PUBLIC TRUST V LUM HC AK CIV-2009-404-2788 [2009] NZHC 1196 (7 September 2009)

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
                                                                      CIV-2009-404-2788



                BETWEEN                     PUBLIC TRUST
                                            Plaintiff

             
  AND                         BRENDAN LUM
                                            Defendant


Hearing:        21 August 2009

Appearances: Ms Keen for the Plaintiff
             Mr A V Ram for defendant

Judgment:       7 September 2009 at 3 p.m.


    
           JUDGMENT OF ASSOCIATE JUDGE DOOGUE


                This judgment was delivered by me on
                07.09.09 at
3 p.m, pursuant to
                Rule 11.5 of the High Court Rules.


                  Registrar/Deputy Registrar

          
     Date...............




Solicitors:
Simpson Grierson, P O Box 2402, Wellington ­ by email: [e-mail]
Mr
A V Ram, 40 Eden Crescent, Auckland ­ [e-mail]




PUBLIC TRUST V LUM HC AK CIV-2009-404-2788 7 September 2009

Background

[1]    On 3 April 2008 the plaintiff (as lender) and Hokianga Property Holdings
Limited (Hokianga) (as borrower), together
with the defendant (as guarantor)
executed two loan agreements. Although the defendant signed the loan agreements
as a guarantor,
it was specifically recorded that the obligations of the guarantor
between the guarantor and the lender were deemed to be principal
obligations rather
as obligations of a surety only.


[2]    The loan was secured over the Hokianga's rural property on the Hokianga
harbour (the property).


[3]    The agreement also contained a provision which required the guarantor to
make payments in full under
the guarantee, free of any set-off. Clause 27 of the
agreements provided as follows:

       27.     Consideration

            
  The Guarantor by execution of this Deed unconditionally and
               irrevocably acknowledges that the Guarantor has received
valuable
               consideration for the obligations the Guarantor has undertaken
               pursuant to this Deed.

[4]
   Further, in the section headed `background' the following provisions
appeared:

       Background

       A.      At the request
of the Guarantor, the Lender has agreed to provide
               certain financial accommodation to or for or at the request of
the
               borrower.

[5]    The deed of guarantee and indemnity supported two loans, one for
$1,600,000 and the other for
$500,000. In each case the loans were for two years
and were signed on 3 April 2008.


[6]    The loans were made but in due course
the debtor fell into arrears under both.
Notices under s 119 of the Property Law Act 2007 (the Act) were given to the
borrower, Hokianga,
on or about 3 October 2008. Notices to the defendant as
guarantor pursuant to s 122 of the Act were served on or about the same date.
The

notice to the borrower expired on 7 November 2008 without the default complained
of being remedied and the plaintiff then invoked
the acceleration clauses under the
loan agreements and called up the balances owing under each of the loan
agreements.    It made
demand for repayment of the loan on the borrower in
December 2008 and then on the defendant under its guarantee in January 2009.


[7]     Steps were then taken to initiate a mortgagee sale and marketing of the
property commenced in May 2008. A public auction
was held on 16 July 2009. The
property was passed in at $300,000. The property remains unsold at the present
time.


[8]     The
outcome of the auction was in stark contrast to a valuation that the
defendant had commissioned and which purported to state the
value of the property
as at 24 March 2008. That valuation was prepared by Tierney & Partners and the
basis of the instructions for
the valuation were that the instructions came from the
defendant (paragraph 2.1 of the Valuation Report) and the purpose was to provide
a
current market value as at 17 March 2008 for mortgage security purposes. The
valuer concluded that the then current market value was $3,500,000.


[9]     In preparation for exercise
of its power of sale, the plaintiff obtained its own
valuation from Telfer Young (Northland) Limited (Telfer Young) in October 2008.
Telfer Young's report, dated 23 October 2008, gave a current market value for the
property as at 21 October 2008 of $600,000 but
$375,000 on a forced sale basis.
Given the great gulf between the Tierney valuation and the Telfer Young valuation,
the plaintiff
sought the opinion of a further valuer, Mr D Grubb. Mr Grubb noted
that the Tierney report was 589% higher than the Telfer Young
value assessment. He
also noted that the Tierney report was undertaken prior to landslips having appeared
on the property. Mr Grubb
had reservations about the accuracy and authenticity of
comparable sales information purportedly relied upon in the Tierney report.
He
suggested that a third valuation be obtained.


[10]    Acting on Mr Grubb's recommendation the plaintiff commissioned a further
valuation of the property from a Mr McBain. Mr McBain's report was prepared as at
11 March 2009. He estimated market value as at
17 March 2008 of $585,000. His

estimate of the market value as at 11 March 2009 was $525,000 and, under forced
sale conditions,
$350,375. As it turned out, his report was quite close to the figure at
which the property was passed in at the auction sale as I
noted in [7] above.


[11]   On 12 May 2009 the plaintiff issued the present proceedings against the
defendant and sought summary
judgment against him seeking judgment in the sum
of $1,689,614.97 under the larger loan and the sum of $537,460.56 under the smaller
of the two loans.


[12]   The defendant has filed a notice of opposition to the application for summary
judgment. The essential
point contained in the notice of opposition was that:

       ...

       (ii)    The plaintiff entirely disregarded the defendant's
interests in
               exercising its power of sale, and in advertising the property as a
               mortgagee sale prior
to being legally allowed to do so. The plaintiff
               must be held liable for the amount which would have been realised
if
               the sale had been conducted without such wilful default.

       (iii)   The plaintiff breached its duty to act
bona fide as it attempted to sell
               the properties without a genuine primary desire to sell the secured
           
   property for the best price obtainable. In fact, the plaintiff unfairly
               has attempted to sell the properties on
the same day as this Court
               hearing. The plaintiff's actions have caused the defendant enormous
               strain
and stress.

       (iv)    The plaintiff has marketed the property for sale well below the
               registered valuation,
the plaintiff has not taken reasonable care when
               it prepared the property for mortgagee sale.

       (v)     The
amount claimed by the plaintiff is incorrect as the plaintiff has
               not accounted for the GST on the sale of bare development
land.

[13]   During the course of the hearing I gave leave to the defendant to amend the
notice of opposition which he had filed
by adding the following additional ground of
opposition:

       The defendant did not receive valuable consideration for the obligations
that
       the guarantor has undertaken pursuant to the guaranteed deed.

The exercise of the power of sale


[14]    Essentially
the defendant claims that the plaintiff has not properly exercised
its power of sale and has thereby caused him loss. This appears
to be a pleading to
the effect that the plaintiff has acted in breach of the duty contained in s 176 of the
Property Law Act 2007.
That section reads as follows:

        176     Duty of mortgagee exercising power of sale

        (1)     A mortgagee who exercises
a power to sell mortgaged property, including
                exercise of the power through the Registrar under section 187, or through a
                court under section 200, owes
a duty of reasonable care to the following
                persons to obtain the best price reasonably obtainable as at the time
of sale:

                (a)      the current mortgagor:

                (b )     any former mortgagor:

                ( c) 
   any covenantor:

                (d)      any mortgagee under a subsequent mortgage:

                (e)      any holder of any
other subsequent encumbrance.

        (2)     A mortgagee who exercises a power to sell mortgaged property may not
            
   become the purchaser of the mortgaged property except in accordance with
                section 196 or an order of a court made
under section 200.


[15]    There is nothing in this complaint. In the first place, the power of sale has
yet to be exercised. Unless
and until that occurs the defendant will suffer no loss
that he can counter-claim for from the plaintiff.


[16]    In any case,
the defendant has not made any of the payments that are claimed
in the plaintiff's application for summary judgment. As I noted in
paragraph [3] the
contract contained a clause limiting the circumstances in which the defendant could
exercise his right of set-off.


[17]    Ms Keen for the plaintiff submitted that in any event there had been no
breach of the obligation under s 176.         
   She drew attention to the fact that the
defendant appears to attach significance to the wide diversity between the Tierney
valuation
on the one hand and the McBain and Nicholl valuations of the other. But
in fact that issue of valuations is beside the point, because
no sale has taken place.
But even if the plaintiff were to proceed in the same way again ­ that is by offering

the property for
sale at auction ­ it would be difficult to understand what breach of
duty might occur. As Ms Keen pointed out, the plaintiff never
gave any indication
of what it considered to be the value of the property to intending purchasers. It took
advice from what appears
to be a competent real estate agent as to the preferred
method of selling the property. Adequate publicity was given to the auction,
it
would seem. In the end the market value will be determined by whatever price is
realised at auction. The fact that the one valuer,
Tierney, assessed the value as being
many times greater than the approximate amount to be obtained on a mortgagee sale
at auction
is neither here nor there.


[18]   The Courts have said that it is not their function to second-guess the steps
that the mortgagee
takes. The principles governing the mortgagee's duties to obtain
the best price reasonably obtainable as at the time of sale were
examined in the well-
known judgment of Harts Contributory Mortgages Nominee Company Limited v
Briars (HC AK CP 403-IM00 19 December
2001). The section which Fisher J
considered in that case is substantially similar to the current section 176.


[19]   Fisher J
held in Harts Contributory Mortgages Nominee Company Limited
that the following were the principles which governed the mortgagee's
duty:

       I would summarise the principles for the purpose of this case as follows:

       [ a]    The overriding requirement
is to take reasonable care to obtain the best
               price reasonably obtainable: Cuckmere Brick Co Ltd & Another v Mutual
               Finance Ltd [1971] 1 Ch 949 (CA).

       [b]     The mortgagee has the power to decide, purely in the interests of
the
               mortgagee, if and when to sell (ibid; Downsview Nominees Ltd v First City
               Corporation Ltd [1993]
1 NZLR 513). Consequently, it is only the best
               price reasonably obtainable at the time of sale that matters.

   
   [ c]    Where the security is substantial, or specialised property is involved, it will
               usually be necessary for
the mortgagee to obtain and act upon specialised
               advice as to the method of sale: TSE Kwong Lam v Wong Chit Sen  [1983] 3
               All ER 54 (PC). Appointing a competent agent to sell does not discharge
               the mortgagee's duties, but since its duty is ultimately
only one of
               reasonable care, putting the matter in the hands of a competent agent will
               usually go a
long way towards discharging the mortgagee's duties.

       [d]     In the normal course the proposed sale will need to be advertised
with an
               adequate description of the property's attributes and, within reason, widely
               enough to attract
all possible purchasers. In some cases this will need to
               extend to both general and specialist publications: see Kwong
supra at p 61;
               Ansell v NZI Finance Ltd (unreported, Wellington Registry, A434/83,
               Quilliam J, 14 May
1984).

       [e]    There is no obligation to postpone the sale in the hope of a better price
              later, or to break
up the assets and sell in a piecemeal manner if this can
              only be carried out over a substantial period or at a risk
of loss: Kwong
              supra at p 59.

       [f]    When assets are sold by tender or auction, a reasonable period must usually
              be allowed for purchasers to inspect the property and arrange finance before
              submitting bids: see Fairer
Fishing Co Ltd v Broadlands Finance Ltd
              (unreported, Timaru Registry, A35/77, 17 August 1984); discussed by
      
       Ross, supra, along with Ansell v NZI Finance Ltd.

       [g]    Those are simply detailed examples of the way in which the
duty to take
              reasonable care to obtain the best price reasonably obtainable might be
              discharged in particular
cases. In the end, the mortgagee's performance can
              only be assessed by reference to each particular case.

       [h]
   The fact that a mortgagee has acted in good faith does not mean that it has
              necessarily discharged its equitable
duty to take reasonable care to obtain
              the best price reasonably obtainable: Moritzson Properties Ltd v McLachlan

             [2001] 9 NZLC 262, 2448 at 2662,457 to 262,458, paras 59 and 10.

       [i]    On the other hand, in evaluating judgments
made by or on behalf of the
              mortgagee it should not be forgotten that in the absence of bad faith, the
           
  mortgagee shares with the mortgagor and guarantor an incentive to
              maximise the price obtained. It is not lightly
to be assumed that the
              mortgagee has acted in a way that was contrary to its own interests as well
              as
the interests of others.


[20]   I respectfully adopt the above statement of principle.

Loss allegedly arising from plaintiff not
exercising proper control over state of
property

[21]   Mr Ram, for the defendant, made a number of criticisms about the state of
the
mortgaged property. First, he noted that the real estate agent that was retained to
market the property had provided reports
to the plaintiff about the state of the
property and had also given an affidavit, which contained remarks on the same
subject. In
the affidavit the agent noted that the property was generally untidy and
not well kept. There were numerous dogs on the property
and no maintenance
appeared to have been carried out on the grounds of the dwelling. The lawns and
garden were overgrown and gutters
were full of leaves. He noted that two major
slips had occurred on the property, one of which was close to the garage workshop
from
which water supply and electricity reached the house. He pointed out the
vulnerability of the house to a loss of power and water
if the shed was displaced as a
result of further ground movement. He noted that a number of people viewing the
property as potential
buyers had commented adversely on the slips that had occurred
on the property.

[22]   Mr Ram submitted that all of these problems
with the state of the property
have caused a mark-down to the value of the security property and potentially
reduced the amount that would be achieved at sale. This would thereby
proportionately increase the amount of money the defendant would be called upon to
pay under his guarantee.


[23]   The point has
already been noted that because there has not been a sale at this
point no loss can have accrued to this stage. That meets the defendant's
criticisms.
But in any event, the submission in my view suffers from another fault and that is
that it makes mistaken assumptions
about the responsibilities of the plaintiff for the
state of the property and its powers of managing it. Mr Ram did not spell out
on
what basis the Court could fix the plaintiff as mortgagee with a duty to take steps to
remedy these problems. The mortgagee, as
Ms Keen pointed out, does not have the
status of a mortgagee in possession. Mr Ram was minded to argue whether this was
so or not.
However, there is no evidence to establish that the plaintiff is a mortgagee
in possession. In my view the status of the plaintiff
as a mortgagee in possession is
nothing more than a bare possibility and unless some evidential basis for the
submission that Mr
Ram makes is put forward, no credible basis for a defence
mounted on this basis is available. That is not to say that the defendant
has to prove
on the balance of probabilities that the plaintiff is a mortgagee in possession. Rather,
it has an obligation to show
that there is some basis upon which the Court could
conclude that that was so. The defendant's arguments under this head do not get
past
the start line. The defendant did not plead in his notice of opposition that the
plaintiff was a mortgagee in possession and
that the various problems with the
property could be laid at the feet of the plaintiff. That being so, there could be no
complaint
made by the defendant that the plaintiff ought to have got rid of the
undesirable tenant and his dogs and cleaned up the property.
In any case, Mr Ram
was not able to explain how a mortgagee in possession could be expected to deal
with the landslips of the property.
I reject his submission that there is a generalised
duty of the part of the plaintiff to bring about improvements to the property
before
exercising the power of sale.

No consideration for guarantee

[24]   I have already recorded that I permitted amendment
of the notice of
opposition to plead this ground but I have to say that at the end of the argument I
was none the wiser as to what
Mr Ram's submissions were on the point.


[25]   The provision of financial advances to a third party is consideration which is
well
able to support a guarantee. The law is correctly stated in Laws of New Zealand
as follows:

       45.     Requisites of consideration.
The consideration for a guarantor's
               promise must move from the creditor, not the principal debtor. It
           
   need not directly benefit the guarantor, although it may do so.
               Further, the consideration may consist wholly of
some advantage
               given to or conferred on the principal debtor by the creditor at the
               guarantor's request.
The guarantor's promise often stipulates an
               advance of money, or the supply of goods to the principal debtor, or

              that the creditor will employ the principal debtor. [Footnotes
               omitted]

[26]   The situation described
in the above passage is exactly what occurred here.
The deed of guarantee which the parties signed in this case provided:

     
 A.      At the request of the guarantor, the lender has agreed to provide
               certain financial accommodation to or for
or at the request of the
               borrower.

[27]   Further, while I have not heard argument on the point, I consider that
the
defendant having signed the deed that acknowledged the existence of good
consideration, is on that ground now prevented from
arguing the contrary.


[28]   Further, as Ms Keen pointed out, because the obligation to guarantee was
contained in a deed, it is not necessary for there to be have been consideration
in
order for the obligation to be enforceable.



Did the defendant suffer loss through relying on the Tierney valuation?

[29] 
 During the course of his submissions Mr Ram appeared to suggest that the
guarantor decided to give the guarantee because he assumed
that the current market
value of the property was as assessed by Ms Tierney in her valuation. In some way

that was not made clear,
Mr Ram sought to establish that if the valuation was
erroneous, the plaintiff was somehow responsible for that state of affairs.
The first
point is that such a defence was not stated in the notice of opposition. Secondly, as
noted already, the report appears
to have been obtained by the defendant and not the
plaintiff ­ see paragraph [8] above. If that is so, the contents of the valuation
could
not give rise to any claim that the plaintiff caused or contributed to any loss the
defendant might have suffered through relying
on it. In any event, Mr Ram was able
to provide no basis upon which the Court could attach liability to the plaintiff ­
presumably
based in negligence - where the report appeared on its face to have been
provided by a registered valuer. Mr Ram wished to dispute
that the Tierney report
was prepared by a valuer with a current practising certificate. He wished to refer to a
report from a database,
which he said reflected the records of the Valuers
Registration Board. But the plaintiff did not consent to that evidence being admitted
and I propose to disregard it. In any event, if the proposed cross claim depended
upon negligence, I would not have thought that
the plaintiff - or anyone - was
careless in relying upon a valuation where the valuer certified in the course of her
report that
she was a registered valuer.



Conclusion

[30]    The defendant does not have a reasonably arguable defence. The plaintiff is
entitled
to judgment. I invite the plaintiff to submit a memorandum setting out the
amounts for which judgment is sought and sending a copy
to Mr Ram. Once
received I shall enter a judgment.

Costs

[31]    I would expect the parties to agree the matter of costs. If they
cannot I will
allocate time at 9 a.m. on a convenient date to hear argument on the point.




_____________
J.P. Doogue

Associate
Judge