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High Court of New Zealand Decisions |
Last Updated: 30 December 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2011-404-001426
BETWEEN SENIORCARE GROUP LIMITED Plaintiff
AND RICHARD JAMES PARKER AND RACHEL SUSAN HARVEY Defendants
Hearing: 15 June 2011
Counsel: P G Skelton for the Plaintiff
D Conner for the Defendants
Judgment: 17 June 2011
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
17.06.11 at 4:30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date...............
Solicitors/Counsel:
R Edwards, Barrister, Auckland – raedwards@xtra.co.nz
D Connor, Auckland – david.connor@davidconnor.co.nz
SENIORCARE GROUP LIMITED V RICHARD JAMES PARKER AND RACHEL SUSAN HARVEY HC AK CIV 2011-404-001426 17 June 2011
Introduction
[1] This case is about the defendants‟ guarantees of their company‟s borrowers obligations and claims of defence in relation to the lender/second mortgagee‟s (Southern Cross) actions at the time the security property was transferred to the first mortgagee (upon its vesting application) when all mortgagee obligations were in default. The issue concerns the guarantee agreement by which the defendants relinquished any rights of claims against Southern Cross in connection with Southern Cross‟ actions affecting the security. The evidence showed that in the face of action by the first mortgagee to have the security property, along with others, transferred to it, Southern Cross undertook a marketing exercise in an effort to sell the security properties for greater value than the first mortgagee offered to acquire them for. In that outcome Southern Cross obtained conditional contracts for purchase at a significantly higher value than the first mortgagee offered. On this basis and to support its opposition to the first mortgagee‟s vesting application, Southern Cross advised the High Court that it intended accepting the conditional offers and for that reason required an adjournment of three weeks. This suited the defendant guarantors for sales at the higher prices would have satisfied any obligation for repayment from them. However, the following day Southern Cross informed the Court that it no longer intended to complete the conditional contracts, and that it no longer opposed the first mortgagee‟s vesting application. The defendant guarantors too withdrew their opposition to the first mortgagee‟s application, but subject to them reserving any rights of action in connection with claims that the subject properties had been transferred to the first mortgagee at under value.
[2] The defendants‟ defence focuses upon claims that, notwithstanding distinct terms of guarantee separating their repayment obligations from any actions of the lender in connection with security held for the loans made, a duty of care by Southern Cross nevertheless remained. Further because of the particular actions undertaken by the lender with respect to the security it held, it is argued Southern Cross is estopped from claiming any shortfall from the defendants.
Background
[3] The defendants (Mr Parker and Ms Harvey) are guarantors under an agreement dated 23 April 2008 between Southern Cross Finance Limited (Southern Cross) and Autumn Lodge Home and Hospital Limited (Borrower) (Term Loan Agreement). Security for the advance was provided by a registered second mortgage over the Borrower‟s property (the Autumn Lodge property) and over other properties owned by related entities. The defendants were directors and shareholders of the Autumn Lodge property.
[4] By deed of assignment dated 30 November 2010 (that is well after the security properties were transferred to the first mortgagee) Southern Cross assigned its rights, interest, benefit and entitlements under the Term Loan Agreement to the plaintiff.
[5] As at 30 November 2010 the amount owed by the borrower to Southern Cross was the sum of $452,207.92. That sum was part of the amount paid by the plaintiff to Southern Cross upon assignment of the debt. The plaintiff claims judgment for that sum together with interest at a rate of 25.2 per cent from 30
November to the date of payment at a daily rate of $269.66.
Opposition to summary judgment
[6] The defendants‟ notice of opposition to the plaintiff‟s summary judgment application pleads that Southern Cross failed to take reasonable care to obtain the best price reasonably obtainable for the land over which it held its mortgage, in that it:
1. Failed to pursue sale agreements that would have realised
sufficient to satisfy the borrowers‟ obligations to the lender.
[7] The defendants also plead that Southern Cross led them to believe that they were not entitled to be involved in the sales process, that a proper sales campaign would be conducted and if successful a sale would be consummated.
[8] Mr Parker and Ms Harvey have each filed affidavits in opposition to the claim.
[9] There is no dispute that they agreed to be bound by the terms of their guarantee. Their defence is that those guarantees are not now enforceable against them.
[10] The affidavit from Mr Parker refers to Court proceedings being underway in Wellington in May 2010 under file number CIV 2009-485-2353. It explains that the Autumn Lodge property, the subject of the defendants‟ obligations, was one of three properties which were at that time the subject of a proposed mortgagee sale. On
7 May 2010 the High Court was to consider an application by the first mortgagee, Beta Pacifica Limited (Beta), to have vested in it those three properties over which it held security, and in respect of which it had taken mortgagee action to acquire the properties for itself.
[11] Mr Parker‟s affidavit recounts his prior discussions with a real estate agent, Mr Reeves, who had been appointed by Southern Cross whose advance to the Borrowers was guaranteed by the defendants and which was secured by a registered second mortgage over the Autumn Lodge property.
[12] The defendants wished to ensure that in Beta‟s mortgagee disposal process a fair and reasonable price was obtained for the properties. Obviously, because they would be liable for the shortfall.
[13] Originally the defendants took steps in the marketing of the properties until advised they could no longer be involved because they were no longer in control of the properties.
[14] Mr Parker recounts that on 3 May 2010 (in advance of a scheduled hearing on 7 May 2010) Southern Cross advised the Wellington High Court they had offers for purchase and that they would that day be signing those and providing copies of agreements to the Court. According to Mr Parker those agreements would have yielded approximately $700,000 more than previously expected to be available to the secured parties. Mr Parker stated the additional amount would have satisfied all of the Borrowers‟ obligations to Southern Cross.
[15] Mr Parker obtained a copy of the conditional agreements for purchase. He exhibited these to an affidavit filed in the Wellington High Court on 4 May 2010. The agreements indicated a total purchase price of $3,035,000 including the sum of
$950,000 for the Autumn Lodge property. Mr Parker says he was informed by Mr Reeves that he had difficulty in obtaining any information from the receiver and also arranging visits by the proposed purchasers.
[16] Mr Parker states that at the Wellington High Court appearance on 3 May
2010, when Southern Cross advised the Court it would be proceeding with offers, it sought a further adjournment to 28 May 2010 to allow sales to progress.
[17] In a memorandum of counsel for Southern Cross to the Court dated 3 May
2010 there was attached a schedule showing an estimate of forced sale values totalling between $2,530,000 and $2,975,000; Beta‟s initial offer for the three properties of $1,770,432; Beta‟s revised offer of $2,333,877; and conditional offers for the property of $3,035,000. The memorandum noted the conditional offers were significantly in excess of those proposed to be paid by Beta, but were conditional on due diligence, finance and valuations as well as licensing requirements. The purpose of the request for a further adjournment to 28 May 2010 was “to enable the due diligence condition in the offers to be satisfied”. In requesting the adjournment Southern Cross‟ counsel advised that counsel for Mr Parker and Ms Harvey consented to the adjournment, but that counsel for Beta had not by that time responded.
[18] The next day Southern Cross‟ position reversed and by counsel‟s
memorandum dated 4 May 2010 it advised that the offers it had previously indicated
it would accept were “not capable of acceptance” and thereupon Southern Cross
withdrew its opposition to Beta‟s application allowing it to purchase the properties.
[19] On 7 May orders were made by the High Court allowing the three properties including Autumn Lodge to be vested in Beta. As earlier noted, at this time the defendants had also withdrawn their opposition to Beta‟s application, subject to them retaining a right of claim concerning the value of properties transferred.
[20] In the process Mr Parker said the defendants have been left “high and dry as we had been excluded from the sales process, lulled by Southern Cross and its agent‟s reassurances that an active sales program was being pursued, and had done little ourselves... That in turn caused lower values to be attributed to the properties, including Autumn Lodge, thereby increasing the shortfall [due from the defendants]”.
[21] Previously, and prior to the 4 May memorandum, the defendants‟ solicitor contacted Southern Cross‟ solicitors to express concern about Southern Cross‟ proposal to withdraw its opposition to Beta‟s application. The defendants‟ solicitor noted that Southern Cross:
Having “indicated” that it will be accepting the offers today to the Court ... that it is free to now not accept them because [it claimed by use of the word “indicated” it had not made a commitment to accept those offers].
[22] The solicitor‟s letter advised that the defendants would defend any claim by
Southern Cross for any shortfall owing in the outcome.
[23] Presently the defendants anticipate they will face further action by the third mortgagees of the three properties, Gateshead and Paranui. Mr Parker notes there is a commonality (although not identical) of control in the shareholding of Beta, Gateshead and Paranui in that a Mr Renwick is a director of Beta and Gateshead, and because both Gateshead and Paranui claim they have suffered a shortfall.
[24] Mr Parker asserts that neither Beta, Gateshead nor Paranui have properly accounted for the amounts they claim were owed to them or as to the true value of the properties they received through the vesting process. Letters have been written
by the defendants‟ solicitors in March and April this year requesting an up to date calculation of all monies owed in respect of Autumn Lodge and the other two properties, and also a copy of settlement details of the prices Beta proposed to pay in pursuit of its vesting application. Mr Parker reports that no response to those requests was forthcoming.
[25] Ms Harvey‟s affidavit simply endorsed all that which was stated by Mr
Parker in his.
[26] No affidavit evidence has been provided in reply to the affidavits of the defendants.
Defence case overview
[27] The defendant‟s case focuses upon claims that in that short period before the matter was dealt with in the Wellington High Court on 7 May 2010 the defendants perceived a lack of interest by Southern Cross and its agent to pursue the marketing of the three properties in the manner that had been done previously. Before then, Southern Cross had acted to oppose Beta‟s vesting application and had sought to sell the three properties at a higher price than Beta offered. Southern Cross obtained three conditional contracts and by memorandum filed on 3 May, counsel for Southern Cross recalled that by an earlier minute Justice Young noted he was unlikely to be sympathetic to any further delay unless conditional [that should have been unconditional] agreements (save for licensing issues) were provided to the Court.
[28] The memorandum noted that Southern Cross had obtained a number of offers. The three best offers were referred to. Southern Cross said it proposed accepting those and that was why it wanted an adjournment because in that outcome its debt would likely be paid. The memorandum explained the contract conditions and why therefore the adjournment was necessary.
[29] By the concluding paragraph of that memorandum, counsel acknowledged that the Court had indicated that adjournments were not likely to be granted on the
basis of agreements conditional upon factors other than the licensing requirements. Counsel stated:
However, given that the Offers are for amounts that will enable Beta to recover more in respect of its first ranked mortgage and potentially for Southern Cross to recovery some (if not all) of the monies owed under its second ranked mortgage, Southern Cross seeks the indulgence of the Court in granting another small extension of time.
[30] The defendants claim that the turnaround indicated by the memorandum of counsel for Southern Cross filed the following day, was remarkable. It noted:
After having the opportunity to review the Offers received... Southern Cross has determined that none of the Offers are capable of acceptance.
Given the Southern Cross has failed to obtain unconditional agreements... it withdraws its request for a further adjournment of the Beta application.
[31] In summary, whilst some reliance is placed upon a perceived lack of interest by Southern Cross to continue actively marketing the properties for sale, significant focus is made upon the events of 3 and 4 May 2010. It is in the context of those the defendants have cast their defences based around a claim that Southern Cross left them high and dry; that if Southern Cross had completed those conditional agreements, and in the outcome they had settled, Southern Cross would have been paid and the defendants would owe them nothing.
[32] Mr Connor submitted Southern Cross were negligent in terms of, or in terms parallel to those expressed by s 176 of the Property Law Act 2007 which required a mortgagee who sells a mortgaged property to ensure that the best price reasonable obtainable as at the time of sale, was obtained. Section 176 imposed a duty of care to ensure that outcome not only for a current mortgagor but for any convenantor or for any subsequent mortgagee.
[33] Section 176 appears to impose a duty upon a selling mortgagee to consider the position of „neighbouring‟ entities. It does not appear to impose any obligation upon a subsequent mortgagee that is not a seller, not even one that actively marketed its security property in order to achieve a better price than the first mortgagee was prepared to offer. Rather, it focuses upon the actions undertaken by the selling mortgagee up to the point of sale.
[34] Nothing by way of explanation has been given to account for Southern Cross‟ position overnight before its 4 May 2010 memorandum. The defendants are suspicious.
[35] Mr Connor for the defendants asserts Southern Cross were bound by s 176 even though they were not the selling mortgagee because they had assumed a responsibility to market the property for best advantage to themselves and therefore to the defendant guarantors. He noted that the purpose of s 176 was to review the actions of a mortgagee prior to and up to the very point of sale and that Southern Cross had in this case been involved for that period of time. There was some mild criticism of the actions of Southern Cross or its agent until 3 May 2010, after offers had been obtained that were significantly better than Beta‟s and Southern Cross indicated it intended to accept those.
[36] Mr Connor submits the Court ought to use discovery because that might reveal the machinations of the events that led to Southern Cross‟ turnaround; that Beta would be required to better explain its purchase processes.
[37] Mr Connor submits that even if s 176 did not apply to impose a duty of care upon Southern Cross, a duty of care arose regardless because Southern Cross assumed a responsibility on its own behalf and on behalf of the defendants to market the properties to achieve the best reasonably obtainable price. They did not do this but instead forced the defendants into a position of meeting their shortfall (and that of their assignee, the plaintiff) in circumstances where they should have to bear that themselves, because it would be inequitable for any claim for payment under the guarantees to be heard in the absence of a counterclaim or set off affecting the very circumstances in which that obligation for repayment arose.
Considerations
[38] The plaintiff invites the Court to accept there was no proper basis to assume adverse consequences and that the Court should accept the decision indicated by their memorandum of 4 May 2010 was for proper commercial purpose.
[39] The plaintiff asserts no issue estoppel arises because to the extent that those considerations involve a balancing of equities it should not be forgotten that the defendants also advised the Court on 4 May 2010 that their opposition to Beta‟s application would be withdrawn, albeit upon terms reserving rights to the defendants to pursue claims that the properties had transferred to Beta at under value.
[40] The Court readily accepts that in the turnaround that occurred the defendants have good reason for disappointment. The question for this Court is whether there is anything that can be done about that in the face of a claim for payment under the defendants‟ guarantees.
[41] The Court can speculate upon reasons for Southern Cross‟ change, in the space of one day, from a party prepared to contract for the sale of security properties at a price that would have cleared its debt (and that of the defendants) to the next day being prepared to forego that objective in the outcome of which its debt would be payable by the defendants‟ guarantors – by a process in which the defendants were not consulted. So in that situation does the law impose any duties upon Southern Cross to the defendants? I think not.
[42] The defendants need to show that Southern Cross was under an obligation to accept the conditional agreements or alternatively to continue to oppose Beta‟s application. I do not think the law goes that far in terms of duties owed by a mortgagee. For such an obligation to be advanced as a defence to a guarantee there must be something to show that in the outcome the defendants were entitled to resile from the obligations imposed by their guarantee. If such rights existed then they ought to be expressed at law or by the terms of the parties‟ contract i.e. the defendants‟ guarantee.
[43] This case does not concern a contracting out situation. In this case the question arises whether the defendants can offset their guarantee obligations by virtue of a defence available to them. In this case they have alleged negligence i.e. by virtue of a breach of duty of care. Ancillary to that argument is the defendants‟ claim that the plaintiff (as assignee of Southern Cross‟ rights) was estopped from
pursuing their guarantee rights because of the manner by which their actions affected
the defendants‟ obligations under those guarantees.
[44] I do not think they have an arguable claim for a claim of negligence in the circumstances. I do not consider the circumstances of the case evidence any duty of care owed by Southern Cross or that if there was a duty of care such was arguably breached in this case. It follows I do not think there is any case for a claim of estoppel which affected the defendants obligations by their guarantees.
[45] A review of these considerations must focus upon the terms of the defendants‟ guarantee. By its terms the defendants acknowledged that their liability was not:
omission which but for this clause 19.2 would have operated to release the guarantor wholly or partly from its liability hereunder to the lender (cl. 19.10).
[46] The clause references therein referred to are remarkably similar to those reviewed by the High Court in New Zealand Bloodstock Leasing Limited v Jenkins .[1]
There, in her analysis of guarantee clauses, Winkelmann J referred to the fact that equity recognised a duty owed by a creditor to guarantors to maintain the security granted by the principal debtor of the debt. The learned Judge noted also that parties to a guarantee can by contract exclude the usual operation of the principles of surety which absolved guarantors of liability if the creditor has released, or through positive
actions or through neglect, impaired securities. With reference to the clauses she reviewed (being for present purposes relevantly identical to the ones before this Court), her Honour noted that the liability of the principal debtor was not discharged by loss of security unless that was contractually stipulated for; that there (as here) it was stated the guarantor‟s obligation was independent of and in no way affected by the security and precluded any discharge of a guarantor‟s liability by reason of the principal debtors failure to perfect security; and therefore operated effectively to maintain a guarantor‟s liability in circumstances where it might otherwise have been discharged.
[47] In this case the defendants assert that if Southern Cross had taken certain action in connection with the securities then they would not have been liable under their guarantee. In the Court‟s view, clauses 19(2)(a), 19(3), and 19.10, operate in a manner to preserve the liability of the guarantors irrespective of prejudicial action undertaken by the security holder. In a similar manner Associate Judge Gendall, in FM Custodians Ltd v Pavan,[2] held that clauses in the guarantee of defendants were found to be sufficient to maintain that guarantee even when it had been alleged that those had been impaired by the lender.
[48] In short it is this Courts finding that there is no arguable defence available to the defendants because such is precluded by their guarantee.
[49] Concerning the defendants‟ claim of a breach of duty of care pursuant to s
176 the plaintiff argues that that provision did not cover Southern Cross because they did not sell the property and because s 176 normally refers to the obligations of a selling mortgagee. Regardless, even if Southern Cross was subject to s 176 duties of care there is no arguable case that such were breached saved by inference and suspicion concerning the circumstances of the sudden reversal which occurred on
4 May 2010.
[50] Before then there was no significant complaint that Southern Cross had not acted appropriately to achieve the best price reasonably obtainable. To the contrary,
the prices obtained to conditional contracts formed the very basis of the defendants‟
claims of mortgagee capitulations.
[51] It is questionable whether Southern Cross were subject to the s 176 duties of care at all because they were not in a position of a party normally bound by those and even if they were the terms of the defendants‟ guarantee declare that an obligation to make repayment was not linked at all to any actions or obligations of the lender.
[52] But, even if there were duties of care they do not go so far as to compel Southern Cross to pursue the agreements for sale which at the time were conditional upon a number of factors none of which, save for one, was the Court prepared to likely consider as a reason to further adjourn Beta‟s vesting application.
[53] The decision whether or not to accept those conditional contracts was a commercial decision to be made by Southern Cross at the time. They had not committed themselves to sign the conditional offers although expressed a willingness to do so. Their change of mind can be viewed with all manner of reason, including suspicion, but there is no reason to consider it was not made for commercial purpose.
[54] Finally there is the issue of the defendants‟ estoppel claim. It is based on the defendants‟ claim that because of Southern Cross‟ actions, the defendants were discharged of their obligations under the contract assigned to the plaintiff.
[55] No issue arises in this case to challenge the fact that the plaintiff took its assignments subject to the equities and liabilities of the assignor. In this case the estoppel argument fails because there was no link between what Southern Cross did and what rights were preserved to the defendants by their guarantee. Southern Cross did not represent that they would not pursue the defendants if Southern Cross did certain things with securities. There is no suggestion that Southern Cross intended to compromise their rights pursuant to the guarantee.
[56] The defendants suggested that Southern Cross‟ agent said that they, the
defendants, could not participate in the sale process but even if that was so those
actions fall far short from being a representation which could stop the guarantee from being enforced.
[57] The defendants assert prejudice has occurred due to the actions of Southern Cross. However, albeit under some pressure perhaps, the defendants too have acquiesced in the process by which their opposition to Beta‟s vesting application was withdrawn. In that outcome however rights of action have been preserved to them, as earlier identified. It is still open to them to pursue s 176 claims based upon assertions of mortgagee failure to obtain the best reasonably obtainable sale price.
Conclusions
[58] The defendants‟ case relies upon their establishing a connection between the mortgage security and the guarantee. There is none such in this case – because of clauses in the guarantee which says the guarantee obligations are independent of any security provided for borrowing.
[59] In the Court‟s view there is no evidence by which it could be said that Southern Cross conducted, or represented that it would not enforce a guarantee, nor by retracting its opposition to Beta, suggesting that it would not enforce the defendants‟ guarantee obligations. It does not follow that because Southern Cross chose not to accept the conditional offers that as a consequence acknowledged it would not pursue any shortfall against the defendants. The guarantee provisions did not permit that construction of matters. Also, it is clear the there was no obligation on Southern Cross to realise the securities before seeking to enforce the defendants‟ guarantee obligations, just as there was nothing in the conduct of Southern Cross that could suggest they were prejudiced in their guarantee rights by not pursuing the conditional purchase offers that they had.
[60] The defendants‟ defence of the summary judgment application invites consideration of duties of care beyond those usually dealt with by s 176. Arguably even if s 176 did apply in terms of codifying duties of care, the circumstances in which those duties are described in this case are beyond those ordinarily recognised in the mortgagee sale process and are certainly precluded by the guarantee terms.
[61] The duty prescribed by s 176 is to take reasonable care. It does not follow that the best price reasonably obtainable will be achieved. Rather it is a matter to be assessed at the time of sale and it is a duty not qualified by a mortgagee‟s right to decide if and when to sell. This is to be compared with the defendants‟ contention that Southern Cross was compelled to complete its conditional sales even though Southern Cross felt those sale agreements were “too conditional”.
[62] At the end of the day there is nothing to suggest that Southern Cross acted other than for appropriate commercial reasons in making a commercial decision.
[63] The defendants‟ claim of an arguable defence and of a right of set
off/counterclaim has not been established. Therefore, it fails.
[64] The defendants have requested in the event the Court was minded to grant summary judgment it should stay an order for judgment pending the defendants‟ being permitted to exhaust their rights in relation to Southern Cross‟ failings. In effect they wish to pursue a claim against Beta and/or Southern Cross because the conditional contracts for sale were not pursued.
[65] It is this Court‟s view that at this time it is inappropriate to stay an order for judgment. Rather, if it is to be pursued, an application for stay should be filed in usual form following the entry of judgment.
[66] Although the Court will award judgment in the amount claimed, it is unclear what part of that sum should also be subject to an award of interest, because some of the judgment sum does not comprise the loan amount. Also, the right to claim interest under a contract merges on judgment, unless there is some express contractual provision that the merger rule is not to apply.
[67] The plaintiff claims costs on an indemnity basis pursuant to clause 19 of the Term Loan Agreement. The Court requires to approve these and will need to see full details of those if an indemnity costs award is to be considered.
[68] Counsel are to exchange and file memoranda addressing matters referred to in paras [[66] and [67] herein. That from Mr Connor is to be filed within seven days of that filed by Ms Edwards.
Judgment
[69] Judgment is entered for the plaintiffs against the defendant, jointly and severally, in the sum of $452,207.92.
Associate Judge Christiansen
[1] New Zealand Bloodstock Ltd & Anor v Jenkins & Anor [2007] NZHC 336; (2007) 3 NZCCLR 811
[2] FM Custodians Ltd v Pavan HC Wellington, CIV 2010-484-835, 12 August 2010.
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