LDC Finance Limited v Jenkins [2012] NZHC 3303 (7 December 2012)

Last Updated: 4 February 2013

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

CIV-2009-442-000281 [2012] NZHC 3303

UNDER Sections 119 and 137(1)(c) Property Law

Act 2007

IN THE MATTER OF an Order for Possession under Parts 12 and

13 of the High Court Rules

BETWEEN LDC FINANCE LIMITED (in receivership)

Plaintiff

AND RICHARD JENKINS and IAN RODERICK SMITH AS trustees of DB ONE FAMILY TRUST

Defendants

Hearing: 19-20 November 2012

Counsel: P J Bellamy with M E Byczkow for Plaintiff

No appearance for Defendants

R W Maze for C N Gordon

Judgment: 7 December 2012

In accordance with r 11.5 I direct that the delivery time of this judgment is 2 pm on the 7th day of December 2012.

_{RESERVED JUDGMENT OF MACKENZIE J}

[1] The plaintiff, which is the successor in title to Halifax Finance Limited, holds a mortgage (the Halifax mortgage) over a property at Spring Grove owned by the defendants in their capacity as trustees of DB One Family Trust. Mr Colin Gordon, the settlor and beneficiary of the Trust, also holds a mortgage over that property. His

_{mortgage was registered in 2003. The Halifax mortgage was registered in}

LDC FINANCE LIMITED (IN RECEIVERSHIP) V JENKINS HC NEL CIV-2009-442-000281 [7 December

2012]

September 2005. So, on the title, Mr Gordon’s mortgage is registered as a first

mortgage and the Halifax mortgage as a second mortgage.

[2] The Halifax mortgage was transferred to SC Management Ltd in July 2006 and then to the plaintiff in March 2007. The mortgage is in default, and LDC commenced these proceedings seeking an order for possession of the property under s 119 of the Property Law Act 2007. It applied for summary judgment. In a lengthy judgment delivered on 15 September 2011, Associate Judge Osborne refused summary judgment. The grounds for refusal were that there was at least an arguable case that Mr Gordon had a mortgage with a priority over the plaintiff ’s mortgage, and had entered into possession of the property. If so, the plaintiff ’s possession was deemed to be withdrawn under s 168 of the Property Law Act.

[3] The plaintiff then issued an amended statement of claim. That alleges that it was an expressed term of the loan agreement between Halifax and the defendants that Halifax would have first mortgage priority. It further alleges that, by his participation in the transaction, Mr Gordon represented to Halifax that he would give Halifax first mortgage priority. It alleges an estoppel arising from that representation by Mr Gordon, and seeks an order that the Halifax mortgage be accorded priority over Mr Gordon’s mortgage.

[4] In filing that amended statement of claim, which sought relief against Mr Gordon as well as the defendants, the plaintiff did not take steps to join Mr Gordon as a defendant. That should have been done. However, Mr Gordon had been served with the original proceedings and had taken active steps to defend the proceedings at the earlier stage. It was Mr Gordon, rather than the trustees, who defended the summary judgment application. At the hearing before me, the trustees took no part. Mr Gordon appeared by counsel and gave and called evidence. In those circumstances, the failure to join Mr Gordon as a party does not prevent the Court from dealing with the proceeding.

[5] The Spring Grove property was for many years owned by Mr Gordon. In

2003, Mr Gordon formed the Trust. He did so on the advice of his solicitor

Mr Ian Smith. The trustees were and are Mr Smith and an accountant, Mr Jenkins.

Mr Gordon sold the property to the Trust and took a mortgage back for the purchase price. He subsequently made some annual gifts of part of the purchase price, but part of the debt (apparently about $77,000) remains. In August 2004 the trustees granted an earlier mortgage to Halifax and Mr Gordon signed a mortgage priority instrument giving that earlier Halifax mortgage priority over his loan. A further advance was later made under that Halifax mortgage. It appears that the total amount advanced under that mortgage was about $50,000.

[6] In September 2005, the trustees entered into a new loan agreement with Halifax. The loan agreement provided for an advance of $224,000. The interest rate was described as “a floating rate loan at the current rate of 16.5 per cent per annum”. It was for a 12 months term. The security was described as the “first registered mortgage over Main Road, Spring Grove”. A further clause, appearing in the fees schedule on the last page of the agreement, after the signature page, said “it is further agreed that the borrowers shall repay the balance of the existing loans secured under the existing first mortgage to the creditor from the proceeds of this advance and that this new advance shall be a first mortgage”.

[7] I heard evidence from Mr Gordon and Mr Jenkins as to the circumstances of the execution of that document. I also heard evidence from Mr Reid, a banking consultant appointed by the receivers of LDC to assist them in recovering money owed to LDC. Mr Reid had no personal involvement in the transaction, and gave evidence based on the documents in LDC’s records. There was a considerable conflict in the evidence over differences between various copies of the loan agreement which were produced in evidence. It is unnecessary for me to address all of that evidence. The findings of fact which it is necessary for me to make can be quite shortly stated. The following sets out my findings of fact on the circumstances of the execution of the loan agreement.

[8] Mr Jenkins and Mr Gordon attended at Mr Smith’s office on

8 September 2005. Also present was a Mr Conlon, who was then a business associate of Mr Gordon. There was some discussion about the purpose of the loan, which was to meet a debt owed by the business operated by Mr Gordon and Mr Conlon. Mr Jenkins did not read the contract in its entirety before signing it. He

did skim read it. He relied on Mr Smith because he was solicitor for Mr Gordon and the Trust as well as being a fellow trustee. Mr Jenkins and Mr Smith both signed the agreement as borrowers, and initialled each page.

[9] Mr Gordon’s evidence, which I accept, is that he did not read the document and he was not taken through it by Mr Smith on a clause by clause basis. There was no mention to him of security for the loan and whether it might be a first or second mortgage. The only part of the contract he reviewed was the signature page. He was asked to initial two clauses and to sign at the bottom of the page. He was told that the clauses were to record the purpose of the loan and to protect the trustees from liability. He did not initial or mark any other page of the contract although he saw Mr Smith and Mr Jenkins do so.

[10] The two clauses which Mr Gordon was asked to initial read as follows:

It is acknowledged by the beneficiary and settlor of the Trust that the Trustees enter into this agreement to borrow funds for the payment of legal fees to settle a dispute between the beneficiary and associated companies and that the beneficiary shall indemnify the borrowers with respect to this advance and any issue surrounding it.

It is further acknowledged that the liability of the Trustees shall be limited at all times to the assets of the DB One Family Trust

[11] Mr Gordon’s signature appears above a specially prepared attestation clause at the bottom of that signature page. A set of initials, which Mr Gordon acknowledges are his, appears against the first of the clauses set out above. In his oral evidence he denied that the initials opposite the second clause were his. In his written evidence in chief he said that he was asked to initial both clauses. It is unnecessary for me to make a factual finding on that second set of initials. He did sign and initial the signature page. He did not sign or initial any other page.

[12] The advance secured by the mortgage was $224,000. LDC has obtained judgment for about $293,000. The disposition of the money advanced is not clear from the evidence. About $50,000 would have been needed to repay the earlier Halifax mortgage. Some was apparently borrowed to provide a source of funds for interest for the 12-month period of the loan. The net amount was, as I have noted, to be used to meet a debt owed by the business operated by Mr Gordon and Mr Conlon.

The debt was for legal fees claimed by a lawyer who had acted for the business on a dispute. The evidence suggests that the amount paid was of the order of $130,000. The quantum of fees had been contested, and Mr Gordon’s evidence is that a reduction had been achieved, to about $60,000. Mr Jenkins’ evidence is that he suggested to Mr Smith that a tender of about $60,000 should be made, and that the amount to be borrowed was left blank when the loan agreement was signed, to allow some flexibility in settling the lawyer’s claim. Mr Gordon and Mr Jenkins both say they were not aware of the amount to be borrowed when they signed the document, and that they did not authorise a settlement at $130,000.

[13] There is no evidence, beyond the first clause referred to at [10], why the debt was to be secured over the Trust’s property. Mr Gordon’s evidence is that there should have been funds available from the settlement proceeds of the dispute in which the lawyer had acted to meet his fees.

[14] The plaintiff’s claim is for estoppel by representation. The amended

statement of claim pleads:

20. An express term of the agreement between Halifax and the defendants was that the defendants would give Halifax first mortgage security for its advance of $224,000.

21. By initialling each page of the agreement and signing the indemnity to the defendants included in the agreement, Mr Gordon in his capacity as settlor and beneficiary expressly represented to Halifax that:

21.1. He had read the agreement;

21.2. He had understood the agreement;

And in his capacity as first mortgagee, he represented that:

21.3. He agreed to give Halifax first mortgage security for its advance and would take reasonable steps to give this agreement effect (“the representations”).

[15] On the facts as I have found them, the allegations in paragraph 21 are not established. Mr Gordon did not initial each page of the agreement. He signed and initialled only the signature page.

[16] To found an estoppel by representation, the representation must be clear and unambiguous. To give priority, Mr Gordon would have had to sign another document to that effect. He was never asked to do so. There was nothing in the loan agreement which constituted a clear and unambiguous statement by Mr Gordon that he would execute a document to enable the Halifax mortgage to be registered as a first mortgage ahead of his own. The plaintiff has failed to establish that he was aware of the condition that Halifax would have a first mortgage security. But, even if he was or should have been aware of it, his signature on the loan agreement, in a different capacity, does not constitute a clear and unambiguous representation as alleged.

[17] In his closing submissions, Mr Bellamy submits that the trustees had agreed to give priority, and that Mr Gordon as beneficiary is bound by the actions of his trustees, and that he specifically indemnified the trustees in relation to this loan. That is not to the point. There is no doubt that the trustees had agreed to give priority. The question is whether Mr Gordon has made a representation, in his capacity as first mortgagee, that he would give priority. The actions of the trustees are not binding on Mr Gordon on that question.

[18] Mr Bellamy also submits that a representation may have been made by Mr Smith on Mr Gordon’s behalf. That submission must fail. There is no evidence from Halifax that Mr Smith did so. Further, Mr Smith was acting for at least three parties in this transaction: Halifax, Mr Gordon, and the Trust. He was also one of the trustees. In those circumstances, clear evidence would be required to show that anything he may have said to Halifax constituted a representation on Mr Gordon’s behalf.

[19] For these reasons, I find that no representation sufficient to found an estoppel was made by Mr Gordon.

[20] In any event, even if there had been a representation, I do not consider that Halifax has established that it acted in reliance on the representation. It pleads in the amended statement of claim:

22. In reliance on the representations, Halifax:

22.1. Repaid the trust’s existing loans;

22.2. Advanced further money to repay outstanding legal fees;

22.3. Discharged its existing first mortgage security over the property.

[21] There is no evidence from which it could properly be inferred that Halifax did any of those things in reliance on anything said or done by or on behalf of Mr Gordon. It is quite clear from the documents that Halifax was not obliged to make the advance until it had all the documentation necessary to enable it to register a first mortgage. Halifax made the advance when it did not have a document signed by Mr Gordon postponing the priority of his mortgage. Mr Smith was acting for all parties in this transaction, including Halifax. He was presumably acting on Halifax’s behalf in disbursing the loan monies and registering the mortgage. Mr Smith must have known that he did not have the necessary documentation. There is no evidence from him, or from someone from Halifax with personal knowledge of the transaction, to explain why Halifax advanced the funds without the documentation necessary to achieve its priority. Halifax had a contractual right, against the trustees, to insist upon the documentation before it made the advance. There is no evidence that its failure to protect its position, by withholding payment until the requisite priority had been obtained, was induced by anything done or said by or on behalf of Mr Gordon.

[22] For these reasons, the plaintiff’s claim must fail. The proceeding is

dismissed.

[23] Costs are reserved. My preliminary view is that Mr Gordon should have costs on a 2B basis. If the parties are unable to agree costs in the light of that indication, they may submit memoranda. Counsel for Mr Gordon should submit a memorandum by 31 January 2013. Counsel for the plaintiff should respond within a

_{further 14 days.}

Solicitors: Duncan Cotterill, Nelson, for Plaintiff

R A Fraser & Associates, Christchurch, for Mr Gordon

“A D MacKenzie J”