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High Court of New Zealand Decisions |
Last Updated: 15 August 2023
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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-2021-404-000030
[2023] NZHC 1988 |
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BETWEEN
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DOUGLAS MURRAY KINNON and AVRYL MARGARET KINNON
Plaintiffs
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AND
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BOON GUNN HONG
First Defendant
NOMINEES AND TRUSTEES LIMITED
Second Defendant
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Hearing:
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22 September 2022
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Appearances:
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M Nicholls for the Plaintiffs
No appearance for the Defendants
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Judgment:
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27 July 2023
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JUDGMENT OF HARVEY J
This judgment is delivered by me on 27 July 2023 at 2.30 pm pursuant to r 11.5 of the High Court Rules.
.....................................................
Registrar / Deputy Registrar
Solicitors:
Martin Nicholls Limited, Far North
KINNON and KINNON v HONG [2023] NZHC 1988 [27 July 2023]
Contents
The purchase of the Property [20]
Subsequent disciplinary proceedings [23]
Who is the beneficial
owner of the Property? [24]
Plaintiffs’ case [24]
Mr Hong’s interpretation of
events [33]
Discussion [43]
What evidential issues arise? [43]
Are the disciplinary proceedings’
records admissible? [50]
Is the Trust the beneficial owner of the
Property? [56]
Did Mr Hong breach his
fiduciary duties? [59]
Plaintiffs’ claim [59]
Orders to convey the Property to the plaintiffs and repay commission [82]
Equitable loss and/or account of profits [84]
Did Mr Hong commit Land
Transfer Act 1952 fraud? [97]
Plaintiffs’ claim [97]
Did Nominees and Trustees
Ltd knowingly receive the Property? [117]
Plaintiff ’s claim [117]
Introduction
[1] Douglas Kinnon and Avryl Kinnon, as trustees of the Cedar Lodge Trust, claimed that their former solicitor, Boon Hong, transferred their property at
75 Rangitane Loop Road, Kerikeri (the Property) to a company that Mr Hong controlled called Nominees and Trustees Ltd (NTL) and then to himself without their knowledge. Mr Hong had been Mr Kinnon and Ms Dyer’s lawyer since the 1990s and lawyer for the Trust since 2001. He became a trustee on 30 October 2001 and remained in that role until 13 June 2007 when he retired. On this date he was replaced by BGH Trusteeship Ltd (BGH), a company variously controlled by Mr Hong and his wife. Mr Kinnon and Ms Dyer had been married but have since separated.
[2] In 2005 the plaintiffs agreed to purchase the Property. There was a dispute, immaterial to the present proceedings except for as background, that delayed settlement. Due to the delay, Mr Kinnon and Ms Dyer had since invested in another property so raising the finance needed to purchase the Property became complicated. On 31 July 2008, Mr Hong made what he described as an “unsolicited benevolence on the conscience loan” or “benevolence loan” of the balance of the purchase price to either the Trust or Mr Kinnon and Ms Dyer personally. On 6 August 2008, Ms Dyer agreed to transfer the Property to BGH. Then on 4 August 2011, Mr Hong transferred the Property from BGH to NTL. On 12 December 2012, he transferred the Property from NTL to himself. Following that, on 17 December 2012, Mr Hong registered a mortgage with ASB over the Property and used some of those funds to pay legal fees in unrelated proceedings.
[3] The plaintiffs claimed breach of fiduciary duties against Mr Hong and alleged fraud under the Land Transfer Act 1952 (the 1952 Act).1 They sought a range of remedies including access to the rectification and compensation provisions of the 1952 Act. To be eligible the Court must find evidence of fraud under that legislation. The plaintiffs also alleged knowing receipt as against the second defendant, NTL.
[4] Mr Hong filed an initial statement of defence but failed to file a statement of defence to the amended counterclaim, which introduced a new cause of action (land transfer fraud) and that required an amended statement of defence.2 On 17 August 2022, Lang J directed that the matter proceed by formal proof. At the hearing held on
1 The transfers and encumbrances occurred before 2017.
2 High Court Rules 2016, r 7.77(6).
22 September 2022, the defendants did not appear. The hearing proceeded on a formal proof basis as directed.
[5] Although the matter is proceeding by formal proof, the amended statement of claim replicates the initial breach of fiduciary duty and knowing receipt claims to which Mr Hong’s initial statement of defence responds. As is orthodox in a formal proof, the onus is on the plaintiff to prove their claims to the Court’s satisfaction.3 I therefore reviewed Mr Hong’s initial statement of defence for the purpose of identifying any possible deficiencies in the plaintiffs’ claim.4
[6] Complicating matters was Mr Hong’s counterclaim. It was heard over 23–26 April 2023, before being dismissed by Jagose J on 5 May 2023.5
Issues
[7] The issues for determination are:
(a) Who is the beneficial owner of the Property?
(b) Did Mr Hong breach his fiduciary duties?
(c) Did Mr Hong commit Land Transfer Act 1952 fraud?
(d) Did NTL knowingly receive the Property?
[8] Also relevant to the plaintiffs’ claims is that in 2020, Mr Hong was struck off the roll of barristers and solicitors by the New Zealand Law Society for his actions in dealing with the Property.6 The transcript of those proceedings sets out how Mr Hong viewed the various transactions complained of in this case.7 The admissibility of that transcript for the purposes of these proceedings is also considered in this judgment.8
3 Rule 15.9(4); and Ferreira v Stockinger [2015] NZHC 2916 at [35].
4 See a similar approach taken in MacFarlane v Informed House Inspections Ltd [2023] NZHC 934.
5 Kinnon v Hong [2023] NZHC 1353.
8 See [50]–[55] of this judgment.
Procedural history
[9] The procedural history is significant and relevant to the approach taken in determining the plaintiffs’ claims. Their statement of claim was filed on 14 January 2021. On 25 March 2021, Mr Hong filed a statement of defence and counterclaim. The plaintiffs sought particular discovery relating to the disgorgement of any unlawful profits made by Mr Hong as a consequence of his mortgage over the Property. Mr Hong opposed such an order. At the conference on 28 September 2021, the parties agreed it would be sensible for particular discovery to be provided if liability was established by the plaintiffs. Associate Judge Sussock directed that the trial proceed in two stages, with only the question of whether there are any profits to be disgorged to be determined at the second stage. Leave was reserved to the plaintiffs to seek further discovery regarding any profits made following determination of Mr Hong’s liability as a trustee.
[10] Two months later on 26 November 2021, Associate Judge Sussock issued a further minute allocating a four-day hearing to commence on 24 April 2023 to deal with the defendants’ counterclaims. At that stage Mr Hong had indicated he would file an application for summary judgment on liability, so Associate Judge Sussock made timetable directions for the summary judgment and corresponding leave application. Further discovery and timetabling were directed. Then on 3 February 2022, Associate Judge Sussock issued a minute allocating a one-day hearing on 6 April 2022 to deal with the defendants’ “omnibus” application, which included leave to bring summary judgment, security for costs and various declarations and orders, and the plaintiffs’ application for further and better discovery.
[11] On 28 July 2022, Associate Judge Sussock dismissed Mr Hong’s application for leave to pursue his summary judgment applications and security for costs and granted the plaintiffs’ application for further and better discovery. In dismissing the leave applications Associate Judge Sussock noted:9
[52] From all of the above it is clear the issues are intensely factual and rely on the parties’ accounts of matters rather than documents. It is clearly not appropriate to determine these issues on a summary basis. A substantive
9 Kinnon v Hong [2022] NZHC 1828.
hearing is required so the issues can be fully explored following oral evidence and cross examination of the witnesses.
[12] On 1 July 2022, the plaintiffs filed and served an amended statement of claim. Throughout August 2022, the plaintiffs sought a statement of defence from the defendants. The latter were also put on notice than an application for formal proof would be sought on 17 August 2022 if a response was not filed by that date. As at 17 August 2022, the defendants had failed to provide any response. Later that day, Lang J directed that a formal proof fixture be allocated. That afternoon the parties were notified by email from the registrar of the one-hour formal proof fixture to take place on 22 September 2022. As mentioned, the hearing proceeded on that basis, and I reserved my decision.
[13] On 5 May 2023, as foreshadowed, Jagose J issued a decision on the counterclaim, confirming that at the time Mr Hong advanced the settlement funds he was, as trustee, under a duty to settle the Property’s acquisition for the benefit of the beneficiaries.10 Jagose J thus found Mr Hong was entitled to reimbursement from the Trust property and had made no advance to the trustees or to Ms Dyer and Mr Kinnon. The Judge suggested the claim could be resolved with recourse to independent expert accounting and the statutory reimbursement provisions, but Mr Hong declined to consent to that approach. The counterclaims were then dismissed.
[14] In summary, the following points are relevant. First, the matter proceeds by formal proof, but there is previous documentation on file indicating Mr Hong’s prospective defence.11 Secondly, there is no evidence as to quantum of liability due to the order that the hearing proceed in two stages.12 Thirdly, there is a decision of this Court13 which is binding as between the parties on the issues it raised and which covers much the same factual background.14
10 Kinnon v Hong, above n 5.
11 See [5] and [33]–[39] of this judgment.
13 Being the counterclaim: Kinnon v Hong, above n 5.
14 White v Attorney-General [2021] NZCA 479.
Background
[15] On 30 October 2001 the Trust was settled.15 The Trust deed was put into evidence. Murray John Kinnon (Mr Kinnon Sr) was the settlor; Ms Dyer, Mr Kinnon Sr and Mr Hong were the trustees and Ms Dyer and Mr Kinnon were the primary beneficiaries.
[16] Relevant clauses of the Trust deed are as follows. Clause 6 provides for renumeration of a professional trustee:
g. Professional Trustee
Any Independent Trustee who is a solicitor or an accountant or who is in the profession or business of providing trusteeship services to clients (hereinafter referred to as “Professional Trustee”), shall be entitled to charge and be paid for time and expenses incurred in the administration of the Trust’s affairs provided such charges are reasonable and the charging basis is made known to the other trustees as [sic] the time of engagement.
[17] Clause 6 also provides for wide trustee powers:
m. Trustees’ powers
(i) My Trustees, in addition to all other powers authorities [sic], and discretion vested in them and subject to all such duties conferred on and imposed upon the trustees by the Trustee Act 1956 and the Trustees Amendment Act 1983 (or any substituted legislation), shall have the powers authorities and discretion’s [sic] or any which shall for all purposes be deemed part of and incorporated into this Deed.
(ii) It is my intention that the Trustees shall have the fullest and most extensive powers possible, at their full absolute and uncontrolled discretion, to do all that is necessary, desirable or expedient, as they see fit, in the management of the Trust Fund in accordance with my wishes herein BUT EXCLUDING any acts of impropriety or dishonesty AND SUBJECT TO the duties and manner of practice as required at law of Trustees generally.
(iii) The powers vested in the Trustees include even those which Trustees would normally have no power to do in the absence of an expressed power conferred by deed or at law or an order of a Court (collectively referred to as “the Powers”). In the exercise of the Powers, the Trustees may do or cause to be done all acts, matters, sign all instruments or documents as if the Trustees are the absolute owners of the Trust Fund or as if I, Settlor were acting personally.
(iv) My Trustees shall at all times in the exercise of their powers and herein, act in a prudent manner in accordance with my wishes herein, currently acceptable practices and legislation in force from time to time.
[18] Clause 6j of the Trust deed indemnifies a “lay person trustee” against loss which is not attributable to dishonesty or knowing breach of trust.16 For a “professional trustee” the clause requires that the trustee “shall exercise due care, diligence and skill to the level as set down in [the] Trustee Act 1956” but indemnifies against certain investment decisions.
[19] Clause 6l limits trustees’ liability:
l. Limitation of liability of Trustee – The liability of my Trustees is limited at all times to the assets of the Trust and shall be indemnified in full by the Trust in respect of all acts or omission on their part or in any way as a result thereof in the carrying out of their capacity as trustee, apart from acts of recklessness, fraud or dishonesty.
(Emphasis added).
[20] The sale and purchase agreement is dated 15 September 2005. It recorded Shelley Jane Keogh as the vendor and Cedar Lodge Trust as the purchaser. Ms Dyer signed on behalf of the Trust. Inserted into what otherwise appears to be a standard form sale and purchase agreement was clause 15. This stated that the parties agreed BGH “has entered into this document in its capacity as professional and independent trustee of the Trust” and restricted liability. At that time BGH was not yet a trustee of the Trust.
[21] In October 2005 the deposit was paid, and the Trust took possession on about 4 December 2005. Mr Kinnon and Ms Dyer moved into the Property from that date until sometime in 2006. The Property was rented out in 2006–2007 and from late 2007 or early 2008 Mr Kinnon resided in the Property, for some time with Ms Dyer. As foreshadowed, settlement was finalised on 31 July 2008 after a dispute over the purchase price.
16 Under clauses 6f and 6g of the Trust deed, Mr Hong was a Professional Trustee.
[22] As I have set out above, on 6 August 2008 the Property was transferred to BGH. This transfer was consented to by Ms Dyer and is not disputed. The transactions under dispute are: on 4 August 2011, a transfer from BGH to NTL; on 12 December 2012, a transfer from NTL to Mr Hong and on 17 December 2012 a mortgage granted in favour of ASB.
Subsequent disciplinary proceedings
[23] Mr Kinnon engaged lawyers who became concerned about the situation and made an independent complaint to the New Zealand Law Society. Mr Kinnon attached to his affidavit the transcript of evidence given before the Lawyers and Conveyancers Disciplinary Tribunal on 12 December 2019; the liability decision dated 10 February 2020; the penalty decision dated 29 April 2020; the decision of the appeal to the High Court and the decision of the appeal to the Court of Appeal. As foreshadowed, the Lawyers and Conveyancers Disciplinary Tribunal found Mr Hong guilty of misconduct because he (a) displayed a disregard for any professional issues arising from his dealings with the Kinnons; (b) lacked appreciation of any kind of need for his clients to receive independent advice; and (c) assumed ownership and control of the property in question without regard to the professional issues that he was required to address. He was struck off the roll.
Who is the beneficial owner of the Property?
[24] By way of background, Mr Kinnon stated in his affidavit of 4 April 2022 that in early 2007 he, on behalf of the Trust, discussed the possibility of Mr Hong buying into the Property when settlement became due, as this would be a good investment opportunity for Mr Hong. The email to Mr Hong from Mr Kinnon and Ms Dyer stated, “we would like you to consider the possibility of taking on the Rangitane property 100% yourself”. Mr Hong replied four days later stating he would like to consider
that. He stated, “My initial feeling of preference is the half share each but if you wish to quit that then I am considering just putting the property on the market [...].”17
[25] On 13 June 2007 BGH became a trustee. The Trust document confirming the change recorded Karen Chan signing on behalf of BGH as director. Company records confirmed that she was its director from 3 June 2004 to 20 February 2008. Mr Hong became sole director on the latter date.
[26] In early December 2008, according to Mr Kinnon, the Trust and Mr Hong agreed to purchase the Property in equal half shares. There was reference in Mr Hong’s emails to considering the prospect of equal half shares but there was no evidence of an actual agreement. In any case, according to Mr Kinnon, Mr Hong changed his mind in early 2008 due to the Global Financial Crisis and the value of the Property dropping below the purchase price. Mr Kinnon did not provide any further evidence of this beyond stating as such in his affidavit.
[27] On 18 July 2008, Mr Kinnon’s evidence was that “on behalf of the Trust” Mr Hong and Ms Dyer signed an authority form to convey the Property to the Trust “on the expectation and understanding that the funds from Westpac would be lent to the Trust alone”. He annexed the form which recorded Ms Dyer and Mr Hong as the “clients”. It referred to the base document being the 1 August 2006 sale and purchase agreement. Curiously, next to “Transferee(s) Proprietorship (Purchaser only to complete)” it stated, “Sole Tenant BGH Trusteeship Limited”.
[28] Mr Kinnon said that the purchase was settled on 31 July 2008 and that Mr Hong had provided the balance of the purchase price to “enable the Trust, through [Ms Dyer] and I, to purchase the Property”. This was approximately $600,000. The record of title recorded the transfer to Ms Dyer and Mr Hong on 31 July 2008.
[29] Ms Dyer’s evidence was that in July or August 2008, Mr Hong advised her to sign some legal documents to enable BGH to “hold the Property on trust for the Trust alone”. She stated that she was advised this would “better protect the Property and the interests of the Trust from any creditors Doug [Mr Kinnon] or I might have”.
17 See this judgment at [49].
Mr Kinnon’s evidence placed this as happening on 6 August 2008. These “legal documents” were not in evidence. The record confirmed that the transfer of title to BGH was registered on 6 August 2008.
[30] The record of title further confirmed the transfer to NTL on 4 August 2011 and to Mr Hong on 12 December 2012, along with the mortgage to ASB Bank Ltd being registered on 17 December 2012. Ms Dyer deposed she “had no knowledge” of the two subsequent transfers and mortgage. Mr Kinnon similarly stated he had no knowledge until years after the transfers and mortgage occurred. Mr Kinnon’s supplementary affidavit stated that “In about 2011 the first defendant began demanding that [Ms Dyer] and I sell the Property so that he could get the funds that he had lent us out.” It was not stated whether this was before or after the 4 August 2011 transfer. At this point the Property was being used as the family home by Mr Kinnon, Ms Dyer and their three children.
[31] From January 2012 to October 2013, Mr Hong began receiving email enquiries from a Trade Me listing of the Property. He informed more than one enquirer that he had taken over the Property from a trust client and the Property was tenanted. On 23 August 2014 Mr Kinnon was served with an eviction notice by Barfoot & Thompson.
[32] In summary, Mr Nicholls argued that the evidence supports the plaintiffs’ claims that Mr Hong acted in breach of his fiduciary duties to effectively cheat the plaintiffs out of their interest in the Property for his own gain. In doing so, he was aided by the actions of Ms Chan who facilitated the transfers that eventually led to the Property being registered in Mr Hong’s name when the evidence demonstrated that it belongs to either Ms Dyer and Mr Kinnon or the Trust. For all of these reasons, counsel submitted that the remedies sought against the defendants are appropriate, including damages, interest and costs.
Mr Hong’s interpretation of events
[33] Mr Hong’s defence is not being considered as the case has proceeded to formal proof. However, in his statement of defence he offered an alternative interpretation of how the Property was to be dealt with. I consider this because it impacts on whether
it is more likely than not the evidence establishes the interpretation of events the plaintiffs relied on. Also, Mr Hong’s position is, to some degree, expressed in the notes of evidence of the Lawyers and Conveyancers Disciplinary Tribunal hearing.
[34] In essence, Mr Hong’s position was that, having paid the bulk of the purchase price, the Property was to be held by him or companies under his control until the plaintiffs “redeemed” it from him.18 The agreement was for the Property to be in his sole control from settlement date and this was the reason for the transfer to BGH Trusteeship Ltd.19 He described the transfer to BGH Trusteeship Ltd as an “assignment”.20 He claimed that under this agreement he was entitled to transfer the property to any entity so long as he controlled it so that he could honour the plaintiffs’ ability to “redeem” the Property.21 This arrangement would ensure repayment. It appears from this arrangement that Mr Hong envisaged the Property being held as security for his “loan” to the Kinnons, essentially operating a common law mortgage.22
[35] Even so, Mr Hong still recognised a trust relationship regarding the Property:23
Q: Was it transferred to Boon Gunn Hong personally or Boon Gunn Hong as a trustee?
A [Mr Hong]: Well as a trustee because, as I said right, at that point in time remember before the, you know, the, yeah, after, yeah, before the (inaudible 15:04: 11) okay, we’ve [sic] all ready to settle so the transfer was sent, already sent, done up and sent over to Grove Darlow in readiness, or rather was it, -
Q: Sorry, just answer the question. You were the transferee in your capacity as a trustee or personally?
A: As trustee, it will be as trustee as I say because it’s supposed to settle.
[36] In addition, Mr Hong explained the transfer to NTL. BGH was operating as a general trustee for several of Mr Hong’s clients. He stated that he wished to move to an arrangement where there was one company for each client, and disestablish BGH:24
... we had BGH as general trustee for all our clients, I’ve implemented that each client is supposed to have their own trustee company so BGH was going
18 Statement of defence dated 22 March 2020 at [33] and [41].
19 At [41].
20 At [41].
21 At [48] and [53].
23 Notes of Evidence at [51].
24 At [56].
to be made redundant just like we did I think for [another client’s] trust and all that, right, so in other words, BGH Trusteeship was going to be deregistered so I therefore transferred it to another trust company.
[37] Mr Hong recognised NTL was operating as a trustee:25
Q: Well who were the clients in this case, who was Nominees and Trustees Limited the trustee for?
A. Well obviously as I say was holding the property, right, pending their redemption or my sale of it, of the Rangitane property.
Q. So you still acknowledge a trustee status to the Kinnon’s at this time? A: Yes. Yes. Otherwise, I would have transferred it to myself, right.
[38] However, at some point Mr Hong came to believe or take the position that the plaintiffs no longer had any interest or equity in the Property:26
Q: What do you say is the beneficial status, if you understand what I mean by that, of the Kerikeri property right now?
A: Right now? Q: Yes.
A: What about a status, status of what?
Q: Who is the person or entity entitled to that property now? A: Now that the issue has come about, right, High Court Judge.
...
Q: Now please answer the question. Because presumably if you go to the High Court you will be trying to persuade the Judge to a certain position and what would that be? Who’s entitled to the property now?
A: Me. My persuasion with the High Court Judge would be that they-
Q: And we’ve been there before but you have no obligation to account to Ms Dyer or Mr Kinnon?
A: Yes. That would be my submissions, application and submission, yes.
[39] Mr Hong’s rationale for this position was that any money the Kinnons had put into the Property had been consumed in unpaid rent they owed him as tenants.
Legal principles
25 At [56]–[57].
26 At [59]–[60].
15.9 Formal proof for other claims
[41] The plaintiffs must establish each cause of action as far as the burden of proof lies on them. Where damages are sought, the plaintiffs are also required to provide sufficient evidence to enable the court to calculate and fix damages.
[42] The plaintiffs are not required to engage with affirmative defences, set-off or counterclaim.27 While affidavit evidence is required, it should not include material that the court could not receive if objection is raised by the defendant.28
Discussion
[43] There is no evidence of the 6 August 2008 documents Ms Dyer signed which transferred the Property to BGH, and so the terms of that agreement are unclear. There is also an absence of documentary evidence as to the nature of the interest Mr Hong took in the Property when it was purchased from the Keoghs. Nor is there any documentary evidence on the nature of the money advanced by Mr Hong in settlement
27 Ferreira v Stockinger, above n 3, at [36].
28 At [34].
of the purchase price. So any attempt at assessing the Trust’s interest(s) in the Property is somewhat hampered by the absence of certain key documents.
[44] Secondly, at first blush the affidavit evidence gives rise to hearsay issues. Under the rules of formal proof, affidavit evidence should not include anything that if objected to by the defendant would be excluded. In addition, an affidavit must be confined to matters that would be admissible if given in evidence by the deponent.
[45] Under ss 17 and 18 of the Evidence Act 2006, hearsay is admissible if the circumstances provide reasonable assurance that the statement it is reliable and the maker of the statement is unavailable or the Judge considers that undue expense or delay would result if the maker of the statement was required as a witness. With affidavit only evidence, a Judge may allow hearsay evidence where “the cost, delay and inconvenience in obtaining an affidavit from the deponent in whose knowledge such matters” would be “out of proportion to the reasonable necessities of the case”.29
[46] Mr Kinnon at [34] of his affidavit states:
After the first defendant asked Jaala to sign the Documents Jaala told me that: the first defendant had told her that it was in the best interest of the Trust that BGH Trusteeship Ltd held the Property in its name as a sole trustee instead of Jaala and BGH Trusteeship Ltd; that the first defendant told her that BGH Trusteeship Ltd would continue to safeguard the Trust’s interest in the Property; and asked me what she should do. ...
(Emphasis added)
[47] “Jaala” is Ms Dyer, whose affidavit covered her conversation with Mr Hong:
14. In July or August 2008, the first defendant advised me to sign some legal documents to enable BGH Trusteeship Ltd to hold the Property on trust for the Trust alone and told me that if BGH Trusteeship Ltd held the Property on trust for the Trust alone, it would better protect the Property and the interests of the Trust from any creditors that Doug or I might have.
(Emphasis added)
29 Nagra v Sri Guru Singh Sabha Auckland Incorporated (1229571) [2023] NZHC 34 citing Makin v Hayward (1991) 5 PRNZ 139 (HC) at 141, in turn citing Patrick v Attorney-General [1957] NZLR 228 at 230.
[48] These statements appear to be hearsay — a statement that is offered by a person other than a witness to prove the truth of its contents.30 Mr Hong is not a witness. However, the statements attributed to him that “it was in the best interest of the Trust that BGH held the Property in its name as a sole trustee instead of Jaala and BGH Trusteeship Ltd” (per Mr Kinnon) and “if BGH Trusteeship Ltd held the Property on trust for the Trust alone, it would better protect the Property and the interests of the Trust from any creditors that Doug or I might have” are not being offered for the truth of their contents. The statements are offered to prove BGH Trusteeship Ltd in fact held the Property on trust for Cedar Lodge Trust, and to prove that Ms Dyer and Mr Kinnon placed their trust in Mr Hong’s advice. The same is the case for the statement “BGH Trusteeship Ltd would continue to safeguard the Trust’s interest in the Property”. I therefore consider that these portions of the affidavit are admissible as they are not hearsay in the orthodox sense.
[49] The attachments of DK-16 and DK-19 are emails between the Kinnons and Mr Hong. Again, although Mr Hong is not a witness, the statements contained in the emails are provided to prove that, at the relevant time, discussions about potentially purchasing the property in half shares were occurring. In short, I consider that the emails are not hearsay statements.
Are the disciplinary proceedings’ records admissible?
[50] How events were perceived by the parties is set out in the notes of evidence of the Lawyers and Conveyancers Disciplinary Tribunal hearing. That said, relying on those proceedings against Mr Hong gives rise to admissibility issues, along with hearsay, per s 50 of the Evidence Act 2006:
50 Civil judgment as evidence in civil or criminal proceedings
(1A) Evidence of a decision or a finding of fact by a tribunal is not admissible in any proceeding to prove the existence of a fact that was in issue in the matter before the tribunal.
30 Evidence Act 2006, s 4 (definition of hearsay statement).
(a) a judgment in rem; or(b) the law relating to res judicata or issue estoppel; or(c) the law relating to an action on, or the enforcement of, a judgment.
[51] Disciplinary proceedings are civil proceedings, so s 50 applies. Res judicata/issue estoppel (per subsection (2)) does not apply because neither Mr Kinnon nor Ms Dyer were parties to the disciplinary proceedings, even though they were witnesses. In addition, s 50 “precludes reliance on judicial reasons in other cases as evidence of facts in issue in this proceeding”.31 Counsel responsibly recognised that I could not rely on the reasons for decision of the disciplinary proceeding in the various court and tribunal decisions. The plaintiffs must independently establish the accuracy of the fact which was the subject of the earlier finding. However, the question remains as to whether the notes of evidence taken in the disciplinary proceeding may be used to establish facts in issue in this proceeding.
[52] In Independent Carpets Ltd (in liq) v Carpet Call 2000 NZ Ltd, a decision on a formal proof, the plaintiff sought to admit, as an annex to an affidavit, the transcripts of examinations of the defendants taken on oath pursuant to the Companies Act 1993, ss 261 and 265.32 Hinton J treated the statements made in the transcripts as prima facie hearsay, noting that the statements were:33
... made during examinations conducted under oath that were recorded and transcribed and convened after they had engaged in initial conversations with the liquidators. I agree with Mr Shackleton this means the statements have very likely been accurately reported. Furthermore, it is likely the statements were deliberate, considered, and made with the benefit of preparation. This speaks to the reliability of the statements. The veracity of the statements is further reinforced by the fact Mr Waugh and Mr Hampton were subject to the pain and penalty of perjury in making them.
[53] Hinton J was therefore reasonably assured as to the reliability of the statements. Turning to undue expense and delay, she identified that the defendants would either co-operate and likely volunteer the same evidence as contained in the transcripts, or the plaintiffs would need to rely on r 9.75 to compel them to make affidavits and then, if necessary, obtain directions for oral evidence pursuant to r 15.9(5). This would have
31 Simunovich Fisheries Ltd v TVNZ Ltd [2008] NZCA 350 at [96].
32 Independent Carpets Ltd (in liq) v Carpet Call 2000 NZ Ltd [2020] NZHC 2757.
33 At [23].
significantly delayed the resolution of the proceeding and involve considerable additional expense, which would be “disproportionate to the meagre advantages likely to be obtained in terms of the quality of the evidence”.34 Hinton J recorded that the defendants had been served with proceedings and were on notice that the plaintiffs relied on the statements made but had taken no steps.35
[54] In Craig v Stringer Palmer J left open whether the transcript of evidence in a previous civil proceeding might be admissible as evidence of a matter in dispute in another civil proceeding.36 Section 50 refers to “evidence of a finding of fact”. The transcript of the disciplinary hearing does not contain any findings. My conclusion is that the notes of evidence are not covered by s 50. I see no reason why, subject to the hearsay rule and general ss 7 and 8 threshold of admissibility, the notes of evidence are inadmissible in the context this proceeding.
[55] Moreover, I consider that Independent Carpets Ltd is analogous to the present case. Mr Hong’s evidence in the Tribunal notes of evidence was given on oath under pain and penalty of perjury. Given the proceeding was a disciplinary hearing that placed Mr Hong’s career at risk, he could be assumed to have considered and prepared for the hearing and the evidence he was to give. Like Hinton J, I consider there would be undue delay and expense if Mr Hong were to give evidence in the present proceeding, while noting the unusual circumstance that Mr Hong has fully participated in the counterclaim heard by Jagose J. However, his refusal to file an amended statement of defence, despite participating in the counterclaim, underscores the difficulty and delay that would likely be caused by requiring his evidence. I find the notes of evidence from Auckland Standards Committee No 5 v Hong admissible.
Is the Trust the beneficial owner of the Property?
[56] The overarching issue is whether the plaintiffs have retained a beneficial interest in the Property throughout its various dealings. Mr Hong claimed in his statement of defence that he did not breach any fiduciary duties in his transfers of the
34 At [27].
35 At [27].
36 Craig v Stringer [2019] NZHC 1363, [2019] 3 NZLR 743 at [27].
Property and mortgaging of it because the Trust and the Kinnons “no longer had any Equity in the Property and had walked away from it”.37 That is plainly incorrect.
[57] The sale and purchase agreement records the Cedar Lodge Trust as the purchaser of the Property from the Keoghs. I agree with Jagose J’s characterisation of the payment from Mr Hong, which is that he paid the balance of the purchase price in order to comply with a trustee’s duty to settle the Trust’s acquisition for the benefit of its beneficiaries — a duty for which Mr Hong would be personally liable for breach.38 Thus, the sole owner (legal and beneficial) at the time of purchase was the Trust. I am satisfied on the balance of probabilities that, despite his belief to the contrary, Mr Hong took no direct, legal interest in the Property upon purchase. Certainly, he is entitled to be reimbursed from Trust property the amount he advanced.39
[58] When the legal title was transferred to BGH, it was held on trust and the Trust retained equitable ownership. Mr Hong was the sole director of BGH and was not without notice of the Trust’s interest. BGH was recorded at that time as a trustee of the Trust. In my assessment, all of this points to the Trust retaining equitable ownership. That is my conclusion on the issue of beneficial ownership immediately preceding the time the events giving rise to the plaintiffs’ causes of action first occurred.
Did Mr Hong breach his fiduciary duties?
[59] In summary, Mr Nicholls submitted that Mr Hong breached his fiduciary duties which he owed to the Trust as trustee and as its lawyer by putting his personal interests before those of the Trust. Counsel contended that Mr Hong was bound to act in good faith; provide full disclosure to the plaintiffs; not to prefer his own interests over the plaintiffs’ interests; and not to make an unauthorised profit at the plaintiffs’ expense.
38 Kinnon v Hong, above n 5, at [25(a)].
39 At [25(a)].
[60] Mr Nicholls argued that fiduciary duties were breached when Mr Hong transferred the Property from BGH to NTL; when he transferred it to himself in December 2012; when he granted a registered mortgage over the Property; and when he made unauthorised profits by using the Property as collateral and as his own. During these acts the plaintiffs claimed Mr Hong knew he was not entitled to transfer the Property to NTL without authorisation of the trustees; knew that this transfer would be adverse to the plaintiffs’ interests in the Property; knew that NTL did not acquire the Property as a bona fide purchaser for fair value without notice of the plaintiffs’ interests; and transferred the Property with an intent to fraudulently defeat the plaintiffs’ interests. Counsel contended that the same is true of the second transfer from NTL to Mr Hong personally, and regarding the mortgage.
[61] Thus, Mr Nicholls argued Mr Hong is bound to transfer the Property unencumbered to the plaintiffs. He is also accountable to them for any unauthorised profits, and liable for any loss. Counsel contended that Mr Hong consciously acted well outside the parameters of established fiduciary duties. Exemplary damages in this case are therefore appropriate.
[62] Mr Nicholl argued therefore that the plaintiffs are entitled to declarations of fraud and that Mr Hong holds the Property on constructive trust for the plaintiffs. They are also entitled to orders that Mr Hong convey the Property encumbered, and if he fails to do so, that the Registrar may execute such an order. Mr Hong should be ordered to return any commission or remuneration. In addition, the plaintiffs seek an order that Mr Hong disgorge all profits or property derived from unlawful use of the Property. Further, they seek an inquiry into the equitable losses suffered by the plaintiffs and judgment for the sum determined.
[63] Counsel submitted that exemplary damages are available for breach of fiduciary duty where the conduct is outrageous, calls for punishment and is conscious wrongdoing in contumelious disregard for another’s rights; any other remedies would fall short of an adequate punishment; and it is a serious and exceptional case. He argued exemplary damages of $20,000 were just along with interest and costs.
Legal principles
[64] The fundamental principle concerning conflicts, or the rule against self-dealing by trustees was set out in Aberdeen Railway Co v Blaikie Brothers:40
A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary character towards his principal, and it is a rule of universal application, that no one having such duties to discharge, shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for cestui qua trust, which it was possible to obtain. It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interest of those for whom he is a trustee, have been as good as could have been obtained from any other person; they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted.
[65] The essential point is that the interest and duty of a trustee must not be put into conflict.41 As a fiduciary, a trustee cannot permit any conflict between personal interests and the trustee’s duties to the beneficiaries.42 Trust beneficiaries are entitled to trustee decision-making untainted by any conflict between the trustees’ duty to them on the one hand and any personal considerations and interests on the other.43 Allied with the trustees’ non conflict rule is the duty not to profit from their office.44
[66] Trustees act gratuitously and are not entitled to reimbursement for their time.45 A profit made directly or indirectly will still be a breach of fiduciary duty.46 A profit made by a third party is also still a breach.47 As is a profit made honestly or dishonestly. Where trustees profit from their role they must account to the trust for the unauthorised retention of trust capital.48 That said, there are limited exceptions including where payment to trustees is provided for in the terms of trust, where there
40 Aberdeen Railway Co v Blaikie Brothers [1843-60] All ER Rep 249 at 252.
41 New v Jones (1833) 1 Mac & G 668n; Bray v Ford [1895] UKLawRpAC 54; [1896] AC 44 at 51.
42 Boardman v Phipps [1966] UKHL 2; [1967] 2 AC 134, [1966] 3 All ER 721.
43 Re Thompson’s Settlement [1986] Ch 99 at 115.
44 Robinson v Pett (1734) 3P Wms 249.
45 Barrett v Hartley [1866] UKLawRpEq 109; (1866) LR 2 Eq 789.
46 Rochefoucauld v Boustead [1898] UKLawRpCh 64; [1898] 1 Ch 550 (CA).
47 Willis v Barron [1902] UKLawRpAC 17; [1902] AC 271 (HL).
48 Re Macadam [1945] 2 All ER 664.
is an agreement with all the trust beneficiaries or where the Court approves.49 Any exceptions that may be provided for in the terms of trust, as they are a derogation of the rule against self-dealing, must be narrowly construed.50
[67] As the Court of Appeal affirmed in Naera v Fenwick, the intent of the conflict rule is prophylactic, to remove the fruits of temptation:51
[90] Where the trustee is conflicted in this manner, he or she cannot deal with the trust without the informed consent of all beneficiaries or of the Court. If neither of these steps is taken, and the conflicted trustee participates in decision making, any resulting transaction will be voidable regardless of the fairness or otherwise of that transaction. Indeed, “no inquiry on that subject is permitted”. Likewise, the honesty or otherwise of the fiduciary is also irrelevant.[91] Furthermore, the transaction will be voidable regardless of whether or not other trustees were similarly conflicted.
...
[68] In a subsequent appeal, Fenwick v Naera, the Supreme Court underscored:52
[61] ... We agree with the Court of Appeal that all trustees participating in decision making must “bring to bear a mind unclouded by any contrary interest”. ...
...
[63] We agree with the Court of Appeal that the rules against conflicts and s 227A are designed with prophylactic effect – to avoid the appearance, and risk, of conflict. This applies both in terms of a conflicted trustee being influenced by the conflict (consciously or subconsciously) and of influencing fellow decision makers (again consciously or subconsciously).
[69] Fiduciary duties also apply in a solicitor-client relationship, which is a relationship of the utmost trust and confidence. Relevant to the plaintiff’s claim is the principle that solicitors must provide their client with relevant advice and information to ensure the client can give informed instructions.53
50 Breakspear v Ackland [2009] Ch 32.
51 Naera v Fenwick [2013] NZCA 353 (footnotes omitted).
52 Fenwick v Naera [2015] NZSC 68; [2016] 1 NZLR 354 (SC).
53 Sandman v McKay [2019] NZSC 41; [2019] 1 NZLR 519 at [80].
Discussion
[70] Mr Hong was a trustee from settlement of the Trust between 30 October 2001 and 13 June 2007, when BGH became trustee with Ms Chan as its sole director. Eight months later, on 20 February 2008, Mr Hong became the company’s sole director. On 13 September 2013, BGH was removed from the Companies Register but it was not until March 2019 that it was removed as a trustee. The relevant transfers occurred on 4 August 2011 and 12 December 2012, and the mortgage registered on 17 December 2012.54 In summary, as foreshadowed, Mr Hong was a trustee of the Trust through BGH at the time of the relevant events.
[71] Mr Kinnon deposed that Mr Hong was legal adviser to both Ms Dyer and himself from the 1990s to about 2012 and to the Trust from 2001 to about 2012. That is corroborated by contemporaneous emails which confirm that Mr Hong was acting on instructions from Ms Dyer. In addition, the sale and purchase agreement records Mr Hong as the solicitor for the purchaser, the Cedar Lodge Trust.55
[72] Both of these are accepted and well-established relationship categories that give rise to fiduciary duties.56 The ultimate duty is one of loyalty.57 As mentioned, the rule encapsulated in Keech v Sanford is that the fiduciary has duties to avoid conflicts of interest and not to profit.58 A fiduciary cannot use that position adverse to the interests of the principal.59
[73] I am satisfied that the evidence confirms Mr Hong breached his fiduciary duties. Three points are relevant. First, even by his own account, he acted to put his personal interests before the beneficiaries/his clients. In seeking control and legal title over the Property, he was prioritising his interest in being repaid or reimbursed over the beneficiaries’ interest the Trust holding in clear, registered title. There is no evidence of a signed agreement to assign the Property and nor did the parties appear
54 Thus, Mr Hong was a trustee from October 2001–June 2007, a former trustee from 13 June 2007– 20 February 2008 and again essentially a trustee, through BGH Trusteeship Ltd which he solely controlled, from 20 February 2008 to March 2019.
55 The agreement records Mr Hong as the vendor’s solicitor but I am satisfied this is an error.
56 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [73].
57 Bristol and West Building Society v Mothew [1998] Ch 1 at 18.
58 Keech v Sanford (1726) Sel Cas King 61.
59 Arklow Investments Ltd v Maclean [2000] 2 NZLR 1 (PC); Chirnside v Fay, above n 56, at [80].
to have any such understanding about the purported loan by Mr Hong. On the contrary, the confused and inconsistent nature of the factual evidence is evidently a result of Mr Hong taking matters into his own hands to secure his interests, which he saw as paramount, without properly explaining to the plaintiffs his proposed arrangements.
[74] It is also clear that by registering the ASB mortgage over the Property, Mr Hong was acting solely in his own interests. The loan did not go to Trust funds because it went to Mr Hong personally. Regarding the final transfer from NTL to Mr Hong personally and the subsequent mortgage, Mr Hong gave the following evidence in the disciplinary hearing:60
Q. So is it true that you transferred the property from what you had at least in your mind as a trustee status with the company Nominees and Trustees Limited to Boon Hong personally –
A: Yeah.
Q: – so you could go to the bank, the ASB and say, “I own this property.” A: Yes.
Q: “It’s unencumbered.” A: Yes.
Q: “And I want to borrow money against it please.” A: Mmm.
Q: Is that what happened? A: Yes.
Q: And you don’t –
A: Why are you asking me, you know, this is –
Q: And you think that was an acceptable thing to do? A: I needed the money, right?
[75] Secondly, Mr Hong failed to give full information to Ms Dyer who was his co- trustee, a Trust beneficiary, and his client. He acted unilaterally without the knowledge or consent of his co-trustee.61 Undoubtedly, as her solicitor and that of the Trust, like Mr Kinnon, Ms Dyer would, not unreasonably, have relied on Mr Hong to inform her about any dealings or proposed dealings with the Property. She did not provide informed consent to the transfers and mortgage, if there was any consent at all. If Mr
60 Notes of Evidence at 58.
Hong believed he had some interest or that there was some agreement that allowed him to do what he did, Ms Dyer should have been made aware of this.62 She deposed that she had no knowledge of the transfers or mortgage contemporaneously.
[76] Thirdly, the transfers and mortgage are prima facie in breach of the self-dealing rule, a rule which is to be applied strictly.63 Relevant here is clause 6m of the Trust deed which provides for “the fullest and most extensive powers possible” which include “even those which Trustees would normally have no power to do in the absence of an expressed power conferred by deed or at law”. This includes enabling the trustees to “do ... all acts ... as if the Trustees are the absolute owners of the Trust Fund” or as if the settlor were acting personally. It is set out in full above at [17].
[77] Although at first blush this clause appears to give a wide power, which might in theory allow Mr Hong to deal with the Property in the manner he did, the trustees must still act by majority. Thus, even if the clause authorised self-dealing it would have to be done with the consent of Ms Dyer. I therefore find that Mr Hong acted in breach of his fiduciary duties.
Relief
[78] The plaintiffs sought a declaration of fraud. As set out below regarding the plaintiffs’ claim of land transfer fraud, I find that the plaintiffs’ evidence is insufficient to establish that Mr Hong acted with dishonest intent in effecting the transfers.64 However, equitable fraud may be established where the fiduciary does not have a subjective intent or design to cheat or act dishonestly.65 In Avondale Printers & Stationers Ltd v Haggie, Mahon J described equitable fraud:66
The basis of that liability in equity was expressed by Viscount Haldane LC in Nocton v Lord Ashburton [1914] UKLawRpAC 31; [1914] AC 932, 953 as follows:
62 See Clark Boyce v Mouat [1992] 2 NZLR 559 (PC).
63 Chellew v Excell [2008] NZHC 2126; [2009] 1 NZLR 711.
64 See [107]–[115] of this judgment.
65 Dominion Finance Group Ltd (in receivership and liq) v Sade Developments Ltd HC Auckland CIV-2009-419-1556, 6 October 2011 at [45]. See also Royal Brunei Airlines Sdn v Tan [1995] UKPC 4; [1995] 2 AC 378 at 389.
66 Avondale Printers & Stationers Ltd v Haggie [1979] 2 NZLR 124 (SC) at 159.
In Chancery the term ‘fraud’ thus came to be used to describe what fell short of deceit, but imported breach of a duty to which equity had attached its sanction.
The nature and extent of those duties has long since been settled. Sometimes the label of “equitable fraud” or “constructive fraud” has been attached to people who acted merely in ignorance of their duties or, to put it differently, in the mistaken belief that they were acting properly. The case of Boardman v Phipps [1966] UKHL 2; [1967] 2 AC 46; [1966] 3 All ER 721 might be a suitable example of that situation. Referring again to Nocton v Lord Ashburton, Viscount Haldane described these consequences in this way at p 954:
But when fraud is referred to in the wider sense in which the books are full of the expression, used in Chancery in describing cases which were within its exclusive jurisdiction, it is a mistake to suppose that an actual intention to cheat must always be proved. A man may misconceive the extent of the obligation which a Court of Equity imposes on him. His fault is that he has violated, however innocently because of his ignorance, an obligation which he must be taken by the Court to have known, and his conduct has in that sense always been called fraudulent, even in such a case as a technical fraud on a power. It was thus that the expression ‘constructive fraud’ came into existence. The trustee who purchases the trust estate, the solicitor who makes a bargain with his client that cannot stand, have all for several centuries run the risk of the word fraudulent being applied to them. What it really means in this connection is, not moral fraud in the ordinary sense, but breach of the sort of obligation which is enforced by a Court that from the beginning regarded itself as a Court of conscience.
The ascription of "fraud in equity" to the conduct described by Viscount Haldane is not in my opinion a misnomer, unappealing though the epithet may be. It derives from the view which equity was obliged to take of the fiduciary who justified his actions by self-serving evidence of innocent motive.
[79] Accordingly, by my findings above that Mr Hong acted in breach of his fiduciary duties by effecting the transfers and mortgage, I conclude that he has also acted fraudulently in equity.
[80] In addition, where a person is conveyed property as a trustee, denying the trust and claiming the land personally is fraud.67 Mr Hong accepted that NTL held the Property as a trustee. It is not clear whether, at the time he transferred the Property into his own name, Mr Hong intended to deny the plaintiffs’ beneficial interest. Certainly, by the time he presented the title to ASB unencumbered in order to obtain the mortgage, Mr Hong was denying the Trust’s beneficial interest. That is evident
from his evidence in the Disciplinary Tribunal. I therefore declare that Mr Hong acted in breach of trust and therefore fraudulently in equity by his transfers of the Property to NTL in 2011 and to himself in 2012.
[81] Secondly, the plaintiffs seek a declaration that Mr Hong holds the Property on constructive trust for them. I am satisfied the trustees of Cedar Lodge Trust remain the beneficial owners of the Property (as explained above at [39]–[58]) and that Mr Hong holds the registered title of the Property. Mr Hong had notice of the Trust’s interest in the Property and therefore NTL can also be taken to have had notice. There is no transfer to a bona fide purchaser for value without notice of the Trust’s interest that would preclude a constructive trust. I therefore declare that the Property is held on constructive trust for the Cedar Lodge Trust.
Orders to convey the Property to the plaintiffs and repay commission
[82] Thirdly, the plaintiffs sought orders to convey the Property back to them. The authors of Civil Remedies in New Zealand note that restitution of property is “problematic”, exercised “[i]n exceptional cases”, and that “it has proven difficult to identify both the form of such a remedy and the circumstances that will justify it”.68 The plaintiffs have not demonstrated why under this cause of action they should be entitled to such orders. Indeed, they advanced their second cause of action in order to access the 1952 Act provisions which I agree are the more appropriate mechanism to achieve this remedy. To do otherwise would undermine the land transfer scheme.
[83] Fourthly, the plaintiffs sought an order that Mr Hong return any commission or renumeration paid to him by the plaintiffs. There is no evidence in the formal proof of any commission or renumeration. The plaintiffs are required to establish why they are entitled to such relief and the quantum but have done neither.
Equitable loss and/or account of profits
[84] Fifthly, the plaintiffs sought an account of profits, subject to a direction for Mr Hong to provide the relevant information as to what the ASB mortgage monies were
used for to enable the plaintiffs to determine whether or not the first defendant has in fact made an unauthorised profit. An account of profits is the most commonly granted remedy for breach of fiduciary duty.69 They also sought an “inquiry into the equitable losses suffered by the plaintiffs and [judgment] for the sum determined by such an inquiry”.
[85] Where damages are sought the plaintiff must provide sufficient information to enable the relevant calculation to be made to fix the damages.70 At first blush these remedies as sought appear inconsistent with r 15.9(4).
[86] In Heartland Bank Ltd, referring back to Ferreira v Stockinger, Duffy J confirmed that to obtain judgment on a formal proof, the plaintiff is required to “prove both liability and quantum to the Court’s satisfaction”.71 In Richmond v Heskett Holdings Ltd, the plaintiffs pleaded in their statement of claim that the relief sought was the price paid for a property less its market value, with the relevant valuations to be provided before hearing.72 The claim proceeded by formal proof and at the hearing the value was provided and awarded. Penlington J set aside the judgment, finding that the relief went beyond the pleadings:73
It has become an accepted practice in pleading in New Zealand that a statement of claim may be filed and served with a pleading to the effect that the amounts will be notified after discovery or that the amounts will be particularised before trial or that there will be an inquiry as to damages. Where, however, a plaintiff proceeds alone, as he did here, he is required to prove his cause of action so far as the burden of proof lies on him. At such a hearing the plaintiff is entitled to such relief as is claimed in his statement of claim and incidental thereto. But he cannot go beyond his pleadings ...
[87] In seeking a sum to be awarded for the amount of equitable loss, the plaintiffs are seeking compensatory equitable damages. That falls within r 15.9(4) which requires the plaintiffs to provide the Court with sufficient information. As does an account of profits which Tipping J in Premium Real Estate v Stevens treated as “a
69 Peter Blanchard (ed) Civil Remedies in New Zealand (2nd ed, Brookers Ltd, Wellington, 2011) at [9.4.2] citing Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL) and Chirnside v Fay above n 56.
70 High Court Rules 2016, r 15.9(4).
71 Ferreira v Stockinger above n 3.
72 Richmond v Heskett Holdings Ltd (1995) 8 PRNZ 533.
73 At 5 (citations omitted).
species of damages”.74 On a first principles basis, therefore, a plaintiff in a formal proof should be expected to provide the Court with sufficient information to fix the quantum of such relief.
[88] On the other hand, as I have mentioned, following a case management conference in the present case on 28 September 2021, Sussock AJ ordered:
The question of whether particular discovery is required in relation to any profits to be disgorged by the first defendant is to await a finding as to the first defendant’s liability as a trustee. Once that determination has been made, leave is reserved to the plaintiffs to make an application for further discovery in regard to any profits made.
[89] This order was made well before Lang J set the hearing down as formal proof on 17 August 2022. This is one of the case’s unsatisfactory procedural complexities. Ordinarily a formal proof would not proceed in a two-stage approach as to liability then as to damages. Yet it is difficult to discern that any appropriate alternative course is available in the circumstances, given Sussock AJ’s order, and notwithstanding that the course of action is not strictly in compliance with r 15.9. However, that order only applies to the claim for account of profits. Therefore, I consider the plaintiff’s claim for an inquiry into equitable losses inappropriate in the formal proof setting. In any event, it is pleaded in alternative to an account of profits. It is accordingly declined.
[90] Regarding the account of profits, the plaintiffs sought directions via their submissions that are essentially particular discovery orders. I consider the best course of action is to make a finding as to liability and further directions as required to progress to “second stage” can be made following a conference with counsel.
[91] As foreshadowed, the plaintiffs sought exemplary damages of $20,000 in relation to both causes of action against Mr Hong. Although the plaintiffs provided authority for the award of exemplary damages in cases of breach of fiduciary duty in principle, no precedent has been provided to justify the figure of $20,000. I
74 Premium Real Estate v Stevens [2009] NZSC 15, [2009] 2 NZLR 384 at [98] and [99]. The Judge noted that compensatory damages and disgorgement damages are almost always inconsistent and require the plaintiff to make an election between them.
acknowledge Mr Kinnon’s evidence in his supplementary affidavit that the experience has been very stressful for him, especially when Mr Hong later attempted to evict him.
[92] There are three elements that must be satisfied before the Court will award exemplary damages. First, there must be conduct that is “so outrageous that punishment is called for as an end in itself”.75 The outrageous behaviour must have been done deliberately or with subjective recklessness.76 Secondly, other remedies that the defendant will have to bear fall short of the adequate punishment.77 Thirdly, the award is discretionary and should only be awarded in “serious and exceptional cases”. If made the quantum must be proportional to the egregiousness of the conduct.
[93] Here the high point of Mr Hong’s conduct is that he acted without properly advising his clients and without the consent of his co-trustee to secure his own interests to the detriment of the Trust’s interests. After ostensibly becoming frustrated by the plaintiffs and under financial pressure, he decided to disregard the Trust’s equitable interest and present unencumbered title to ASB to acquire mortgage funds which he used personally. This behaviour is rationalised by Mr Hong with reference to legal arrangements which do not appear to have been agreed, but, of which no findings are able to be made in this limited proceeding.
[94] In Eden Refuge Trust v Hohepa Duffy J awarded exemplary damages of
$10,000 against a trustee of a religious charitable trust who had “consciously connived to sell the trust’s real property and to convert it into funds that could be transferred to him offshore, to be applied for his own purposes”.78 At relevant times the trustee had acted “dishonestly, highhandedly ... and contumeliously”.79 He had continuously siphoned funds from the trust, including by granting a mortgage over a trust property for his personal benefit. That behaviour is more egregious than Mr Hong’s. There is evidence suggesting that Mr Hong acted under the mistaken belief he was entitled to do as he did. This indicates that the $20,000 claimed by the plaintiffs is inappropriate.
75 Cook v Evatt (No 2), [1992] 1 NZLR 676 (HC) at 706.
76 Couch v Attorney-General [2010] NZSC 27, [2010] 3 NZLR 149.
77 Cook v Evatt (No 2), above n 75.
78 Eden Refuge Trust v Hohepa 3 NZLR 273 (HC) at [50].
79 At [50].
[95] In Cook v Evatt (No 2) the fiduciary operated a scheme which was “a deliberate plan” to conceal its own interests in order to manipulate its principal and its other clients for personal profit.80 The Court emphasised that exemplary damages were needed to deter others who might be minded to exploit similar positions of trust. The award granted was $5,000.81 This was tempered by the fact the plaintiff received the profits enjoyed by the fiduciary.
[96] I also need to consider whether the remedies which will be (or in this case have been) granted are sufficient. The most relevant point is the fact that Mr Kinnon received $8,000 in compensation following the disciplinary proceedings.82 The issues were similar as was Mr Kinnon’s justification for the award, including emotional distress and the breakdown of his marriage.83 I acknowledge Mr Kinnon received that compensation personally as Mr Hong’s client, rather than as trustee. However, although Mr Kinnon points to his personal suffering as a result of Mr Hong’s actions, he brings this claim as a trustee. There is no evidence of the Trust’s loss justifying exemplary damages. There is also an element of double recovery if Mr Kinnon received exemplary damages where he has already personally received $8,000 for the same breaches of duty. In short, my conclusion is that exemplary damages are not appropriate here. I will also discuss interest and costs separately below.
Did Mr Hong commit Land Transfer Act 1952 fraud?
[97] The plaintiffs pleaded that by the transfers of the Property and the mortgage placed upon it Mr Hong dishonestly intended to defeat their rights and interests. Again, the plaintiffs sought remedies to effect the transfer of the Property to them, here relying on the stronger provisions of the 1952 Act and its compensation provisions. Unlike under the Land Transfer Act 2017, fraud under the 1952 Act is not defined.84
80 Cook v Evatt (No 2) above n 75.
83 See Hong v Auckland Standards Committee No 5, above n 6 at [202].
84 See Land Transfer Act 2017, s 6.
Counsel highlighted what he argued was the leading statement on land transfer fraud under the 1952 Act:85
If the object of a transfer be to cheat a man of a known existing right, that is fraudulent, and also fraud may be established by a deliberate and dishonest trick causing an interest not to be registered and thus fraudulently keeping the register clear. It is not, however, necessary or wise to give abstract illustrations of what may constitute fraud in hypothetical situations, for each case must depend on its own circumstances. The act must be dishonest, and dishonesty must not be assumed solely by reason of knowledge of an unregistered interest.
[98] The plaintiffs claimed that when Mr Hong personally transferred, or instructed his wife to transfer, the Property from BGH to NTL in 2011, he knew that he was not entitled to do so without the trustee’s consent. He also knew that the acquisition of the Property by NTL would be adverse to the plaintiffs’ interests. He further knew that NTL did not acquire the Property as a bona fide purchaser for value without notice of the plaintiffs’ interest. The plaintiffs also claimed Mr Hong transferred the Property to cheat them out of their existing rights, acting fraudulently and dishonestly.
[99] The plaintiffs argued that the same fraud was perpetuated by the transfer of the Property by Mr Hong from NTL to himself. The plaintiffs said they had therefore been deprived of their registered interest in the Property and were entitled to have the Property’s registered title transferred to them per s 63(1)(c) of the 1952 Act:
63 Registered proprietor protected against ejectment
(1) No action for possession, or other action for the recovery of any land, shall lie or be sustained against the registered proprietor under the provisions of this Act for the estate or interest in respect of which he is so registered, except in any of the following cases, that is to say:
...
(c) the case of a person deprived of any land by fraud, as against the person registered as proprietor of that land through fraud, or as against a person deriving otherwise than as a transferee bona fide for value from or through a person so registered through fraud:
...
85 Waimiha Sawmilling Co Ltd (in liq) v Waione Timber Co Ltd [1926] AC 101 (PC), cited in Bunt v Hallinan [1984] NZCA 98; [1985] 1 NZLR 450 (CA) and Infinity Enterprises NZ Ltd v Kinara Trustee Ltd [2020] NZCA 309.
[100] Further, counsel submitted that when Mr Hong granted the ASB mortgage in December 2012, he knew he was not entitled to do so; that the mortgage would be adverse to the plaintiffs’ interests in the Property; and, despite this, he granted the mortgage because he intended to cheat the plaintiffs out of their interests dishonestly and fraudulently. Accordingly, they claimed they were entitled to recover under the compensation provisions of the 1952 Act the extent of the mortgage, provided it does not exceed the value of the Property at the date the mortgage was registered. The plaintiffs confirmed that they have made demand of the first defendant.
[101] As a result, the plaintiffs claimed as relief a declaration as to fraud, an order under s 63(1)(c) of the 1952 Act that the registered title be transferred to them and a direction under s 85 that the Registrar rectify the Register. In addition, the plaintiffs sought orders that they were entitled to recover the mortgage sum under the 1952 Act compensation provisions and that they were at liberty to redeem the mortgage. Finally, the plaintiffs sought exemplary damages of $20,000 and costs.
Legal principles
[102] Land transfer fraud must involve dishonesty of some sort,86 in the sense of “moral turpitude”.87 The learned authors of Hinde, McMorland and Sim note that the requirements in the definition of fraud in the Land Transfer Act 2017, s 6 for “dishonest conduct” and “inten[tion] at the time of registration of the estate or interest that the registration would defeat the unregistered interest” were designed to capture the position set out in Infinity Enterprises NZ Ltd v Kinara Trustee Ltd,88 a case decided under the 1952 Act.89 The fraud must be “brought home to” the registered proprietor or their agent.90 Finally, it must operate against a prior identifiable interest in the land.91
[103] In this context the summary given by Allan J in Tapsell v Murray is apposite:92
86 Bunt v Hallinan, above n 85.
87 Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604 at 614[1988] HCA 16; , 78 ALR 1 at 6.
88 Infinity Enterprises NZ Ltd v Kinara Trustee Ltd, above n 853.
90 Dollars & Sense Finance Ltd v Nathan [2008] NZSC 20.
91 Waller v Davies [2007] NZCA 51; [2007] 2 NZLR 508.
92 Tapsell v Murray [2008] NZHC 768; (2008) 9 NZCPR 184.
Fraud
[62] The Land Transfer Act [1952] does not define fraud, but it is well settled that what is meant is actual fraud or dishonesty of some sort, rather than constructive or equitable fraud.93 On occasion, the Privy Council has warned against importing doctrines of equity into the process of determining whether fraud has been established in cases under the Land Transfer Act.94
[63] Each case must depend upon its own circumstances. It will sometimes be difficult to know precisely where to draw the line.95 As has often been said, a comparison of the facts of decided cases can be “little short of dangerous”.96
[64] It is important to distinguish between consciously dishonest conduct on the one hand and behaviour founded upon a mistaken, but honest, belief on the other. Actual knowledge of the existence of an adverse right which will be destroyed by the impugned transaction, will often lead to a finding of fraud.97 And knowledge that a transaction is in breach of trust will generally lead to the same result.98
[104] In Khan v Shariff the Court of Appeal noted that in a formal proof context which deals with fraud, particular care must be taken by the Judge to ensure the claim is satisfied by the plaintiffs’ evidence.99 That is consistent with r 5.17(2) which provides that if a party alleges a state of mind (such as dishonest or fraudulent intent) the party pleading much give particulars of the facts relied on in alleging that state of mind. It is not sufficient to leave the Court to infer fraud from the facts; it must be distinctly alleged and proved.100
[105] In Three Rivers District Council v Bank of England (No 3) Lord Millet stated that fraud is not sufficiently particularised if the facts pleaded are consistent with innocence or mere negligence. He emphasised that this is not just a matter of pleading but also one of substance:101
93 Assets Co Ltd v Mere Roihi [1905] UKLawRpAC 11; [1905] AC 176 at 210.
95 Stuart v Kingston [1923] HCA 17; (1923) 32 CLR 309 at 359; and Bunt v Hallinan, above n 95, at 461.
96 Harris v Fitzmaurice [1956] NZLR 975 at 978: Bunt v Hallinan, above n 95, at 461.
97 Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd [1923] NZGazLawRp 32; [1923] NZLR 1137 at 1174.
98 Locher v Howlett (1894) 13 NZLR 584 at 595.
99 Khan v Shariff [2018] NZCA 583 at [23].
100 Robert Osborne and others McGechan on Procedure (online ed, Thomson Reuters) at [5.26.08(1)], cited in Peck v Grasshopper Lawnmowing Services Ltd [2018] NZHC 2615.
101 Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1 (HL), the judgment of 22 March 2001, at [184]–[189], applied NG v Harkness Law Ltd [2014] NZHC 850; Kimble Contracting Ltd v Wouldes [2017] NZHC 1554; Peck v Grasshopper Lawnmowing Services Ltd, above n 100; White v Attorney-General (sued obh of New Zealand Police) [2020] NZHC 740; Fruit Shippers Ltd v Petrie [2020] NZHC 749; and Smith v Noble Investments Ltd [2020] NZHC 1236. Compare Sofer v Swiss Independent Trustees SA [2020] EWCA Civ 699.
As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.
[106] Finally, s 182 of the 1952 Act provides that “knowledge that any... trust or unregistered interest is in existence shall not of itself be imputed as fraud”.
Discussion
[107] The plaintiffs must prove that Mr Hong’s actions demonstrate that he intentionally and dishonestly sought to defeat the Trust’s interest in the Property, and that his actions are not consistent with innocence or mere negligence.
[108] From Mr Hong’s perspective, he was essentially operating a common law mortgage. The reasons there was not in fact a common law mortgage were because there was no loan and because there was no common intention between the parties to form a mortgage.102 If that were the case, however, the Trust would have an equity of redemption. That interest would not be defeated by Mr Hong transferring the Property with notice of the interest, as he did because he solely controlled NTL.
[109] It appeared from the plaintiffs’ evidence that Mr Hong was acting unilaterally in purporting to impose this arrangement that resembled a common law mortgage. Even so, there is a lack of contemporaneous evidence relating to the arrangement upon purchase of the Property and the agreement to transfer it to BGH. Ms Dyer’s and Mr Kinnon’s affidavit evidence is all there is — evidence that has not been subject to cross examination. Mr Hong has not been here to explain his side of the story (despite having the opportunity to do so). In such circumstances, having regard to the need for fraud to be distinctly proven, I am not prepared to make a finding of dishonest intent on behalf of Mr Hong on that ground.
102 Hayes Securities Ltd v Bambury [1991] 1 NZLR 304 (CA); and Waller v Davies, above n 91.
[110] Then there is the issue that Mr Hong acted without Ms Dyer’s consent as the other trustee. However, Mr Hong had obtained Ms Dyer’s consent to transfer the Property to BGH. Again, the lack of clarity and agreement about the purpose and effect of this transfer to BGH means it is difficult to know whether Mr Hong was acting honestly, but mistakenly, when he acted alone rather than with the agreement of his co-trustee to effect further transfers. In any case, even if by acting unilaterally in the transfers Mr Hong was in breach of trust or fiduciary duties, it does not automatically follow that he was acting fraudulently in a land transfer context. I do not consider the plaintiffs’ evidence establishes, to the standard required of fraud, that Mr Hong’s actions were only consistent with a dishonest intent.
[111] Further, because Mr Hong knew (or was wilfully blind) that the Property was held on trust for the Cedar Lodge Trust, as the only natural person behind the transfers, each purchaser knew of the Trust’s equitable interest and accordingly it was not defeated by either transfer. The transfers did not operate “against” the Trust’s interest. As a matter of law, the transfers could not defeat the Trust’s equitable interest.
[112] Mr Nicholls accepted that if NTL held the Property as a trustee there would be no fraud in relation to the transfer from BGH to NTL. And although Mr Hong at some point formed the view that he would no longer personally recognise the beneficial interest of the Trust in the Property, there was no evidence that this intent was formed at the time of the transfer from NTL to Mr Hong personally. In fact there is some evidence that suggests the contrary in the Tribunal notes of evidence:103
Q: So at some point around December 2012 or a bit sooner you considered yourself to be free of any constraints in the way you dealt with this property –
A: No actually –
Q: – in regards to the Kinnons, is that correct?
A: No actually my mind was not because of that then, right, I’ve given the statement in my affidavit.
[113] Further, although not evidential, Mr Hong’s position in his initial statement of defence supports this analysis: “The transfer of the Property to himself would not
103 Notes of Evidence at 57.
impede his ability to honour the redemption of the Property with the K[innon]s, if they have requested as such.”104
[114] This analysis is consistent with the authority cited by Allan J for the proposition that “knowledge that a transaction is in breach of trust will generally lead to [a finding of fraud]”.105 In that case, Locher v Howlett, the question was put as follows:106
I now come to the defence raised by the defendant Gotch, under section 189 of “The Land Transfer Act, 1885.” It may be considered as the settled construction of this enactment that a purchaser is not affected by knowledge of the mere existence of a trust or unregistered interest, but that he is affected by knowledge that the trust is being broken, or that the owner of the unregistered interest is being improperly deprived of it by the transfer under which the purchaser himself is taking. The question, then, is, did the defendant Gotch know that Locher was being improperly deprived of his equitable interest?
[115] Regarding the mortgage, I consider that the plaintiffs cannot bring a claim of land transfer fraud against Mr Hong. He has not acquired any registered interest as the mortgagor. Any claim would have to be against the party who obtained the registered interest — the bank. It is the bank’s title that would have to be impeached for fraud.
[116] Given that I have not found for the plaintiffs on this cause of action, no relief is available. In any event, I note Schmidt v Registrar-General of Land held that the compensation provisions of the 1952 Act are not available for the actions of a fraudulent trustee.107
Did Nominees and Trustees Ltd knowingly receive the Property?
[117] Mr Nicholls submitted that as Mr Hong is the sole director and shareholder of the second defendant, NTL, his knowledge is imputed to it. When it received the Property from BGH, NTL acquired it with notice that it would be adverse to the plaintiff’s interest, did not acquire it as a bona fide purchaser without notice of the
104 Statement of defence at [55].
105 Tapsell v Murray, above n 92, at [64], citing Locher v Howlett (1894) 13 NZLR 584 at 595.
106 At 595–596 (emphasis added).
107 Schmidt v Registrar-General of Land [2015] NZHC 2015, [2016] 2 NZLR 121.
breach of trust, and acquired it with intent to defraud the plaintiffs. In addition, counsel contended that, when the second defendant received the Property, it became a deemed trustee and breached its fiduciary duties by transferring the Property to Mr Hong.
[118] The plaintiffs sought a declaration that the second defendant fraudulently transferred the Property to the first defendant in December 2012. They also sought orders that the second defendant return any commission or renumeration paid to it by the plaintiffs and disgorge any unauthorised profits derived from its unlawful use of the Property. In addition, the plaintiffs sought an inquiry into the equitable losses suffered by them plaintiffs and judgment for the sum determined by such an inquiry. Exemplary damages of $5,000 were sought along with interest and costs.
[119] Mr Nicholls submitted that if either of the first two causes of action are made out, this must be made out because the second defendant was in effect Mr Hong and has the same actual knowledge. In addition, counsel contended that because unjust enrichment is the foundation of knowing receipt and the remedy is restitutionary in nature, the second defendant should be ordered to repay any profit that it has made, plus interest on that profit, while it was the registered owner of the Property.
[120] Mr Nicholls argued that if a restitutionary order against the second defendant is made, then the plaintiffs seek an order that the first defendant disclose the accounts of the second defendant.
Discussion
[121] I agree with counsel that if one of the two other causes of action are made out, then knowing receipt is established because NTL has the same knowledge as Mr Hong. Having found that Mr Hong acted in breach of fiduciary duty by transferring the Property to NTL, I consider that the company is liable in knowing receipt.
[122] Once it had received the Property, NTL became a deemed trustee and owed fiduciary duties. For the same reasons I found that Mr Hong acted in breach of fiduciary duties for transferring the Property from BGH to NTL, I also conclude that NTL breached its fiduciary duties when it transferred the Property to Mr Hong because it is the alter ego of Mr Hong. However, for reasons already expressed, I do not make
a finding of dishonesty. I therefore decline any declaratory relief to that effect. Regarding a declaration of fraud in equity, I consider the finding of breach of trust against NTL along with the declaration against Mr Hong sufficient and see no utility in a further declaration against NTL.
[123] For the same reason I declined to order return of any commission or renumeration regarding the first defendant, I also decline to do so in respect of the second defendant.
[124] Unlike in the case of the first defendant, there is no prima facie evidence that NTL made any profit from receiving the Property. It appears from the available evidence NTL simply held the Property for a time then transferred it to Mr Hong. However, given Mr Hong is the alter ego of NTL as the sole director and shareholder, my initial view is that discovery would not be complicated. Mr Hong should hold all of the relevant materials. Therefore, I find that in principle NTL is liable for an account of profit, with quantum, if any, to be determined at the second stage.
[125] The plaintiffs sought exemplary damages of $5,000 against the second defendant. I am not satisfied the second defendant’s conduct was egregious to a degree requiring further punishment. In addition, to the extent that the second defendant is the alter ego of Mr Hong, there is arguably an element of double recovery in claiming damages against it, particularly in light of the compensation granted by the Disciplinary Tribunal to Mr Kinnon.
Interest and costs
[126] I agree that in principle interest may be awarded from judgment date to date of payment. However, under s 11 of the Interest on Money Claims Act 2016, the Court must specify the amount on which interest is awarded under s 10. That is not possible until the quantum relating to account of profits, if any, is fixed. Interest will be determined at the second stage. Under s 9(1)(a)(ii) the start date will not run until the profits are quantified.
[127] The plaintiffs then referred to s 24 as the basis for interest prior to judgment being awarded. Section 24 relates to contractual terms, which is not in issue here.
Section 25 requires the plaintiffs to precisely specify the applicable section of the Act. There is therefore no basis pleaded for awarding interest prior to judgment.
Decision
[128] I declare that 75 Rangitane Loop Road, Kerikeri is held on constructive trust for the Cedar Lodge Trust.
[129] I declare that Mr Hong acted in breach of trust and therefore fraudulently in equity by his transfers of the Property to Nominees and Trustees Ltd in 2011 and to himself in 2012.
[130] Mr Hong and Nominees and Trustees Ltd are liable in principle for an account of profits. A teleconference is to be scheduled to determine the appropriate directions to progress the second stage in relation to quantum.
[131] Interest is to be determined at the second stage.
[132] My preliminary view is costs should be awarded on a 2B basis. If parties take a different view submissions can be filed of up to five pages within one month.
Harvey J
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