Nesbit v House 2 Home Limited DC Blenheim CIV-2011-006-189 [2012] NZDC 764 (22 May 2012)

Last Updated: 5 January 2020

IN THE DISTRICT COURT AT BLENHEIM

CIV-2011-006-000189

BETWEEN CHERYL JOY NESBIT GEORGE JAMES NESBIT Plaintiffs

AND HOUSE 2 HOME LIMITED First Defendant

AND JANELLE ANNE MORGAN Second Defendant First Defendant Hearing: 22 May 2012

Appearances: S F Gaines for the Plaintiffs M Hardy-Jones for the First and Second Defendants

Judgment: 22 May 2012

ORAL JUDGMENT OF JUDGE C N TUOHY

[1] This claim has been the subject of a simplified trial and it has itself become simplified during the course of the trial.

[2] The claim against both defendants is for the sum of $57,000 plus agreed interest at 14% per annum for the period up to trial date during which that interest has not been paid. That sum has been calculated and agreed by counsel at $5,320.

[3] The claim is for monies advanced to the first defendant, House 2 Home Limited, for a property investment. In the course of the trial the first defendant, through counsel, acknowledged its liability to repay the sums claimed. There will therefore be judgment by consent against the first defendant for $57,000 plus agreed interest of $5,320.

NESBIT V HOUSE 2 HOME LIMITED & ANOR DC BLE CIV-2011-006-000189 [22 May 2012]

[4] The claim proceeded against Mrs Morgan, the second defendant, the now sole director and effectively the controlling mind of the first defendant. The claim against her is that she is personally liable for participating in a breach of trust by the company in disposing of both properties without ensuring repayment of the plaintiffs’ interest.

[5] There are two properties involved in the case, one in Blenheim in Maxwell Road and the other one in Cameron Street, Timaru.

[6] The plaintiffs advanced $57,000 to the company in April 2004. At that time the company, acting through Mrs Morgan, and the plaintiffs signed an agreement which all parties acknowledge in many important respect did not represent their actual agreement.

[7] Their actual agreement was that the plaintiffs would invest the sum of

$34,000 in the Maxwell Road property and $23,000 in the Cameron Street property. Those funds would be contributed towards the purchase price of the two properties. The properties themselves were to be held in the name of a company, with the intention that purchasers would be found for them at a higher price payable by instalments over a number of years, so-called wrap agreements. When those purchasers finally settled and the properties were transferred to them, which was anticipated to be in a number of years hence when they had acquired sufficient equity to arrange alternative finance from lending institutions, the plaintiffs’ contribution would be repaid. Until repayment interest would be paid to the plaintiffs by the company at the rate of 14% per annum.

[8] There was a suggestion made during the trial that the agreement made between the plaintiffs and the company required the plaintiffs to consent to any sale of the properties. Having considered the agreement I am satisfied that the provisions relating to consent to sale, Clauses 12.1 and 15.1, are intended to apply to anticipated sales by way of wrap agreement to a purchaser paying by instalments.

[9] In fact in relation to Maxwell Road, such a wrap agreement had already been entered into prior to the plaintiffs making their advance, indeed, two or three months prior to it.

[10] In relation to the Cameron Street property, no wrap agreement was ever entered into. The property was finally sold under a normal immediate sale and purchase agreement.

[11] With regard to Maxwell Road, the evidence of the Nesbits, which I accept, was that they did not realise when they made their advance that a wrap agreement had already been signed for Maxwell Road. They thought that one had been negotiated and was just about to be signed and the property just about to be acquired. In fact the property had already been acquired and, as I have said, a wrap agreement signed a couple of months previously.

[12] While I accept the Nesbits’ evidence in this respect, I do not think that they were intentionally misled about that point by Mrs Morgan. I believe that there was a simple misunderstanding between them at that time. I say that because the agreement clearly stated in the appendix an actual purchase price for Maxwell Road and, indeed, Cameron Street, and referred to a date of 30 January 2004 which was a couple of months, at least, before the agreement between the parties was signed and the advance made. So it was there to be seen in the schedule. There was no hiding it. Further, I do not think there was any intentional misleading about this point because I can see no advantage in Mrs Morgan misleading the Nesbits about that at that time. Indeed, the proposal would probably have been easier to sell to the Nesbits with a wrap agreement already wrapped up.

[13] As far as Cameron Street is concerned, I am satisfied that the intention initially and, indeed, throughout was to find a wrap purchaser for an arrangement similar to the one that was actually in existence for Maxwell Road. However, the company never did find a wrap purchaser. The reason for that, it appears, is that the particular property was not sufficiently attractive to wrap purchasers to acquire one.

[14] I do not consider that the agreement between the parties required consent to be given by the Nesbits to a sale of the property, not to a wrap purchaser, but a sale because the commercial purpose of the venture was found in practice not to be possible for that property. That is not to say, of course, that the company was not required to repay the contribution of the Nesbits when the company did sell.

[15] As I say, the fact is that the company did sell the Cameron Street property in 2007 and it was effectively Mrs Morgan who was the controlling mind of the company in relation to that sale. The sale realised ample net proceeds to repay the Nesbits. Mrs Morgan candidly acknowledged that without telling the Nesbits about the sale she made a decision not to repay them but rather used all of the net proceeds for the company’s own purposes. She continued to ensure that the company paid 14% interest to the Nesbits even though the purpose of their advance was no longer possible and the property for which they had advanced their money had been disposed of to a third party.

[16] With regard to Maxwell Road, that was a different kettle of fish. The company had to settle in 2010 when the wrap purchaser required settlement. Mrs Morgan did not advise the Nesbits that it was happening. While there was ample from the balance sale price to repay the loan to the bank taken out to buy Maxwell Road, the mortgage which was secured over the property in favour of the bank was the usual all obligations type and the bank took all the net proceeds, using them not only to repay the loan taken out to fund the purchase but toward repayment of other unrelated indebtedness of the company. The evidence about that from Mrs Morgan was to the effect that this was a requirement of the bank rather than something done at her request.

The first issue that arises is: was there a trust in respect of the plaintiffs’ advances?

[17] In effect they were two separate advances - $23,000 towards the Cameron Road purchase and $34,000 towards the Maxwell Road purchase.

[18] I consider that the answer to that is yes. Where parties have made partial contributions to the purchase of real estate, which is put into the sole name of one of

them, then that one holds the property, at least a fractional share of the property, on a resulting trust for the purchaser who has contributed but is not recorded as the legal owner on the title. That is a longstanding centuries old legal principle. If someone makes a payment for the purchase of a property, wholly or in part, and it is put into the name of someone else, in this case the company (which in relation to Maxwell Road was in effect still a partial contributor itself), that property is held on trust, at least a share is held on trust, for the party which has provided a contribution to the purchase price but not recorded as the legal owner. The Nesbits are in that position.

[19] I accordingly reject the submission that their advances were merely unsecured loans. They were intended, in my view, not as loans in the true sense but as contributions to the purchase price which resulted in the Nesbits having an equitable interest in the properties themselves on terms that on the sale of each property a sum equal to their contribution would be repaid to them and that in the meantime they would receive 14% per annum on the amount of their contribution.

The second issue is: was there a breach of trust by the company?

[20] In respect of Cameron Street I have no doubt of that at all. The company, acting in the person of its controlling mind, Mrs Morgan, made a deliberate decision not to refund a sum equal to the Nesbits’ contribution knowing that the terms that the company had received that contribution on required repayment on disposal. Rather the company made a deliberate decision to use the total proceeds for its own purposes and without disclosing to the Nesbits that the property had been sold. Obviously if that had been disclosed the Nesbits would have been jumping up and down for return of their contribution. The continued payment of the 14% interest, of course, ensured that they would likely ask no questions.

The next issue is: is Mrs Morgan liable for participating in those actions of the company?

[21] The answer is yes. Again, it is a long established principle of law that if someone knowingly and dishonestly assists in a breach of trust by another then that person is personally liable for assisting in that breach of trust.

[22] What has to be shown first is that there was money lost as a result of a breach of trust or a breach of fiduciary duty. There was here. The proceeds of sale of Cameron Street have gone.

[23] Secondly, that the defendant has participated in that breach of trust by helping or assisting in some way with it. Obviously the company is not a human person. It can only act through its controlling human persons. The controlling human person is, or was, Mrs Morgan and she participated in and, in fact, procured that breach of duty.

[24] The third element that has to be shown and the final one is that there was dishonesty on the part of the defendant in doing so. Dishonesty in this context denotes actual knowledge that the transaction is one which a person cannot honestly participate in and that is the situation here. My view is that, at least for the purposes of the law of trusts, this was dishonest conduct. A reasonable person would consider that what was done here was not honest - to use the money for the company’s own purposes knowing that it should have been repaid to the Nesbits. It is as simple as that really.

[25] However, I take a different view with regard to Maxwell Road. I do not consider there has been a deliberate breach of trust by the company in relation to that. What happened here was that eventually the property was transferred to the wrap purchaser. That was an inevitable result of the original arrangement which everyone had agreed to. I have mentioned that there might have been a misunderstanding about whether the wrap agreement had already been signed or was just about to be signed. I do not think it makes any difference. Both parties, the company and the Nesbits, anticipated there would be a wrap agreement. There was one. According to its terms, the wrap purchasers had the right, if they wanted to and could raise the money, to settle the agreement for the balance then owing. That is what happened here. It was, as I say, the anticipated result of the original arrangement. The original arrangement contemplated, of course, that the sale to the wrap purchaser would be for a higher price than the company paid for the property and it was.

[26] The cause of the loss of the ability to recover the Nesbits’ contribution out of the final payment by the wrap purchaser was not any deliberate breach of trust by the company. There was no fiduciary obligation in the signed agreement or in general law which required the company to ensure that the property was not used as security for sums additional to the amount required to purchase it. Indeed, although there is no direct evidence of this, it is very likely that the property was subject to a first all obligations mortgage to the bank from the time it was first acquired by the company. In other words, that was the situation that the Nesbits bought into.

[27] Neither was there a fiduciary obligation in the original agreement or in general law for the company to retain separately payments made on account by the wrap purchaser. In this case a deposit of $16,000 plus ongoing instalments over the years were made by the wrap purchasers. Of course, those instalments would also have been used for paying 14% per annum interest and, no doubt, the rates and insurance premiums on the property. However, it is quite feasible that the wrap purchasers may not have settled for years and years on. They had no obligation to do so and by the time they settled there may not have been sufficient to even repay the mortgage that was raised although, presumably, that was reducing from the instalments.

[28] The cause of the loss of the ability to recover was the inadequacy of the legal agreement which the Nesbits signed without legal advice - the inadequacy of that document to protect the property from being used as security for other loans and to protect the deposit and instalment payments from being used for general purposes. So I do not find that the company has breached its trust by allowing the property to be subject to an all obligations mortgage, which thus left it vulnerable to all the equity being taken by the bank, as happened.

[29] Nor do I consider that it is liable for anything done initially. I think the transaction anticipated that the initial contribution towards Maxwell Road would go to the company, as it did, because the company had initially paid the whole of the owners’ equitable contribution to the purchase.

[30] So while there may have been a breach of trust by the company when it failed to repay the Nesbits’ contribution on settlement by the wrap purchasers, it was not a deliberate action of the company so Mrs Morgan cannot have dishonestly participated in it.

[31] So there will be judgment against the second defendant, Mrs Morgan, for

$23,000 and interest on that at 14% from the date when it ceased to be paid. That will need to be calculated by counsel.

[32] There remains the issue of costs. I think counsel should have leave to file memoranda regarding costs, that is if they cannot agree between themselves. I will put a time limit of 14 days on that.

C N Tuohy

District Court Judge

NB: This judgment was delivered orally on the day of the hearing. As well as polishing the grammar and expression, and correcting minor errors, it has been expanded to better express the reasons for it.

C N Tuohy

District Court Judge