Yarrow v Finnigan [2012] NZHC 2281 (6 September 2012)

Last Updated: 14 September 2012

IN THE HIGH COURT OF NEW ZEALAND NEW PLYMOUTH REGISTRY

CIV 2011-433-000330 [2012] NZHC 2281

UNDER The Trustee Act 1956

BETWEEN PAUL STEVEN YARROW Plaintiff

AND MICHAEL CHANEL FINNIGAN Defendant

Hearing: 4 September 2012

Appearances: J S Campion for the Plaintiff/Respondent

L J Taylor for the Defendant/Applicant

Judgment: 6 September 2012

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

6 September 2012 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

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

Solicitors/Counsel:

D Connor, Barrister, Auckland – [e-mail] / [e-mail]

L Taylor, Wellington – [e-mail] / [e-mail]

PAUL STEVEN YARROW V MICHAEL CHANEL FINNIGAN HC NWP CIV 2011-433-000330 [6 September

2012]

[1] The defendant (Mr Finnigan) has applied pursuant to Rule 5.45(1)(b) of the High Court Rules for an order that the plaintiff (Mr Yarrow) give security for costs because there is reason to believe that Mr Yarrow will be unable to pay Mr Finnigan’s costs if Mr Yarrow is unsuccessful in his proceeding against Mr Finnigan.

[2] Mr Yarrow appears to concede he would be unable to meet an adverse award of costs. For him it is submitted that his current impecuniosity has been caused by Mr Finnigan and therefore no order should be made. On behalf of Mr Yarrow it is submitted that the Court should decline to make an order for security because such order would prevent Mr Yarrow from bringing his case to Court; further that it would be unjust to impose an order for costs in circumstances where Mr Finnigan’s wrongful actions were arguably the cause of Mr Yarrow’s impecuniosity.

Mr Yarrow’s claim

[3] Mr Yarrow and his No.2 Family Trust are the shareholders of and he is the director of Yarrows Traditional Foods (1923) Limited (Yarrows Traditional Foods) which wholly owns Yarrows (The Bakers Limited) (In Receivership) (YTB).

[4] There are various other trusts and commercial interests associated with Mr

Yarrow.

[5] Mr Yarrow’s claim pleads that Mr Finnigan was his advisor and agent

because:

(a) There was a relationship of at least 30 years between Mr Finnigan and

the plaintiff’s late father Noel.

(b) Mr Finnigan is a chartered accountant and had provided accounting advice to companies in the Yarrow Group including to Yarrows Traditional foods and to YTB.

(c) From about 20 September 2000 Mr Finnigan was appointed Mr

Yarrow’s Power of Attorney.

(d) During 2006/7 Mr Yarrow expressed concerns to Mr Finnigan about the financial management and governance of the Yarrow Group.

(e) Mr Finnigan set up an office in New Plymouth from which the commercial and business dealings of the Yarrow Group, Mr Yarrow’s interests, and Mr Yarrow personally were dealt with.

(f) In 2008 Mr Finnigan agreed he would work from the New Plymouth head office and oversee all corporate and governance matters relating to the Yarrow Group, Mr Yarrow’s interests and Mr Yarrow personally, and would advise Mr Yarrow on matters affecting his commercial and business interests and those of the Yarrow Group including in relation to actions that could be taken to improve the financial position of those interests including the reporting of any matters that positively or negatively affected the same.

(g) For this Mr Finnigan was to be employed by Yarrow Traditional Foods for one year from 1 April 2006 and thereafter to be engaged as a consultant at a salary or $130,000 per annum. Also arrangements were made for Mr Finnigan to receive a pension upon his retirement.

[6] Mr Yarrow pleads that there were a number of transactions which call into question the quality and indeed transparency of Mr Finnigan’s actions and advice. One of these is the ‘Minto transaction’ relating to an August 2007 agreement to purchase land and buildings (the Minto Land) in Australia for $22M. It was envisaged that Yarrows (The Bakers) Australia Pty Limited (YTBA) would lease and operate its business from the Minto Land. One of Mr Yarrow’s interests paid the initial deposit of A$4M for the Minto Land. Mr Yarrow says Mr Finnigan advised that the initial deposit should be borrowed and the purchase should be completed by a further borrowing of $4M from directors of YTBA (including Mr Finnigan), with the balance being provided by funding from Westpac Bank.

[7] Mr Yarrow says Mr Finnigan directed the method and means by which the

Minto Land was ultimately acquired and in that process Mr Yarrow’s own interests

lost the ability to convert its borrowings into units in the entity that purchased that land.

[8] Another claim concerns what Mr Yarrow terms as the Deed of Family Arrangement and the “Finnigan Plan” undertaken in the period December 2009 to February 2010. Mr Yarrow says he entered into the Deed of Family Arrangement (DFA) thereby giving effect to a plan devised by Mr Finnigan which Mr Yarrow says was referred to as the “Finnigan Plan”. Mr Yarrow says that he and a number of his entities entered into the DFA in reliance on Mr Finnigan’s advice which required him to waive claims against his late father’s estate (which he says were worth $2M), and to gift $2M to Mr Yarrow’s parent’s charitable trust of which Mr Finnigan was a trustee.

[9] According to Mr Yarrow Mr Finnigan advised Mr Yarrow that by this arrangement he and his related interests would receive benefits totalling $7.9M.

[10] Then on 10 February 2010 Mr Yarrow entered into a “Side Deed” intended to supplement the DFA which required Mr Yarrow to forego rental on the Minto Land if mortgage outgoings exceeded rent received, and as well to incur other costs.

[11] Mr Yarrow says that in these various circumstances identified Mr Finnigan owed him duties arising in tort and in contract. He said Mr Finnigan had a duty to him to exercise skill and care in the provision of advice, and that such duties were breached in various ways. Those included Mr Finnigan’s failure to advise:

(a) That the Finnigan Plan and the DFA would fail if at the time the

Yarrow Group was insolvent.

(b) That the Yarrow Group was at the time insolvent, as Mr Finnigan knew.

(c) That Mr Finnigan failed to advise Mr Yarrow of that insolvency, and the implications arising from it.

(d) That Mr Finnigan had assured Mr Yarrow that the Yarrow Group was solvent at about that time in February 2009 when solvency was queried by the Westpac Bank.

(e) That Mr Finnigan failed/concealed the cost of rent and set up costs incurred by YTBA in relation to the Minto Land totalling A$7M because the posting of those journal entries would have revealed the insolvency of the Yarrow Group.

[12] Likewise in connection with the Side Deed it is claimed Mr Finnigan knew the Yarrow Group was insolvent when the Side Deed was entered into.

[13] In connection with the Minto transaction Mr Yarrow says Mr Finnigan failed to advise him that his interests were being excluded from participation, and that he was not advised that costs would exceed rental returns, and that Mr Finnigan was instrumental in Mr Yarrow’s giving rental guarantees to other investors in the Minto transaction.

[14] Finally it is pleaded that Mr Finnigan owed equitable duties of good faith, loyalty and fidelity to Mr Yarrow obliging Mr Finnigan to consult with Mr Yarrow and to account for any benefits received by Mr Finnigan as a consequence. Mr Yarrow pleads that Mr Finnigan breached these equitable duties by:

(a) Concealing the insolvency of the Yarrow Group at relevant times in order to protect the income and pension he had been promised.

(b) By abandoning Mr Yarrow whilst preferring his own interests in the

Yarrow Group.

(c) By advising Mr Yarrow, the Yarrow Group and Mr Yarrow’s interests to enter into the DFA, the Side Deed and the Minto transaction.

(d) By failing to disclose known irregularities in the Yarrow Group’s

accounts.

(e) By preferring his own interests to those whose interests he was engaged to protect.

[15] As a consequence it is pleaded that Mr Finnigan acted in a high handed manner and in contumelious disregard of Mr Yarrow’s rights. Mr Yarrow pleads these breaches were premeditated, dishonest, motivated by self interest and involved a subordination of the Yarrow interests which he had promised to protect.

[16] Damages claimed include $4M in relation to the DFA personal losses and

$7M in alleged DFA benefits forgone.

The defence

[17] It is that in as much as the preceding relates to advice allegedly given by Mr Finnigan to Mr Yarrow concerning various aspects of his financial affairs and whether he should sign the various deeds, Mr Finnigan denies giving advice on the issues in question. Challenged (by a request for further and better particulars) about how the alleged advice was given Mr Yarrow responded that the advice was given in writing and orally. As to the written advice Mr Yarrow says it was given in documents and emails “which he either does not have possession [of] or cannot currently locate”.

[18] Mr Yarrow alleges that Mr Finnigan agreed to personally advise him on a range of financial business matters and that in consideration for doing so he would arrange for him to be employed by Yarrows Traditional Foods and receive a pension. But, for Mr Finnigan it is submitted that these claims are inconsistent with the documentary evidence that has been provided. The evidence provided indicates agreements between YTB and Mr Finnigan; that there is nothing to show Mr Finnigan was retained as a personal advisor to Mr Yarrow as opposed to working for YTB.

[19] Rather, by his own admission Mr Yarrow took legal advice in respect of a least one of the transactions in issue in this proceeding. Mr Yarrow refers to receiving advice in respect of the DFA from an Auckland barrister.

[20] Mr Finnigan says that the evidence Mr Yarrow has put in support of a claim of an employment agreement and of a deed of pension are about agreements with YTB. None makes reference to Mr Finnigan being retained as a personal advisor to Mr Yarrow. Further, that the deed of pension does not refer to any obligation to advise Mr Yarrow personally. Rather it says it was entered into in recognition of Mr Finnigan’s 30 years of service to YTB as a professional advisor, director and employee.

[21] Also Mr Yarrow’s pleading does not give any particulars about how Mr

Finnigan’s allegedly negligent advice caused claimed losses of over $11M.

[22] Mr Taylor submits that in light of Mr Yarrow’s admission that he had legal advice, there is a very real issue regarding whether there was any reliance at all upon advice allegedly given by Mr Finnigan.

Principles

[23] There is no dispute regarding these. The interests of both parties must be balanced. An order for security ought not to be made where it is likely to have the affect of preventing a plaintiff from pursuing a claim. A defendant must also be protected against being drawn into unjustified litigation. [1]

[24] The following factors are commonly regarded as relevant to the exercise of

the Court’s discretion about whether or not security ought to be ordered:

(a) The merits and bona fides of the plaintiff ’s case, while recognising the

limitations on assessing merits at an interlocutory stage.

(b) The “reasonable probability” that the impecuniosities of the plaintiff have been caused by the very acts of the defendant on which the action has been brought.

(c) The means by which a plaintiff may be able to overcome the problem of providing security (such as by the means of interested shareholders).

(d) The conduct of the parties resulting in the litigation including where a defendant appears to have deliberately set out to injure a plaintiff and where the likelihood of damage to the plaintiff should have been foreseen.

(e) Whether the making of an order for security might prevent the plaintiff from proceeding with a bona fide claim.

(f) Any admission made in the course of the proceeding or of some part

of the plaintiff’s claim.

(g) Where there are grounds for thinking the defendant is using the application oppressively to prevent the plaintiff’s case from coming before the Court. [2]

Considerations

[25] Ms Campion for Mr Yarrow submits that the case is currently at an early stage and discovery has not been completed. Therefore, it is difficult for the plaintiff to adduce evidence to support aspects of his case at this stage. Therefore, Ms Campion submits the Court should be hesitant to draw the conclusion that it is not a “reasonable probability” that the impecuniosity of Mr Yarrow have been caused by the very acts of the defendant on which the action has been brought.

[26] Mr Yarrow’s pleadings include claims of dishonestly and fraud. Those are serious charges and for which the Court will require an appropriate high level of proof in due course.

[27] Ms Campion submits that because Mr Yarrow took legal advice it did not mean that the reliance upon Mr Finnigan’s advice was rendered nugatory. It seems to be suggested that to place any importance upon the fact of independent legal advice being obtained is to ignore, as Ms Campion puts it, “the trust and reliance [Mr Yarrow] placed upon [Mr Finnigan]”.

[28] It is not the purpose of this Court at this time to resolve the respective claims of commercial negligence or impropriety when that task is better left for a trial in due course. It is sufficient in this case to identify that there is a serious conflict about these claims upon which important evidence including that of experts is yet to be heard.

[29] But, the Court cannot ignore the nature of the claims or the magnitude of consequences claimed as a result. When, as here those claims involve allegations of dishonesty and fraud the Court is entitled to expect the plaintiff to accept the burden and responsibility of proof because of the size of the task to meet those claims.

[30] Of course the Court should accept as a starting point that the plaintiff is capable of proving its claim and with it the various disparate allegations. But, in this case the Court is some considerable distance from being in a position to accept appropriate proof exists. A Court should be weary in assuming such proof is available. At best it has in this case respective counsels’ views about the quality of evidence that is yet to be assessed.

[31] The merits of the case are far from clear. The documentary evidence initially suggests a contractual arrangement rather more limited than Mr Yarrow suggests. Mr Yarrow suggests that his impecuniosity was Mr Finnigan’s responsibility. That does not mean that proof of appropriate responsibility by Mr Finnigan will not be proved. In this case it does mean that such proof is not yet clearly available.

[32] What that does mean is that it is not clear on the available evidence that Mr Yarrow’s claim of impecuniosities has been caused by those same reasons he has pleaded.

[33] YTB went into receivership on 30 May 2011. Unquestionably Mr Yarrow’s financial position was affected significantly in that outcome. Yet, the statement of claim appears to show there is no direct link between the allegations against Mr Finnigan and the receivership of YTB. Rather it is asserted that Mr Yarrow’s losses occurred as a result of Mr Finnigan’s advice in relation to personal affairs and concern the transaction involving YTBA. It appears significant further inquiry ought to be made regarding the impact of YTB’s receivership.

[34] The claims against Mr Finnigan are premised upon Mr Yarrow’s relationship with Mr Finnigan. Mr Yarrow says it was through Mr Finnigan’s relationship with his father that his relationship with Mr Finnigan grew.

[35] In written submissions counsel stated:

It is hard to convey the esteem in which the plaintiff held the defendant and the reliance that he placed upon him. The psychological influence exerted by the defendant over the plaintiff is hard to demonstrate to the Court by documents. Over many years, the plaintiff was associated with Mr Finnigan and built a relationship of confidence and trust with him.

[36] Those submissions continued:

... it is artificial for Mr Finnigan to suggest that his role was only to advise the company, when it is apparent that he held himself out to the plaintiff as the plaintiff’s trustworthy advisor (and as an advisor to the Yarrow family) and caused the plaintiff to come to rely upon the defendant and to believe that the defendant was looking after the plaintiff’s best interests. Certainly, that is what the plaintiff believed, and he acted accordingly.

[37] And further:

Mr Yarrow’s claim against his brother had been struck out on the basis of a clause in the purchase agreement which barred claims between the brothers... Again it is disturbing that such a case could have leaked its way into the agreement while an assurance as to the commercial value of the venture did not. But on closer inspection it turns out that the same clause purports to protect the legal and accounting advisors from actions as well. The plaintiff was given no advice about this clause and no advice that he could or should sue his advisors.

[38] Finally regarding Mr Finnigan’s claim he was not engaged to provide advice to Mr Yarrow, counsel’s submissions assert:

The defendant’s suggestion that he was only advising YTB discounts the effect of his conduct to the plaintiff personally, who believed he was being personally advised by the plaintiff and acted in reliance on that belief. The defendant’s suggestion seems like a convenient recasting of the defendant’s role in relation to the Yarrow family and companies – a recasting of the defendant’s role into a dispute and a limited one in which he advised only YTB; but one which is historically inaccurate and which conveniently ignores his admitted advisory role to the plaintiff, his family and his companies... it is artificial to treat the Yarrows Group of companies and related entities and actors as discreet entities with discreet roles when they are so interrelated, overlapping and financially independent, which is due in no small part to the defendant’s advice on the Yarrow’s company structure.

Conclusions

[39] Sometimes the balancing exercise of the Court requires the Court to consider imposing an order for security even though the Court is aware that may cause some difficulty, as in this case, for a plaintiff. That does not mean the Court should abdicate any responsibility for requiring a payment of security where such is appropriate.

[40] This case has been tested by claims that Mr Yarrow has initiated the proceeding order to publicise his concerns in order to embarrass Mr Finnigan. Certainly, there is cause for concern about the fact that details of the claim were publicised even before the proceeding had been served. Those matters are of no consequence to the security application. Nor should the Court draw any conclusions about claims of bad faith by Mr Yarrow in the process.

[41] In these cases and routinely where a plaintiff claims impecuniosities because of the actions of the party being used, the Court will engage a process of investigating the merits of the plaintiff’s claim as part of the process of assessing claims of a plaintiff’s impecuniosities.

[42] In this case the stakes are high. According to Mr Yarrow the financial consequences are huge. For Mr Finnigan they must be very significant. He is 75 years of age and carries no indemnity insurance. Bearing in mind what the Court considers are claims as yet largely unsupported other than by inference it is inappropriate to consider other than that an order for security in a significant amount be paid.

[43] Mr Yarrow’s claims of significant financial loss are supported by broad assertions but the claims lack particulars and there is no suggestion that calculations have been made with the assistance of professional advice. It is not clear what direct link exists between allegations of negligence, dishonesty and the kind and the receivership of YTB insofar as it has been identified as being connected with advice given by Mr Finnigan. Claims of $4M and $7M are barely explained. It is not enough to say these can be proved in due course. The pleadings and evidence is unclear about the link between the Minto Land and the financial difficulties faced by YTB, or how that was linked to Mr Finnigan.

[44] Mr Yarrow claims impecuniosities but does not explain himself. It is not sufficient to claim that he has no obligation in that respect. This is a commercial dispute. Allegedly millions of dollars are at stake. Mr Yarrow has other proceedings on foot. Apparently these include the High Court proceeding in New Zealand against the former CEO of YTB and a proceeding in New South Wales against the directors of the Australian division of Yarrows. Apparently in both of those, Mr Yarrow has been represented.

[45] Weighing all of these factors in balancing the interests of both parties the

Court accepts it is appropriate that an order for security for costs be made. [46] Relevant considerations in this case are:

(a) The amount of relief sought.

(b) The nature of the proceeding including the complexity of the issues. (c) The estimated duration of the trial.

(d) The probable costs payable if the plaintiff is unsuccessful.

[47] Counsel agree that a three week trial may be needed. On a 2B basis costs in the vicinity of $75,000 will be payable to the successful party.

[48] It is appropriate to order the payment of security in two tranches. As to the first, there is an order that Mr Yarrow pay into Court the sum of $25,000 to be held there on interest bearing deposit, as security for costs to that time when the setting down date for trial is fixed.

[49] Leave is reserved to the defendant to make further application to cover costs for trial and trial preparation once the estimated trial length becomes clearer.

[50] The Court directs that this matter be scheduled for call in the chambers list on

4 December 2012 at 10:00am. If at the time of that call security has not been paid then the Court will consider any application for strike out then made.

Associate Judge Christiansen

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[1] A S McLachlan Ltd v MEL Network Limited [2002] NZCA 215; (2002) 16 PRNZ 747.

[2] Bell-Booth Group Limited v Attorney-General (1986) 1 PRNZ 457.