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Court of Appeal of New Zealand |
Last Updated: 2 September 2018
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BETWEEN |
JAMES JOSEPH MURREN AS TRUSTEE OF THE JAMES J MURREN SPENDTHRIFT TRUST AND DANIEL LEE Appellants |
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AND |
GLENN SCHAEFFER Respondent |
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Hearing: |
2 August 2018 (further material received 15 August 2018) |
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Court: |
French, Simon France and Moore JJ |
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Counsel: |
A J Horne and A E Simkiss for Appellants A R Shaw for Respondent T D Gee for R Schaeffer (non-party) |
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Judgment: |
23 August 2018 at 11 am |
JUDGMENT OF THE COURT
Pending resolution of the proceedings in the High Court: if contracts are executed for the sale of any or all of the properties comprised in and CT NL12C/1028, and CT 387916 and 387917, whether with or without the assets owned by the Mahana Estates wine business, from the proceeds of sale after payment of registered security holders (other than the respondent), the sum of $6,291,306.72 is to be paid into the respondent’s solicitors’ trust account and placed on interest bearing deposit.
____________________________________________________________________
REASONS OF THE COURT
(Given by Simon France
J)
Introduction
[1] The appellants invested in a vineyard venture suggested to them by the respondent, Mr Schaeffer. They have filed proceedings seeking to recover their investment plus interest. The pleaded causes of action are a breach of the Fair Trading Act 1986, negligent misstatement, deceit, fraudulent misrepresentation and a breach of the Nevada Deceptive Trade Practices Act.[1]
[2] The proceeding was commenced in 2015. There have been various interlocutory hearings. The trial will take place in October this year. Late in 2017, the appellants came to believe that Mr Schaeffer was divesting himself of his New Zealand assets and relocating back to the United States. In February 2018, not having received undertakings requested, they applied for a freezing order that would attach to the proceeds of the sale of various assets.
[3] The application was heard by Peters J, who declined it and discharged an interim order that had been made earlier on a limited notice basis.[2] The Judge held that while the applicants had established a good arguable case on a prospective cause of action, the evidence was insufficient to establish a real risk of dissipation of assets.
[4] The appellants now appeal the decision. Mr Schaeffer cross-appeals the finding there of a good arguable case. In this Court, Brown J made an interim freezing order which since the hearing we have confirmed remains in force pending delivery of this judgment.[3]
Background facts
[5] Mr Schaeffer promoted a limited partnership to invest in a New Zealand wine enterprise. The idea was that the limited partnership would own 80 per cent of the wine enterprise. Mr Schaeffer, through an investment vehicle, would be the majority partner in the limited partnership, and a number of small partners would make up the balance of ownership.
[6] Mr Schaeffer in 2001 and 2002 approached his friends James Murren (to contribute 10 per cent) and Daniel Lee (five per cent) to be investors.[4] What he allegedly said to them about the nature of the investment and how the partnership would be structured and operated forms the basis of the proceedings.
[7] Over a period from 2002 to 2008 Mr Murren and Mr Lee responded to capital calls — Mr Murren to the amount of around USD 1.6 million and Mr Lee around USD 700,000. The money was invested as intended in the wine venture; at issue is how that was done and whether the structure of the investment reflected the representations allegedly made by Mr Schaeffer.
[8] The vineyard and winery are known as Mahana Estates. There are two associated companies, which can be called WEHL (which owns the land) and MEL (which is the winemaking and trading entity).[5] The limited partnership is called Kiwi Ventures (Kiwi). There are two blocks of land owned by WEHL, on both of which there are vineyards, and on one the winery complex.[6] There is a third piece of land on which there is a residence.[7] It is owned by Mr Schaeffer personally through a different company. The interim freezing order attaches to the proceeds of the sale of any of these three parcels of land.
[9] Throughout most of the period the shareholding has broadly reflected the general proposal put forward in 2001 and 2002 — two local people, Mr and Mrs Woollaston have always owned 20 per cent of the enterprise, and Mr Schaeffer or associated entities owned the other 80 per cent. This holding was for the most part in Mr Schaeffer’s name, but since the proceedings commenced, he transferred some of the holdings either into the name of Kiwi, or into the names of the individual partners in Kiwi in parcels proportionate to their share of Kiwi.
[10] Concerning Kiwi, at the time of the initial agreement to invest, Mr Schaeffer circulated a limited partnership agreement. Mr Murren and Mr Lee signed it but noone else did. Notwithstanding that, money was invested. Then in 2006, a revised version of the agreement was circulated and was executed by everyone. Mr Schaeffer’s interests are through an investment company, Constellation Partners LLC (Constellation).
[11] Mahana Estates is an active business. It and the land are presently advertised for sale.[8]
Events triggering application for freezing order
[12] In October 2017, the appellants became aware Mr Schaeffer was conducting a major sale of artwork. At an event promoting the auction, Mr Schaeffer said he now spent most of his time in the United States. The sale catalogue described him as residing in the United States. The sale yielded over $1 million to Mr Schaeffer.
[13] The second event was that the appellants learned that the wine business, including the land, was being marketed. It is described as a quiet marketing in that the sale was not then listed on websites. The third event was it recently becoming known to the appellants that Mr Schaeffer had bought a house in Nebraska in 2016.
Freezing orders
[14] The relevant rule is r 32.5 of the High Court Rules 2016 which for present purposes requires the applicants:
- (a) to establish they have a “good arguable case” on a prospective cause of action; and
- (b) to satisfy the court, having regard to all the circumstances, that there is a danger a prospective judgment will be wholly or partly unsatisfied because the assets of the prospective judgment debtor might be removed from New Zealand, or disposed of or diminished in value.
[15] A good arguable case requires the applicant to establish the allegations are tenable and are supported by evidence, having regard to the stage of the proceedings.[9] In Wing Hung Printing Co Ltd v Saito Offshore Pty Ltd this Court observed:[10]
It is clear, however, that the good arguable case test does not require the plaintiff to establish a prima facie case. This recognises that disputed questions of fact cannot be readily resolved on affidavit evidence. On the other hand, there must be a sufficiently plausible foundation established that the claim falls within one or more of the headings in r 6.27(2).
[16] The second stage requires the court to be satisfied there is a danger the judgment will not be satisfied because assets may be removed or dealt with in a way that frustrates the judgment. In Raukura Moana Fisheries Ltd v The Ship “Irina Zharkikh”, the test was put this way:[11]
[122] It is perfectly clear that a Judge must not infer a risk of dissipation merely because a foreign defendant has assets within the jurisdiction of the Court. Nor is a risk of dissipation to be inferred merely because the defendant plays its financial cards close to its chest as in The Niedersachsen. On the other hand, the test which the plaintiff must satisfy is not unduly exacting. The plaintiff must point to circumstances from which a “prudent, sensible commercial man, can properly infer a danger of default”. This phraseology comes from the judgment of Lawton LJ in Third Chandris Shipping Corporation v Unimarine SA [1979] QB 645 at p 671.
[17] If these two qualifying matters are established, a court will finally need to consider where the balance of convenience lies.
Good arguable case
[18] The High Court found this aspect of the test was met.[12] Mr Schaeffer challenges that finding. A preliminary point raised is that the Judge referred to an “arguable case” rather than a “good arguable case”.[13] We see nothing in a point such as this; the issue on appeal is whether the Judge erred in her assessment.
[19] Mr Schaeffer submits that the appellants’ case cannot succeed for reasons of causation, lack of proved loss, and limitation hurdles. We will briefly address these but with the trial imminent consider it appropriate to limit as much as possible any comment on the merits.
[20] The core argument for Mr Schaeffer is that the 2006 executed agreement is crucial. Properly interpreted, it contemplates the exact structure that now exists. It is apparently accepted this was not always so since the shares were in Mr Schaeffer’s name, rather than that of the partnership. However, as part of the submissions filed for the appeal, Mr Schaeffer acknowledges for the first time that all of the 80 per cent that remains in his name is held by him on trust for the limited partnership.
[21] The 2006 agreement was signed by the appellants after they had invested some money and before each of them invested further money. It has an “entire agreement” clause. It is therefore submitted that any representations are overtaken by the agreement. Further, the representations cannot be shown to be causative of loss, the structure is (now) exactly as it was represented it would be, and finally the structure itself, even if noncompliant, cannot be shown to be a reason for loss. Mr Schaeffer then finally advances a series of arguments directed in support of his limitation defences.
[22] As with Peters J, we consider the test for a good arguable case is made out. The appellants plead representation and reliance. The extent to which the claimed representations are disputed is unclear but there seems limited difference between the parties on this aspect. The appellants claim the representations were knowingly untrue and without them they would not have invested money. It will be argued that they are therefore entitled to be placed in the situation in which they would have been but for the false representations and deceit.
[23] There is ample evidence that establishes a plausible foundation for the appellants’ case. Representations were made. The appellants plead they were significant in making their investments. The structure established by Mr Schaeffer arguably was not as promised. To what extent, and whether any difference has been causative of loss is a trial issue. We decline to have regard to Mr Schaeffer’s belated acknowledgement of trustee status. The implications of that are best left to the parties to assess.
[24] It is not necessary to detail the limitation arguments. The appellants claim awareness at a certain point in time which, if accepted, would defeat a limitation defence. Mr Schaeffer submits the appellants’ claim is untenable. It is a trial issue.
[25] We are satisfied the appellants comfortably meet the arguable case requirements. We have not been persuaded Mr Schaeffer’s response is so overwhelming as to require that assessment to be changed. Each side at this point has matters of apparent strength and weakness. However, there is a sufficient apparent divergence between that which seems to have been contemplated at the time investments were sought, and that which has existed in the 16 years since, to consider the appellants meet the test of a good arguable case. Mr Shaw for Mr Schaeffer sought to rely on recently provided trial briefs for the appellants as strengthening his submissions. We do not see them as assisting. The key impediment for Mr Schaeffer on this aspect remains unchanged — namely, they are all arguments that need to be addressed at trial.
A danger any judgment will be unsatisfied
[26] In order to be able to make a freezing order, relevantly the court must be satisfied both:[14]
- (a) there is a danger any judgment will be wholly or partly unsatisfied; and
- (b) that situation exists because the assets of the potential judgment debtor may be removed from New Zealand.
[27] The High Court considered the appellants’ evidence insufficient to establish a real risk of dissipation.[15] We disagree, and consider the evidence establishes a clear risk that if the properties are sold, the proceeds may move offshore. In reaching this assessment we acknowledge Mr Schaeffer’s point that his efforts are all consistent with an intention to maintain the business and present it in the best possible light for sale. The focus of the freezing order, however, is on the proceeds if and when the business is sold. At that point, Mr Schaeffer’s commitment to a business now sold does not assist.
[28] We turn first to the sale of the artwork. It transpires from evidence filed by Mr Schaeffer that the sale of the artwork, and the committing of the proceeds to the business, was a condition imposed by a mortgagee in order to maintain borrowings. It is also clear that Mr Schaeffer has indeed directed almost half of the proceeds of the art sale to paying off, for the business, a short term borrowing from a different lender. This is an example of Mr Schaeffer supporting the business.
[29] However, two other comments are needed. First, it is said in the evidence that a further condition of the mortgagee was that out of the proceeds Mr Schaeffer should purchase wine from the business. The idea, it seems, is to then sell the wine overseas as part of brand development. Mr Schaeffer bought the wine in his own name and, so far as is known, the wine is now overseas. Whatever the motivation, the objective reality is that these art sale proceeds, now in the form of wine, are still in his name and are now overseas. Second, for reasons not presently clear, and despite repeated requests, the reason behind the art sale and the required use of the proceeds was never disclosed by Mr Schaeffer until after the freezing order application was made. Given the reason for the sale, it is a puzzling example of nondisclosure.
[30] Next, Mr Schaeffer has put on the market his only New Zealand residence. Along with his interest in Mahana Estates, they seemingly consist of all his New Zealand assets. Added to this is the fact he bought a new residence in the United States in 2016, and he describes himself as resident there.
[31] Finally, we observe Mr Schaeffer has recently arranged a security over the business’s assets, and claims to be owed $22 million. How much of that debt may in fact be owed to the limited partnership is unclear. The reality is that although the trustee status of Mr Schaeffer has now been acknowledged, Mr Schaeffer also has a personal secured claim against the proceeds, and he will have control of those proceeds when and if they are received from any sale.
[32] In terms of Mr Schaeffer’s approach to the proceedings, Peters J was critical of the lack of information he had provided in relation to the companies’ financial position.[16] We have commented on the surprising silence concerning the sale of the artwork. We also refer to the belated acceptance, a day before the hearing, that Mr Schaeffer holds all his shares in the companies on trust for the partnership. This is contrary to his pleadings and previous affidavit evidence where he said he held “a proportion” of them for the partnership, and with his recent actions in transferring some of the shares into the name of the partnership and/or its investors.
[33] These matters confirm the view that the risk of the proceeds of the sale leaving New Zealand is real, and support the making of a freezing order.
Balance of convenience
[34] The trial is scheduled for late October. The proposed freezing order does not hinder the operation of the business or the ability to sell if a suitable offer is received. There is presently no agreement for sale on any of the properties.[17] The order will be limited to the size of the claim, which may leave a surplus depending upon the price realised. Secured creditors will not be affected. The other partners in the limited partnership are potentially affected.
[35] In these circumstances, and given particularly the proximity of the trial, the balance clearly favours the making of the orders. It is difficult to identify factors that are contrary, other than the constant reality of a freezing order that it will tie up money to protect a prospective judgment which may not be achieved.
Leave to adduce further evidence
[36] A basis on which Mr Schaeffer sought to resist the freezing order was that the appellants did not come with clean hands. The alleged lack of cleanliness arose from comments said to have been made by Mr Lee at a mediation. The comments as alleged were at the least inappropriate and possibly threatening. A dispute exists as to exactly what Mr Lee said. Leave is sought to admit evidence from those present at the hearing.
[37] If admitted, the evidence, and the topic generally, affords no tenable basis on which to deny an otherwise appropriate freezing order. The comments were made a year ago and bear little or no relevance to the trial issues. Accordingly, the application to adduce further evidence is declined on the basis that it is of insufficient relevance to the matters in issue.
Registered interests
[38] There are registered security interests in favour of two lending institutions, and a third shared security interest, all of which the appellants accept have priority before the freezing order attaches to the balance of the proceeds. However, there are three further registered securities in favour of Mr Schaeffer’s former wife concerning which doubts are raised.
[39] Ms Schaeffer was not served with the proceedings. She has, however, now filed evidence and sought leave to be heard. Ms Schaeffer sets out the origins of the indebtedness secured by the registered securities, and submits any freezing order should equally respect her registered interests.
[40] Initially the appellants opposed this, seeking further time to assess the evidence now filed. However, that position was altered at the hearing to one of being content to have the priority recognised as long as leave was reserved for the appellants to return to court should further relevant information emerge.
[41] We will of course grant such leave but record that, even without the appellants’ agreement, based on the evidence filed we would have accepted that Ms Schaeffer’s registered securities deserved the same protection as the other registered securities. We make this observation so it is plain that the appellants should not seek to revisit this matter in the absence of strong new supporting evidence.
[42] It is convenient at this point to address the issue of what was termed the “belated” disclosure of Ms Schaeffer’s position. The appellants sought to place blame on Mr Schaeffer’s nondisclosure. However, the security interests being discussed are interests registered in Ms Schaeffer’s name. If the appellants intended to treat them differently, and seek to convince the Court that priority should not be recognised, the onus was on them to seek the information. No approach to Ms Schaeffer was made. This conclusion will be reflected in the costs orders.
[43] Finally, we make it plain the discussion of registered interests excludes any in favour of Mr Schaeffer.
Terms of order
[44] The freezing order can be simplified from the interim order to require that, in the event of sale of any or all of the three properties (identified in the order by Certificate of Title reference), after payment of registered security interests (other than those in favour of Mr Schaeffer), the net proceeds of up to a total of $6,291,306.72 are to be paid into the trust account of Mr Schaeffer’s solicitors, and held on interest bearing deposit.
[45] Leave is reserved to any party to seek a variation should circumstances change.
[46] Any application for variation is to be made to the High Court.
Costs
[47] It is agreed between the parties that costs should follow the event on a standard appeal basis. The appellants sought costs for a second counsel. We do not approve that, since it was a standard interlocutory matter. Mr Schaeffer is also liable to pay costs on the application for an interim order, these being reserved at the time it was granted.[18]
[48] There was an issue as to costs for Ms Schaeffer. Her counsel, Mr Gee sought increased costs or full indemnity on the basis of two English authorities.[19] The proposition taken from those cases was that an applicant should undertake to meet the costs of an uninvolved third party such as a bank on whom the order is served. The Courts were there contemplating, in the first case, the bank being put to considerable endeavour and, in the second case, a port authority losing income from having a ship berthed.
[49] The appellants submitted responsibility for Ms Schaeffer’s costs should lie with Mr Schaeffer, but for the reasons given we do not accept that.
[50] The Court of Appeal (Civil) Rules 2005 confer a broad costs discretion (r 53) supported by a set of familiar principles (r 53A). It has previously been held the broad discretion confirmed by r 53 allows costs orders in favour of, or against, nonparties.[20] This is reinforced by r 53E(3)(d), which provides that a court may order a party to pay indemnity costs if “the person in whose favour the order of costs is made was not a party to the appeal and has acted reasonably in relation to it”.
[51] This specific rule empowers this Court to make such an order, but of course does not require we do so. However, we consider its terms apply fully to Ms Schaeffer. The appellants sought to deal with her registered interests differently from other registered security holders. She was not served with the proceedings or by other means afforded the opportunity to avoid involvement. Her evidence when filed was focused, as was the appearance on her behalf. As noted, no evidence has been produced to justify singling Ms Schaeffer out, and the lack of time available to the appellants to do so is of their own making.
[52] The costs orders are therefore:
- (a) the appellants are entitled to costs for a standard appeal on a band A basis and usual disbursements;
- (b) certification for second counsel is declined;
- (c) the appellants are entitled to costs for a standard application on a band A basis and usual disbursements;
- (d) costs in the High Court are to be fixed by that Court; and
- (e) Ms Schaeffer is entitled to all her costs and usual disbursements associated with the filing of evidence and the appearance of counsel, such costs to be met by the appellants.
Result
[53] The application for leave to adduce further evidence is declined.
[54] The appeal is allowed. The cross appeal is dismissed.
[55] The following freezing order is made (and the interim order thereby cancelled):
Pending resolution of the proceedings in the High Court: if contracts are executed for the sale of any or all of the properties comprised in and CT NL12C/1028, and CT 387916 and 387917, whether with or without the assets owned by the Mahana Estates wine business, from the proceeds of sale after payment of registered security holders (other than the respondent), the sum of $6,291,306.72 is to be paid into the respondent’s solicitors’ trust account and placed on interest bearing deposit.
[56] Leave to apply to the High Court to vary this order if circumstances change is granted.
[57] The respondent must pay the appellants costs for a standard appeal on a band A basis and usual disbursements.
[58] The respondent must pay the appellants costs for a standard application on a band A basis and usual disbursements.
[59] Costs in the High Court are to be fixed by that Court.
[60] The appellants must pay Ms R Schaeffer costs associated with the filing of evidence and the appearance of counsel on an indemnity basis and usual disbursements.
Solicitors:
MinterEllisonRuddWatts, Auckland for Appellants
C & F Legal Ltd,
Nelson for Respondent
Hamish Fletcher Lawyers, Nelson for R Schaeffer
(non-party)
[1] Nevada Deceptive Trade Practices Act Nev Rev Stat §41.600.
[2] Murren v Schaeffer [2018] NZHC 1517 [HC decision].
[3] Murren v Schaeffer [2018] NZCA 265 [CA interim order].
[4] Initially both were to contribute five per cent, but by 2006 Mr Schaeffer’s contribution had increased.
[5] Woollaston Estates Holdings Ltd and Mahana Estates Ltd.
[6] Being the land comprised and described in Certificates of Title 387916 and NL 12C/1028.
[7] Certificate of Title 387917.
[8] However, we were advised by the appellants after the hearing that conditional tender offers for all three properties are under consideration by Mr Schaeffer.
[9] Wing Hung Printing Co Ltd v Saito Offshore Pty Ltd [2010] NZCA 502, [2011] 1 NZLR 754 at [37]–[41]; and Dotcom v Twentieth Century Fox Film Corp [2014] NZCA 509, (2014) 22 PRNZ 479 at [18].
[10] Wing Hung, above n 9, at [41] (footnote omitted).
[11] Raukura Moana Fisheries Ltd v The Ship “Irina Zharkikh” [2001] 2 NZLR 801 (HC).
[12] HC decision, above n 2, at [25].
[13] At [25].
[14] High Court Rules 2016, r 32.5(4).
[15] HC decision, above n 2, at [34].
[16] HC decision, above n 2, at [34].
[18] CA interim order, above n 3, at [24].
[19] Searose Ltd v Seatrain UK Ltd [1981] 1 WLR 894 (QB); and Clipper Maritime Co Ltd of Monrovia v Mineralimportexport [1981] 1 WLR 1262 (QB).
[20] Erwood v Maxted [2010] NZCA 93, (2010) 20 PRNZ 466 at [18]. This decision was later reversed in Erwood v Maxted [2011] NZSC 23, however the Supreme Court did not address this point.
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