum or $75,000 a month. The debt to AFI Management Pty Ltd, now K R Mortgage Company Ltd, is over $9 million once interest is taken into account. The proceeds of sale, including anticipated proceeds of sale of the unsold lots (10 and11), will not be enough to clear all the debts to the Lepionka interests.
30 GLW Group Ltd v Lepionka & Company Investments Ltd [2019] NZCA 24.
31 At [72] below.
[36] The Lepionka mortgagee has not given chapter and verse on the amounts it claims. Given the challenges to the subdivision costs and the legal costs it has charged to its mortgage, it has not shown beyond argument that its claims are correct. Similarly, while it has proved the principal owing under the AFI loan,32 it has not proved how much is owing for interest. All the same, it seems very likely that there will be nothing left for the Paterson interests.
[37] The Lepionka mortgagee also points out that it has achieved a settlement by its payment to the liquidator of GLW Group Ltd and by taking the assignment of the AFI Management Pty Ltd debt and associated securities. While there will be nothing left for Mr Paterson and his associated interests, there is enough finality to allow the sales to proceed.
[38] The Paterson interests do not accept this. They want to carry on CIV-2015- 404-2168 and the appeal. In their eyes, Fitzgerald J’s judgment can be attacked, including on these grounds:
(a) Westpac and the Lepionka mortgagee did not comply with s 118 of the Property Law Act 2007 (which provides a moratorium) but the mortgagee accepted interest on the principal amount after expiry of the term of the loan.
(b) The Lepionka mortgagee wrongly did not accept offers to redeem.
(c) Given the Lepionka mortgagee’s breach of equitable duty, the Lepionka purchases should be set aside. That gives them a claim to an interest in the property.
(d) The market value of the property was higher than she found.
They also maintain that a proper taking of accounts will show that the Lepionka claims are overstated. I have not set out in full every argument that the Paterson interests wish to raise. Mr Sullivan set out extensive matters, some traversed in the December
32 Fitzgerald J found the amount proved in her statutory demand decision.
2017 decision and some new. Without intending any disrespect to Mr Sullivan, it is not necessary to go into them all, because however they are formulated, the Paterson interests must show an arguable case that they can be continued. My reasons for saying that they cannot apply to all the potential arguments.
[39] Aside from lodging the caveat, the Paterson interests have not taken any formal steps to further their claims in CIV-2015-404-2168 and the appeal.
The trust alleged by the Paterson interests
[40] Notwithstanding the liquidation of GLW Group Ltd, the abandonment of the appeal and the discontinuance of CIV-2015-404-2168, the Paterson interests say that they can continue. They say that GLW Group Ltd was a corporate trustee but that it resigned its trusteeship before it was put into liquidation. Naldapat Ltd replaced it as trustee, but Naldapat in turn resigned and was replaced by LW354 Ltd as trustee. The rights in the proceeding against the Lepionka mortgagee, including the right of appeal, are trust assets that GLW Group Ltd no longer held, once it resigned as trustee. Mr Grant, as liquidator of GLW Group Ltd, therefore had no authority to enter into the settlement agreement with the Lepionka mortgagee, to agree to discontinue the proceeding and to abandon the appeal to the Court of Appeal. Because the settlement can be set aside, so can the discontinuance and the abandonment of the appeal and the appeal against Fitzgerald J’s decision can be reinstated.
[41] The trusteeship claim arises this way. In early 2009, Mr Paterson agreed to buy the Kahuranaki Road property. On 14 September 2009, he signed a deed of nomination and trust, appointing GLW Group Ltd as nominee to take title. The relevant operative words are:
The nominator ... nominates the nominee as the party that is to take title to the property in trust for the nominator.
(Emphasis added)
[42] Mr Paterson (“GP”) and GLW Group Ltd (“GLW”) signed a deed on 30 September 2009 called “Declaration of trustees re trust agreements/arrangements in New Zealand”. As background to that document, Mr Paterson had already arranged
for the shares in GLW Group Ltd to be settled on Mr V Franklin to hold on trust for Mr Paterson’s sons, Luke and William. The deed includes the following:
GLW hereby confirms in this declaration, that the property transferred to it at settlement on 19 September 2009, (following the nomination pursuant to the Sale and Purchase agreement dated 18 March 2009) is held by GLW as bare trustee for the boys, with GP (meaning Mr Paterson) named on the 14 September 2009 trust deed in lieu of the boys, the boys not being of legal age to administer their own affairs.
GP hereby confirms that this declaration that the property declared to be held on trust for him by GLW as bare trustee, is only held that way due to the legal owners (the boys) not being of legal age to administer their own affairs. As such, GP is the holder of the property in trust for his sons. The ownership and all the rights and entitlements of the property is for the sole benefit of LUKE and WILLIAM PATERSON.
(Emphasis added)
Under these documents GLW Group Ltd owned the Kahuranaki Road property on trust for Mr Paterson, who in turn held his beneficial interest on trust for his sons.
[43] Ms O’Neil has included in her affidavit a copy of a deed of appointment and retirement of trustee dated 20 July 2018 under which GLW Group Ltd retired as trustee and Naldapat Ltd accepted appointment as trustee. LW354 Ltd was incorporated on 13 November 2018. On the same day it was appointed new trustee in place of Naldapat Ltd under a deed in similar terms to the deed under which Naldapat Ltd was appointed. Ms O’Neil also explains that GLW Group Ltd takes its name from Mr Paterson and his sons: Garth, Luke and William.
[44] The Lepionka mortgagee is understandably suspicious of the claim that LW354 Ltd is now the trustee of a trust for the Kahuranaki Road property first established in September 2009. It points out that Mr Paterson’s conduct was inconsistent with the existence of a trust. Moreover, if a trust existed, he did not tell others about it. First, Fitzgerald J was critical of Mr Paterson’s reliability and credibility.33
[45] Second, the existence of the trust is inconsistent with Mr Paterson’s dealings with Westpac.34 In the mortgage registered on 9 October 2009, amongst other things GLW Group Ltd as mortgagor undertook:
3. You undertake to the secured parties as follows, except to the extent that the secured parties consent or is expressly permitted in a bank document:
(a) Title
Only you own the mortgaged property or will do so on completion of any purchase financed under the mortgage. You must make sure that no other party has any:
...
(j) No dealings
You must obtain the secured parties’ with consent to ...
As director of GLW Group Ltd Mr Paterson signed certificates to Westpac when further accommodation was arranged. A certificate of 15 December 2012 included:
The company is entering into the documents solely for its own benefit and not as trustee or nominee arranged by any third party.
Another certificate made on 10 January 2014 contains the same declaration. There is no evidence that Westpac was made aware of the trust.
34 In the hearing Mr O’Brien QC submitted that these dealings gave rise to an estoppel binding GLW Group Ltd and LW354 Ltd. After discussion, he did not pursue the matter. It was not developed to the extent that I could hold in the context of a caveat application that all the grounds for equitable estoppel had been established.
[46] Third, in the caveat case,35 while there were claims of trusteeship to justify a caveat, GLW Group Ltd did not state that it was holding the land under a trust. In fact, it disclaimed any caveatable interest.
[47] Fourth, the first that the Lepionka interests knew anything about the alleged trust was Mr Paterson’s affidavit of 20 December 2018 filed in the Court of Appeal in support of his application to be added as a party to the appeal. Copies of the deed of nomination of 14 September 2009 and the declaration of 30 September 2009 were attached as exhibits.
[48] Notwithstanding these difficulties, Ms O’Neil has provided two documents that support the existence of the trust on which GLW Group Ltd held the land. The first is an email of 1 October 2009 by a witness to the 30 September 2009 declaration, where the witness refers to having signed the document (“yesterday’s NZ farm secret trust deed”). The second is a deed dated 7 April 2012 which amends a deed for a trust Mr Paterson established in Australia in May 2000, the Garth Paterson Family Trust. The April 2012 deed refers to the trust established on 30 September 2009.
[49] Given those matters, it is arguable for LW354 Ltd that in September 2009 GLW Group Ltd declared in writing that it held the Kahuranaki Road property on trust and the trust has continued ever since. In a proceeding where I have to decide whether LW354 Ltd has an arguable case, I cannot reject out of hand the claim that GLW Group Ltd held the property on trust until 20 July 2018 and the trusteeship passed from it to Naldapat Ltd and in turn to LW354 Ltd.
The caveatable interest
[50] Here again is the interest that LW354 Ltd claims in its caveat:
The abovenamed caveator claims an interest in the land contained in the above certificate of title 716653 as beneficial and/or equitable owner of the freehold estate and the fee simple, pursuant to a cestui que trust agreement as per the deed of appointment and retirement of trustee dated 13 November 2018 as successor pursuant to a deed of appointment of trustee dated 20 July 2017 between the registered owner GLW Group Limited and Naldapat Limited.
35 GLW Group Ltd v Lepionka [2018] NZHC 1658.
With that, LW354 Ltd is claiming a beneficial interest in the Kahuranaki Road property arising from the transfer of the trusteeship to it. GLW Group Ltd remained the registered proprietor. Legal ownership could be changed only on registering a dealing under the Land Transfer Act. But as the new trustee LW354 Ltd could call for the legal title to be transferred to it. If necessary, it could apply to the court for a vesting order.36 The deeds under which Naldapat Ltd and LW354 Ltd became trustees had vesting clauses, but until there was a transfer under the Land Transfer Act they were effective to transfer only an equitable interest in the land. LW354 Ltd’s right to call for the legal title is an interest under s 138 of the Land Transfer Act and is caveatable. The caveat has a mistaken reference to a deed “dated 20 July 2017”. That is an obvious misnomer and does not invalidate the caveat.
[51] LW354 Ltd’s caveat does not claim any greater interest in the land than that. The submissions for LW354 Ltd made constructive trust claims and the Lepionka mortgagee rejoined that the caveat was invalid for not stating clearly that an interest under a constructive trust was claimed. The constructive trust arguments are beside the point in establishing the interest claimed under the caveat.
[52] As the replacement trustee, LW354 Ltd can have no greater rights in the land than GLW Group Ltd. Its interest is subject to the interests of the secured creditors, the Lepionka mortgagee and KP Mortgage Company Ltd. If the Lepionka mortgagee is correct, the interest of GLW Group Ltd as mortgagor will be extinguished on the transfer to the Lepionka purchasers in the exercise of the powers under the mortgage. LW354 Ltd’s interest in the land as successor trustee will be likewise extinguished.
Can LW354 Ltd continue the proceeding by GLW Group Ltd against the Lepionka mortgagee?
[53] LW354 Ltd wishes to continue GLW Group Ltd’s claim against the Lepionka mortgagee in CIV-2015-404-2168. Ms O’Neil puts it this way:
36 Trustee Act 1952, ss 52 and 57 and Land Transfer Act 2017, s 89.
[54] For LW354 Ltd to continue GLW Group Ltd’s claim against the Lepionka mortgagee, it will need to overcome these obstacles: the settlement between GLW Group Ltd and the Lepionka mortgagee, the discontinuance in this court and the abandonment of the appeal to the Court of Appeal.
The settlement between GLW Group Ltd and the Lepionka mortgagee
[55] As to the settlement which Mr Grant made with the Lepionka interests, LW354 Ltd says that as GLW Group Ltd was no longer trustee, it could not surrender or discharge the rights claimed in CIV-2015-404-2168 and the appeal. It claims that LW354 Ltd, as the successor trustee, is not bound by the settlement. Ms O’Neil says that Mr Grant was aware of the trust. She has attached copies of emails between Mr Paterson and Mr Grant in May 2018 where Mr Grant suggested that it would be prudent to replace GLW Group Ltd as trustee before liquidation. Mr Grant has not given an affidavit. His second liquidator’s report is silent on the question of any trusteeship. It is arguable for LW354 Ltd that after going into liquidation GLW Group Ltd could not deal with trust assets that had passed to the replacement trustees – at least, not without the assistance of the court.
[56] I record two potential objections which do not hold up and then say why the Lepionka mortgagee can nevertheless take the benefit of the settlement.
[57] First, it might be thought that as liquidator of the insolvent GLW Group Ltd, Mr Grant could act in the interests of trust creditors to realise a trust asset, the rights claimed in CIV-2015-404-2168 and the appeal. But that is true only up to a point. There is no suggestion that any of GLW Group Ltd’s creditors are not trust creditors. That is, the company incurred all its liabilities as trustee and there are no general creditors. A trustee has a right of indemnity against trust assets for liabilities incurred
as trustee.37 The indemnity allows for reimbursement, exoneration, retention and realisation. It is secured by an equitable lien, a proprietary interest which arises by operation of law and takes priority over the claims of beneficiaries. If a corporate trustee goes into liquidation, the right of indemnity vests in the liquidator. If the trust property vests in a new trustee, the lien survives and the new trustee takes subject to the lien of the old trustee. But there is a catch. The former trustee cannot retain assets for the indemnity against the new trustee. The equitable lien can be exercised only by court order. In LSF Trustee Ltd v Footsteps Trustee Co Ltd (in liq) I said:38
The trustee may retain the trust fund until he has been indemnified for present liabilities and contingent or future liabilities, and a trustee may realise trust assets to meet his expenses and liabilities. That position changes when the trustee is replaced. The equitable lien allows the former trustee recourse to trust assets owned by the new trustee, but only with the court’s assistance.
There is no evidence that Mr Grant sought the court’s assistance before settling with the Lepionka interests. It is arguable for the Paterson interests that he could not deal with trust assets after GLW Group Ltd retired as trustee. The problem might be cured by the court giving retrospective approval, as in Trim Perfect Australia Pty Ltd v Allbrook Constructions Pty Ltd, but I cannot deal with that here.39 That requires a separate proceeding involving all the parties to the agreement and the Paterson interests.
[58] Second, Mr Colson submitted that the cause of action had not vested in the new trustees and Mr Grant as liquidator could still deal with it as an asset of the company. To put his submission into context, as a conveyancing shortcut in most cases a deed appointing a new trustee vests trust assets in the new trustee without the need for express words of conveyance.40 In practice many deeds appointing new trustees have express terms vesting all trust assets in the new trustee. Mr Colson argues that in this case only some trust assets vested.
37 For the following principles, see Lemery Holdings Ltd Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344, (2008) 74 NSWLR 550; LSF Trustee Ltd v Footsteps Trustee Co Ltd (in liq) [2017] NZHC 2619, [2017] NZAR 1676 at [14]- [16].
38 At [16].
39 Trim Perfect Australia Pty Ltd v Allbrook Constructions Pty Ltd [2006] NSWSC 153.
40 Trustee Act 1956, s 47(1)(b). For present purposes it is not necessary to dwell on the limitations and exceptions.
[59] The deed of appointment and retirement of trustee between GLW Group Ltd and Naldapat Ltd includes these provisions:
1.3 Discharge of retiring trustee
On and from the date of this deed the Retiring Trustee is discharged from further performance of its obligations and duties as trustee of the Trust.
1.4 Assignment of Trust’s debts
(a) The Retiring Trustee must give notice in writing to each person or entity owing monies to the Retiring Trustee, as trustee of the Trust property, and do all things as may be necessary for the assignment to the New Trustee of any real property mortgage debts or chose of action of the Trust for the real property.
(b) For the avoidance of doubt, the mortgage debts referred to above are specifically limited to:
(i) First mortgage debt to Westpac Bank (now Lepionka and Company Investments Ltd);
(ii) second mortgage debt to AFI Management Pty Ltd, over limited parts of the property described in the attached plan as Lots 3, 4, 5, 8 and 11. Also, a limited part, (to the value of
$630,000) of Lot 2. The liability of the second mortgage debt assumed by the New Trustee under this debt is limited to the combined value of lots 3, 4, 5, 8 and 11, as per the contracts from January 2014 between the retiring trustee and Lepionka and Company Ltd; and Stefan Lepionka and Nigel Hughes ATF of the S J Lepionka Family Trust; less the value of the assigned mortgage; plus $630,000 from Lot 2.
The details particularised in (i) and (ii) above are hereinafter called the
Mortgage Debts.
1.5 Indemnity
The new trustee indemnifies the retiring trustee to the limit of the net assets of the trust against loss arising from the mortgaged debts which the retiring trustee has incurred while acting as trustee and which are unpaid as at the date of this deed, and undertakes and agrees that the new trustee will pay and discharge the mortgage debts out of the assets of the trust.
...
2.4 Title to the real property of the trust
The execution and, where required by law, the registration of this deed will without any conveyance vest the real property of the trust in the new trustee. The new trustee and the retiring trustee must do all things necessary to transfer the legal title to the real estate in the trust to the new trustee, including all necessary notifications, registrations, and other procedures and formalities.
2.5 Funds due from the sale of the property not properly subject to trust
The proceeds of sale of any lots not listed in paragraph 1.5(b) above (includes monies above the $630,000 from lot 2), are property of the trust and from the date of this executed deed, vest with the new trustee.
The deed of appointment and retirement of trustee between Naldapat Ltd and LW354 Ltd of 13 November 2018 is generally in the same terms except that cl 2.5 reads:
The proceeds of sale of any of the property is the property of the trust, and from the date of the executed deed, vests with the new trustee. The proceeds of sale of any chattels on the property also vests with the new trustee. However, those proceeds only vest with the new trustee for the purpose of distribution of the said proceeds to the owner of the chattels.
[60] Mr Colson argued that cl 2.4 applied to the real estate, that is the GLW Group Ltd’s interest in the Kahuranaki Road property. There is a misnomer in cl 2.5. Clause 1.5(b) should properly be read as cl 1.4(b). Clause 2.5 applies only to any surplus available after mortgagees have been paid. He argued that other trust assets, not referred to in cl 1.4(b), remained vested in GLW Group Ltd.
[61] I do not accept that interpretation. It is inconsistent with cl 1.3, under which the retiring trustee is discharged from further performance. It is hard to see how the trustee could perform duties after discharge. Under cl 1.4(a), the parties intended to transfer “any real property mortgage debts or chose of action of the trust for the real property” to the new trustee. GLW Group Ltd’s claim against the Lepionka mortgagee in CIV-2015-404-2168 and in the appeal are a chose in action under cl 1.4(a). The clause can be read as assigning the chose in action to the new trustee. Admittedly the clause does not contain express words of conveyance. It is, instead, promissory: “The retiring trustee must give notice in writing ... and do all things as may be necessary for the assignment ...” The new trustee can enforce that, and equity regards as done what ought to be done. Accordingly, it is arguable for LW354 Ltd that the chose in action in GLW Group Ltd’s claims in CIV-2015-404-2168 and appeal rights vested in Naldapat Ltd under the deed of 20 July 2018 and were no longer an asset of GLW Group Ltd.
[62] Now for the point that protects the Lepionka mortgagee. Even though the causes of action arguably had vested in Naldapat Ltd before GLW Group Ltd went
into liquidation, and later in LW354 Ltd, that does not mean that the Paterson interests remain free to continue against the Lepionka mortgagee. This aspect is governed by Part 2 subpart 5 of the Property Law Act 2007 – assignment of things in action.
[63] These definitions in s 48 can be noted:
assignment means an instrument effecting or relating to an assignment
debt includes an obligation to—
(a) pay money:
(b) deliver or transfer property:
(c) do or not do any other thing
debt owing includes an obligation that is due to be performed
debtor means a person (including a trustee) who is under an obligation to pay a debt
payment of a debt includes the performance of an obligation that is not an obligation to pay money
thing in action—
(a) means a right to receive payment of a debt; and
(b) includes part of a thing in action.
These extended definitions of “debt” and “payment” apply to GLW Group Ltd’s ongoing claims in CIV-2015-404-2168 and the appeal. The Lepionka mortgagee is the debtor, which is said to be under obligations to transfer property (to return the Kahuranaki Road property if the appeal succeeds) and to pay money (the taking of accounts under s 185 of the Property Law Act, including paying any damages for breach of any duty as mortgagee). Those obligations are debts.
[64] Under the settlement between GLW Group Ltd and the Lepionka purchaser, there was a payment of $100,000 in full and final settlement of the claim made by GLW Group Ltd. While the agreement is not in evidence, there is no dispute that it had that effect. It can be seen in the payment to the liquidator, the discontinuance of CIV-2015-404-2168 and the abandonment of the appeal. The settlement discharged the debt.
[65] The Lepionka mortgagee can assert that discharge against the Paterson interests because it did not actually know that the claim had been assigned to a new trustee. Section 51(2) of the Property Law Act 2007 says:
Payment of all or part of a debt to the assignor by a debtor who does not have actual notice of the assignment discharges the debtor to the extent of payment.
There is no evidence that the Lepionka mortgagee actually knew of the assignment. The Lepionka mortgagee is clear in its evidence that it first knew of any trusteeship by GLW Group Ltd and that LW354 Ltd had replaced it as a trustee when it received Mr Paterson’s affidavit of 20 December 2018. By then, it had already settled with the liquidator of GLW Group Ltd because a discontinuance had been filed in the High Court and the appeal to the Court of Appeal had been abandoned. In the face of that clear evidence, LW354 Ltd’s response is speculative. Ms O’Neil says:41
LW354 Ltd stands in the position that GLW Group Ltd used to, and this was known by the liquidator when he entered into a settlement with Lepionka, so that will surely have been disclosed to Mr Lepionka and his lawyers. They took the risk that LW354 Ltd and Garth would continue to pursue the litigation and continue to demand provision of the accountant by LCIL as ordered by the High Court.
While cl 1.4 of each deed of retirement requires the retiring trustee to give notice of the assignment to the debtor (the Lepionka mortgagee), it was in the interests of the new trustee, as assignee, to ensure that notice was given. For the interest asserted in the caveat to be arguable, LW354 Ltd needs some evidence that notice was given to the Lepionka mortgagee. Ms O’Neil as director of GLW Group Ltd would know whether the company as retiring trustee gave notice to the Lepionka mortgagee under cl 1.4. Mr Paterson and Ms Dapas could also have told her whether they gave notice. In the absence of any evidence from any of them that actual notice was given, I cannot accept her speculation that Mr Grant might have given notice.
[66] Even if the Property Law Act 2007 did not apply, an incoming trustee should still have given notice to the debtor. The learned authors of the Law of Trusts say:42
But effective as the assignment may be as between the former trustees and those who replace them, the new trustees will be under a duty to perfect their
41 Affidavit of 10 June 2019 at [18].
42 H A J Ford and W A Lee Law of Trusts (3rd ed, Thomson Reuters, Sydney) at [8400].
title by notifying the relevant obligors or by registration as may be required by the character of each particular item of the trust property. Otherwise the obligors will continue to consider themselves bound to the former trustees, and if they pay them they will be discharged.43
[67] Accordingly, the claim in CIV-2015-404-2168 was discharged under the settlement between GLW Group Ltd (in liq) and the Lepionka mortgagee, notwithstanding the assignment under the deed of 20 July 2018.
The discontinuance of CIV-2015-404-2168 and the abandonment of the appeal
[68] Even if LW354 Ltd could get over the problem that the claim against the Lepionka mortgagee has already been discharged, it has to set aside the discontinuance in this court and the abandonment of the appeal.
[69] LW354 Ltd no doubt wishes to be substituted by GLW Group Ltd as plaintiff in CIV-2015-404-2168. It could only do that if it could have the discontinuance set aside. Under r 15.22 of the High Court Rules, a discontinuance may be set aside if the court is satisfied that the discontinuance is an abuse of the process of the court. Mr Sullivan did not explain exactly how LW354 Ltd would put its case, but I assume that it would run something along the lines that the settlement between GLW Group Ltd (in liq) and the Lepionka mortgagee was invalid, the court should set aside the settlement or declare that it was invalid and LW354 Ltd should be substituted as plaintiff to continue the claim in place of GLW Group Ltd. The abuse of process lay in the discontinuance by someone who had no authority to do so. It was in the beneficiaries’ interests to allow CIV-2015-404-2168 to continue.
[70] McGechan comments that situations where a discontinuance amount to an abuse of process will surely be rare.44 The argument is a difficult one, given the age of the proceeding, the need for finality, the Lepionka mortgagee’s good faith in entering into the settlement, believing that it was dealing with someone entitled to settle, the delays by the Paterson interests in prosecuting matters since Fitzgerald J’s decision of December 2017 and the apparent insolvency of the Paterson interests –
43 Citing Re Lord Southampton’s Estate (1880) 16 Ch D 178; Re Patrick [1891] 1 Ch 82.
Mr Paterson is bankrupt, LW354 Ltd appears to be no more than a shell company, and there is a history of non-payment of costs by the Paterson interests.
[71] Even if LW354 Ltd could be substituted as a plaintiff in CIV-2015-404-2168 on the discontinuance being set aside, it would need an extension of time under r 29A of the Court of Appeal (Civil) Rules 2005 to bring an appeal out of time. It would also need to get around the notice of abandonment filed in December 2018.
[72] As to persuading the Court of Appeal, LW354 Ltd will have to deal with the problem that there has already been an appeal which has been abandoned. In Humphries v Carr, Glazebrook and Ellen France JJ said:45
It is clear that, whether or not abandonment leads to dismissal, if the applicant wishes to have his or her notice of abandonment set aside must meet a high threshold. The case for the Court’s exercise of its discretion must be, as put in Sexton at [31], at least, “compelling” or, as in Cramp comprise “an exceptional case”. In assessing whether the threshold is met, it must be telling in the case of a notice of abandonment that the appellant has made a choice not to continue whereas in the case of a deemed abandonment the appellant may not have exercised any choice in the matter but rather let matters slide or simply overlooked a time limit.
LW534 Ltd might put its case on the basis that it was not the original appellant and therefore had not made any choice but has been substituted as a plaintiff in the High Court. It would still have to deal with the fact that the Court of Appeal had already addressed matters in its decision of 28 February 2019 when it held that Mr Paterson and LW354 Ltd could not be added to an appeal which had already been abandoned.46 Mr Paterson and LW354 Ltd put before the court the matters which LW354 Ltd now raises to show why it ought to be allowed to continue the claim formerly run by GLW Group Ltd. The Court of Appeal did not accept that it had jurisdiction to add parties after the abandonment of an appeal but said that even if the jurisdiction existed it would not exercise its discretion in favour of Mr Paterson and LW354 Ltd.47 It would be extremely difficult for LW354 Ltd to persuade the Court of Appeal to have a second look when it has already decided that it would not allow LW354 Ltd to continue the
45 Humphries v Carr [2009] NZCA 608 at [17].
46 GLW Group Ltd v Lepionka & Company Investments Ltd [2019] NZCA 24.
47 At [7]-[10].
appeal. The court is unlikely to welcome fresh invitations to re-examine a matter on which it has already given a decision.
[73] I have little reason to believe that LW354 Ltd would have any prospects of success in installing itself as a plaintiff in CIV-2015-404-2168 by having the discontinuance and the abandonment of the appeal set aside. The prospects are not enough to be considered reasonably arguable.
[74] The prospects on appeal do not look promising. The Paterson interests want the sales to the Lepionka interests to be set aside. They want findings that Lepionka mortgagee ought to have allowed the mortgage to be redeemed. On a favourable finding on that issue, the Lepionka mortgagee would not be able to claim interest that had accrued since. Fitzgerald J found in her December 2017 decision that the Paterson interests had not proved that they had funds in hand to redeem the mortgages. The Paterson interests have not so far adduced any evidence to show that that finding was incorrect. In the absence of any evidence to show that the mortgages could have been redeemed, it is hard to see that the Court of Appeal would on appeal interfere with the judgment of Fitzgerald J. The appeal is a long shot, even if all the procedural hurdles can be overcome. Besides the weakness of the appeal is likely to weigh in procedural decisions on setting aside the discontinuance and extending the time to appeal.
[75] To sum up, while LW354 Ltd may arguably have an interest in the property, that interest is no greater than its former trustee’s, GLW Group Ltd. That interest stands to be extinguished under s 103 of the Land Transfer Act 2017 when the Lepionka mortgagee transfers its sales as mortgagee. Fitzgerald J upheld its powers in her December 2017 decision. Her decision is final, because the proceeding was settled and the appeal was abandoned. The Lepionka mortgagee is not bound by any absence of title by GLW Group Ltd because it did not have actual knowledge of any assignment of the cause of action to a new trustee. Besides, the prospects of LW354 Ltd reinstating the proceeding and the appeal are so remote that they do not need to be taken seriously. The caveat can accordingly serve no useful purpose and should be removed.
Breaches of the court order and undertaking
[76] The above is enough to warrant the removal of the caveat. It is not necessary to have regard to any other matters going to a residual discretion. But, in case the matter turned on the exercise of a discretion, I would in any event not uphold the caveat. That is because it has been lodged in breach of a court order and of Ms O’Neil’s undertaking to the court.
[77] In her caveat decision of 6 July 2018, Fitzgerald J ordered GLW Group Ltd not to lodge a caveat without leave of the court.48 That order also binds LW354 Ltd as successor trustee. It is bound as a privy.49 LW354 Ltd breached the order when it lodged the caveat without first seeking leave of the court.
[78] Ms O’Neil breached her own undertaking to the court of 17 May 2018, which Fitzgerald J accepted as a substitute for an order barring her from lodging a caveat without leave of the court. The undertaking is subject to exceptions, but they do not apply. The caveat was lodged to protect the interest of LW354 Ltd as trustee in place of GLW Group Ltd and Naldapat Ltd. The first exception to the undertaking deals with the proceeds of sale of lots 2 and 6. Those have already been applied to reduce the indebtedness of GLW Group Ltd to the Lepionka mortgagee. The caveat does not purport to come within that exception. The second exception applies if Ms O’Neill takes an assignment of the second mortgage (the AFI mortgage). That did not happen.
[79] The position here may be compared with caveats lodged in breach of a contractual no-caveat clause. In Mortre Holdings Ltd v ANCL Investments Ltd, the Court of Appeal held that a no-caveat clause does not prevent a caveatable interest from arising and a court therefore retains a discretion to uphold the caveat.50 However, the no-caveat clause is relevant to the court’s discretion whether to sustain it. Even if a caveator shows a seriously arguable case for an interest in the land, the court may decline to sustain the caveat because of the no-caveat clause. That is because a court
48 GLW Group Ltd v Lepionka &Company Investments Ltd [2018] NZHC 1658.
49 Shiels v Blakeley [1986] 2 NZLR 262 (CA) at 268.
50 Mortre Holdings Ltd v ANCL Investments Ltd [2016] NZCA 494.
will not lightly condone a breach of contract, particularly when the term has an obvious commercial purpose.51
[80] A typical no-caveat clause imposes a clear restraint against lodging a caveat without exceptions. Usually a caveator has no prospect of persuading the registered proprietor to agree to the caveat being lodged. The registered proprietor can be counted on to insist on his contractual rights. The would-be caveator must look for other remedies if he believes that he is entitled to interim protection – for example, an interim injunction barring dealings in the land. On the other hand, Fitzgerald J restrained GLW Group Ltd from lodging a caveat without first obtaining leave of the court. That left room for a caveat to be lodged if GLW Group Ltd could show a good reason for it. If LW354 Ltd considered that it had a proper basis for lodging a caveat, it ought to have applied for leave first. It was improper to lodge the caveat and try to justify it afterwards. It caused the mischief which the order was designed to prevent
– a delay in settlement and the need for a full hearing to decide the merits of the caveat. LW354 Ltd has clearly breached Fitzgerald J’s order.
[81] Ms O’Neil gave her undertaking as a substitute for the court making an order against her. She was barred from lodging a caveat in her capacity as a director without first obtaining leave of the court. Again, she had the opportunity to seek leave of the court but did not do so. The same approach should apply to her as if the court had made an order. Given the flexibility provided by the opportunity to seek leave of the court, the breach of the order and the breach of the undertaking are even more serious and provide all the more reason for removing the caveat.
[82] Mr Sullivan sought to justify the lodging of the caveat by referring to the undertakings that the Lepionka interests had given, recorded in Fitzgerald J’s judgment of 6 July 2018. Those undertakings were given in response to GLW Group Ltd’s application for a stay in CIV-2015-404-2168. Fitzgerald J made the order barring caveats and accepted the undertakings by Ms O’Neil and Ms Dapas in CIV- 2018-404-690, the Lepionka mortgagee’s application to remove the caveat. One set of undertakings was not a quid pro quo for the other. The undertaking given by
51 Mortre Holdings Ltd v ANCL Investments Ltd [2016] NZCA 494 at [21]- [26].
Ms O’Neil is enforceable against her, even if the Lepionka interests cannot be called upon under their undertakings, because they settled the appeal by GLW Group Ltd.
[83] Mr Sullivan also sought leave retrospectively to allow the caveat. As I have set out, the caveat should not remain because the interest claimed under it will be extinguished. But the caveat should not be allowed retrospectively. Leave is required first to check a caveat is appropriate, given the disruption that a caveat can cause. The caveator should not cause the damage first, then try to justify it afterwards.
[84] Fitzgerald J’s purpose in making the orders barring caveats and accepting the undertakings was to protect the Lepionka interests from vexatious caveats lodged at the behest of Mr Paterson.52 LW354 Ltd’s caveat has had the effect which Fitzgerald J wanted to guard against – it has delayed the implementation of the sale, led to more litigation and caused unnecessary expense.
[85] In some cases where a caveat is to be removed because a mortgagee is to exercise a power of sale, the removal is deferred until title is transferred under the power of sale. That is because the caveat may otherwise be sustainable. I have not done that here because the breaches of the order and the undertaking mean that the caveat should not have been lodged at all. I am satisfied that LW354 Ltd’s caveat was vexatious and an abuse of the caveat process. Mr Paterson was clearly behind lodging the caveat. He and his associates should understand that the litigation cannot be re- opened and that the Lepionka mortgagee can complete the sales of the lots in the Kahuranaki Road property. This attempt to block the transfers of title has been pointless.
Outcome
[86] Initially, the Lepionka mortgagee sought an order for costs against Naldapat Ltd. Naldapat Ltd withdrew its caveat after Lepionka’s lawyers said that they would not pursue it for costs if it withdrew the caveat. That was a unilateral contract which Naldapat Ltd performed. There is no order for costs against Naldapat Ltd.
52 GLW Group Ltd v Lepionka & Copmpany investments Ltd [2018] NZHC 1658 at [62]- [71].
[87] LW354 Ltd’s caveat is to be removed.
[88] The Lepionka mortgagee seeks indemnity costs against LW354 Ltd. I leave the parties to confer as to costs. If they cannot agree on costs, memoranda may be filed and I will give a decision on the papers.
[89] The Lepionka mortgagee seeks an order for non-party costs against Ms O’Neil. It should make a separate application for non-party costs, which should be served on Ms O’Neil. Out of caution, I assume that any application for non-party costs against Ms O’Neil is a civil proceeding under Part 2 of the Trans-Tasman Proceedings Act 2010 and the 30 working day response period under s 17 will apply.
[90] Leave is reserved to apply for further directions if required.
[91] After I had drafted my reasons for this decision, I received a memorandum from the Lepionka mortgagee, which raised three matters: a new caveat and notice of claim lodged after the hearing on 27 June 2019, a response to an allegation against Mr Joe Duncan and a clarification on costs in respect of Naldapat Ltd. I have not changed my reasons. The new caveat and notice of claim may lead to further steps, which are beyond the scope of this proceeding. I therefore should not comment on them. LW354 Ltd argued that the Lepionka mortgagee was tainted by an association with Mr Duncan. The memorandum urged that I should not draw any adverse inference against Mr Duncan. For the reason given in paragraph [38] above, I did not go into that in detail and I see no need to reconsider that. As to costs, counsel submitted that the Lepionka mortgagee had told the caveators that it would not seek costs if both caveators withdrew their caveats. Notwithstanding that, the Lepionka mortgagee did not ask me to vary my costs order, but it reserved its right to apply for costs against Ms Dapas.
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Associate Judge R M Bell
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URL: http://www.nzlii.org/nz/cases/NZHC/2019/1646.html