Trustees Executors Limited v Smith [2012] NZHC 2386 (14 September 2012)

Last Updated: 9 October 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-1155 [2012] NZHC 2386

UNDER the Insolvency Act 2006

IN THE MATTER OF of the Bankruptcy of GERALD MURRAY SMITH

BETWEEN TRUSTEES EXECUTORS LIMITED Judgment Creditor

AND GERALD MURRAY SMITH Judgment Debtor

Hearing: 26 June 2012

Counsel: A Holgate for Judgment Creditor

J Toebes for Judgment Debtor

Judgment: 14 September 2012 at 11.30 am

RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (Set aside Bankruptcy Notice)

This judgment was delivered by me on 14 September 2012 at 11.30 am pursuant to

Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

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

Solicitors:

The Conveyancing Shop Lawyers Ltd, PO Box 9592, Epsom, Auckland

JTLAW, PO Box 25443, Wellington

TRUSTEES EXECUTORS LIMITED V SMITH HC AK CIV-2012-404-1155 [14 September 2012]

Introduction

[1] On 1 August 2011 the judgement creditor, Trustees Executors Limited, obtained summary judgment against the judgement debtor, Mr Smith, in the amount of $1,512,800.42. On 26 March 2012, after collecting the sums from two mortgagee sales that took place, Trustees Executors served a bankruptcy notice on Mr Smith requiring that he pay the remaining outstanding sum of $452,539.93. Mr Smith now applies to have the bankruptcy notice set aside.

[2] Mr Smith submits that he has a triable counterclaim which he genuinely proposes to pursue. The claim is two-fold and based on Trustees Executors’ mortgagee sale of two properties, 181 Orakei Road and 181A Orakei Road:

(a) First, he claims that Trustees Executors repudiated its duty under s

176 Property Law Act 2007 to obtain the best price reasonably obtainable for the two properties at mortgagee sale.

(b) Secondly, he claims that Trustees Executors exercised its rights in respect of the sale of the properties and the mitigation of its loss oppressively such that the relevant credit contract should be reopened under part 5 Credit Contracts and Consumer Finance Act 2003.

[3] Trustees Executors opposed Mr Smith’s application.

Background

[4] On 20 April 2007 the Netherwood Trust, of which Mr Smith is a trustee, obtained loans from Trustees Executors totalling $1,575,000. The loans were secured by a mortgage over two properties (181 Orakei Road and 181A Orakei Road) and a guarantee from Mr Smith, who resided at 181A Orakei Road.

[5] From 15 February 2009, the trust defaulted on its obligations to Trustees Executors. In July 2009, Trustees Executors issued Property Law Act notices on the trust, and on 17 August 2009 the trust’s indebtedness became payable.

[6] Operating on the advice of Barfoot & Thompson Limited, Trustees Executors subsequently conducted two advertising campaigns in an effort to sell the two properties through mortgagee sales. The first campaign commenced in October 2010 and offered the properties as a combined package. The properties did not sell.

[7] During the first advertising campaign, Mr Smith remained in the 181A Orakei Road premises. On 25 May 2011, Trustees Executors served an order for vacant possession on Mr Smith. It required that he vacate the premises by 9 June

2011 in time for the second advertising campaign for a mortgagee sale. Toogood J upheld the order in a decision on 8 June 2011.1 Trustees Executors subsequently allowed Mr Smith an extension and on 13 September 2011, he vacated the property.

[8] On 1 August 2011 Trustees Executors obtained summary judgment against

Mr Smith in the amount of $1,512,800.42 in a judgement delivered by Peters J.2 On

25 August 2011 Trustees Executors instructed Barfoot and Thompson to commence the second advertising and sales campaign for the properties. On 26 October the properties were passed in at an auction. Through subsequent negotiations, both properties were sold separately. On 2 December 2011, the sale of 181A Orakei Road was settled for $600,000. On 20 December 2011, the sale of 181 Orakei Road was settled for $570,500. The combined price of both properties came to $1,170,500.

[9] Although Trustees Executors was not contractually obliged to do so, it allowed Mr Smith to pursue attempts to sell the properties. He conducted an unsuccessful mortgagor auction of both properties on 3 July 2011. Outside of that auction, he listed the properties for sale and received the following offers for the two properties between December 2010 and September 2011:

(a) An offer for 181A Orakei Road on 2 December 2010 for $565,000 (the evidence does not disclose whether this offer was conditional or

_{unconditional);}

1 _{Trustees Executors Limited v Smith HC Auckland CIV-2011-404-1377, 8 June 2011.}

2 Trustees Executors Limited v Smith HC Auckland CIV-2011-404-1377, 1 August 2011.

(b) A conditional offer for 181 Orakei Road on 13 April 2011 for

$601,500;

(c) A conditional offer for both properties on 26 May 2011 for

$1,462,000;

(d) An unconditional offer for both properties on 6 July 2011 for

$1,250,000;

(e) A conditional offer for 181 Orakei Road in September 2011 for

$580,000; and

(f) An unconditional offer for both properties on 25 October 2011 for

$1,100,000.

[10] Trustees Executors refused each of the conditional offers. It says that none of them were acceptable for “various reasons”. There is little in the evidence to explain Trustees Executors’ position with respect to each offer. However the available facts do not disclose anything to indicate that Trustees Executors acted unreasonably or failed to fulfil its duties by not accepting the conditional offers. In the case of the 6

July 2011 unconditional offer, Trustees Executors’ uncontroverted evidence is that it did in fact accept the offer, but the that “purchaser did not confirm conditions”.

[11] After the two properties were sold, and taking into account interest,

$452,539.93 remained owing to Trustees Executors. On 26 March 2012 Trustees Executors had a bankruptcy notice served on Mr Smith. Shortly after being served, Mr Smith filed his application to have the notice set aside.

Discussion

[12] In seeking to have Trustees Executors’ notice set aside, Mr Smith relies on his two-fold cross claims and on s 17 of the Insolvency Act 2006. Relevantly, s 17 states:

17 Failure to comply with bankruptcy notice

(1) A debtor commits an act of bankruptcy if-

...

(d) the debtor has not ...

(ii) satisfied the Court that he or she has a cross claim against the creditor.

...

(7) In subsection (1)(d)(ii), cross claim means a counterclaim, set-off, or cross demand that—

(a) is equal to, or greater than, the judgment debt or the amount that the debtor has been ordered to pay; and

(b) the debtor could not use as a defence in the action or proceedings in which the judgment or the order, as the case may be, was obtained.

[Emphasis added]

[13] Mr Smith, as the judgment debtor, must show: 3

(a) that at least one of his two-fold claims is a genuine triable counterclaim, set-off or cross-demand; and

(b) that he could not have set up the cross claim in the 1 August 2011 summary judgment proceeding.

[14] In approving this formulation, the Court of Appeal in Sharma v ANZ Banking Group (New Zealand) Ltd said the claim must be one which is of true substance and which the judgment debtor genuinely proposes to pursue.4

[15] Mr Smith must produce evidence to support his contention that the alleged cross claim is equal to or greater than the outstanding balance of the summary judgment debt. Bare assertions as to quantum made by the debtor and his solicitor will not suffice.5

[16] Mr Smith must also establish he could not have used the alleged counterclaims as a defences in the in the 1 August 2011 summary judgment

3 _{Clark v UDC Finance Ltd [1985] 2 NZLR 636, 639.}

4 Sharma v ANZ Banking Group (New Zealand) Ltd (1992) 6 PRNZ 386 at 389 approving the approach of Casey J in Clark v UDC Finance Ltd [1985] 2 NZLR 636 at 637.

5 Refer Hedley Ex Parte Milton Bradley (NZ) Limited B1394/89, Auckland High Court, 14 December

1989, pg 9 and Couper v Tui Foods Ltd B304/96, Wellington High Court, 27 September 1996 at 9.

proceeding. When considering whether he could not have used the counterclaims in that proceeding, the emphasis is on legal impediments.6 Practical or factual impediments can be considered but only if there are cogent circumstances. The mere failure to take advantage of an opportunity because of inconvenience or difficulty will not be enough.7

Conclusions

[17] In order to determine whether Mr Smith’s bankruptcy notice should be set aside, the specific grounds that he raises only require me to consider three issues in respect to each of the two-fold claims:

(a) whether it is genuinely triable;

(b) whether it is equal to or greater than the outstanding balance of the summary judgment debt; and

(c) whether Mr Smith could have used it as a defence in the proceeding in which summary judgement was obtained.

Is Mr Smith’s s 176 Property Law Act counterclaim genuinely triable?

[18] The first limb of Mr Smith’s counterclaim is that Trustees Executors breached its duty under s 176 Property Law Act to obtain the best possible price for the properties at mortgagee sale. Relevantly, s 176(1)(a) states:

176 Duty of mortgagee exercising power of sale

(1) A mortgagee who exercises a power to sell mortgaged property... 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:

_...

6 _{Clark v UDC Finance Ltd at pages 639-640 and in Hardie v Booth [2992] 1 NZLR 356 at 362.}

7 Stirling v Webb Ross and Co, CA 47/86, 24 April 1986 and Harach v Dia, HC Wellington CIV-2006-

485-2245 at [22].

[19] Mr Smith accepts that Trustees Executors was entitled to exercise its right as mortgagee to sell the properties. He contends however, that Trustees Executors breached its duty under s 176 because the properties were sold for amounts significantly under value. In support of this counterclaim, he submits that:

(a) On 1 July 2011 an Auckland Council valuation showed that 181 and

181A Orakei Road were valued at $720,000 and $750,000 respectively.

(b) After deciding to sell the properties in April 2011, Trustees Executors ignored realistic chances of obtaining reasonable prices for the properties.

[20] Based on these grounds I do not think that this claim is genuinely triable. My reasons can be stated briefly:

(a) On 3 July 2011 Mr Smith tested the market himself by taking the properties to auction. The properties did not sell at a price that achieved the Council valuation. In fact they did not sell at all.

(b) Having allowed Mr Smith the opportunity to sell on the open market, Trustees Executors proceeded (as it was entitled to) with a second advertising campaign. Mr Smith makes no complaint about the adequacy of the campaign.

(c) Mr Smith’s sole complaint is about the price that Trustees Executors obtained. But a mortgagee sale for a price less than the current market value assessed by valuers does not, of itself, establish a breach of duty, although a large discrepancy may indicate a failure to take

reasonable care.8

(d) On 25 October 2011, the day before the properties were passed in at auction, Mr Smith obtained an unconditional offer for both properties

8 ASB Bank Limited v Byrne HC Auckland CIV 2011-404-4053, 6 March 2012 (per Associate Judge

Doogue) at [8] to [10].

for $1,100,000. The combined purchase price that Trustees Executors achieved for the properties, $1,170,500, exceeds that figure by

$70,500.

[21] I accept that there are discrepancies between the valuation of both properties by Auckland Council in July 2011 and their sales prices in December 2011. Nonetheless, I do not think that they are sufficient, of themselves, to indicate that Trustees Executors failed to take reasonable care. Elias CJ’s statement in Moritzson

Properties Ltd v McLachlan is apposite: 9

It may be that in the case of a sale at demonstrated gross undervalue an inference may be drawn that reasonable steps were not taken to achieve a proper price. But in the absence of other inadequacy, it seems to me that something overwhelming would be required.

[22] This is not a case of “a sale at demonstrated gross undervalue” and there is no suggestion of any “other inadequacy” in Trustees Executors’ sales procedure. Given the overall circumstances, this counterclaim cannot succeed.

Is Mr Smith’s oppression counterclaim genuinely triable?

[23] The second limb of Mr Smith’s counterclaim is that Trustees Executors exercised its rights in respect of the sale of the properties and the mitigation of its loss oppressively under part 5 of the Credit Contracts and Consumer Finance Act. He seeks to reopen the original $1,575,000 loan that Trustees Executors extended to the Netherwood Trust on 20 April 2007, including his guarantee to Trustees Executors. Sections 118 and 120(b) apply. Relevantly, they state:

118 Meaning of oppressive

In this Act, oppressive means oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice.

...

120 Reopening of credit contracts...

The Court may reopen a credit contract... if, in any proceedings (whether or not brought under this Act), it considers that—

9 Moritzson Properties Ltd v McLachlan (2001) 9 NZCLC 262,448 at [61].

...

(b) a party has exercised... a right or power conferred by the contract... in an oppressive manner;

[24] Mr Smith alleges that Trustees Executors exercised its rights in respect of the sale of the properties and the mitigation of its loss oppressively by:

(a) Not allowing him to attempt to sell the properties individually, significantly reducing his chance of selling them (Mr Smith alleges that this was unwise to the point of not making good commercial sense);

(b) Evicting him from 181A Orakei Road in May 2011 and leaving it vacant for a number of months, when Trustees Executors could have mitigated its loss by continuing to receive rent; and

(c) Not accepting the following offers for purchase, while allowing interest owing on the loans to escalate:

(i) an offer for 181A Orakei Road on 2 December 2010 for

$565,000;

(ii) a conditional offer for 181 Orakei Road on 13 April 2011 for

$601,500;

(iii) a conditional offer for both properties on 26 May 2011 for

$1,462,000;

(iv) an unconditional offer for both properties on 6 July 2011 for

$1,250,000; and

(v) a conditional offer for 181 Orakei Road in September 2011 for

$580,000.

[25] Mr Smith also claims that one of Trustees Executors’ representatives made a verbal remark to him that contributed to its oppressive conduct. A Mr Kennedy allegedly told Mr Smith that he intended to destroy him, take his properties and put him on the street. While Trustees Executors does not deny that Mr Kennedy made the remark, Mr Smith provides no evidential basis that it occurred after 1 August

2011 as he does not disclose any date. Further, even if it did occur after 1 August

2011, Mr Smith does not explain how the remark, though inappropriate, of itself amounts to Trustees Executors’ exercising its rights of sale or the mitigation of its loss oppressively. The relevant test of oppressiveness is concerned not with words but with actions. The test is whether Trustees Executors actually exercised its rights in respect of the sale of the properties and the mitigation of its loss oppressively, and not merely whether it talked about exercising its right oppressively.

[26] Accepting for the moment that this counterclaim might have substance, it is clear that nearly every one of the acts that Mr Smith alleges were oppressive occurred before 1 August 2011. Mr Smith had the opportunity to raise those acts and this limb of his counterclaim at the summary judgement proceeding on that date. I am not persuaded by counsel for Mr Smith’s argument that the summary judgment hearing was not the ideal setting to tease out the issues of this claim.

[27] The only allegedly oppressive acts that Mr Smith says occurred after 1

August 2011 are:

(a) Trustees Executors continually disallowing him to attempt to sell the properties individually; and

(b) Trustees Executors’ refusal to accept a $580,000.00 conditional offer

for 181 Orakei Road in September 2011.

[28] These are the only relevant acts to the oppression limb of Mr Smith’s counterclaim. I accept that while he could have raised this limb of his counterclaim at the 1 August 2011 hearing, he could not have raised these allegedly oppressive acts at that point.

[29] In s 118, ‘oppressive’ is described as “harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice”. The acts that occurred after 1 August 2011 that Mr Smith complains of do not meet that description.

[30] I emphasise that Trustees Executors had no contractual obligation to give Mr Smith an opportunity to sell the properties. He cannot complain about the circumstances of that opportunity that was extended to him. Further, having come to the conclusion that Mr Smith’s s 176 Property Law Act counterclaim is not genuinely triable, it is not appropriate to revisit these issues in an assessment of oppression under s 118 Credit Contracts and Consumer Finance Act.

Conclusion

[31] Neither limb of Mr Smith’s counterclaim constitutes a genuinely triable cross claim as required by s 17 of the Insolvency Act. Further, even if either counterclaim was genuinely triable, the amount recoverable would be less than the outstanding balance of the summary judgment debt.10

[32] For the reasons discussed earlier, the conclusion that I am led to is that I cannot set aside Mr Smith’s bankruptcy notice. There is simply no arguable basis under s 17 to do so.

Result

[33] Mr Smith’s application to set aside the bankruptcy notice is declined.

[34] As the application has failed, Trustees Executors is entitled to an order for costs. I make an order for costs in favour of Trustees Executors on a 2B basis

_{together with disbursements to be fixed by the Registrar.}

_{Associate Judge Sargisson}

10 As required by Insolvency Act 2006 s 17(7)(a). The claim is for $452,539.93 but the difference

between Mr Smith’s Auckland Council valuations and the prices that the properties sold for is only

$299,500.00.