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High Court of New Zealand Decisions |
Last Updated: 15 March 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-4053 [2012] NZHC 351
UNDER Part 12 of the High Court Rules
IN THE MATTER OF of an application for summary judgment
BETWEEN ASB BANK LIMITED Plaintiff
AND BRIAN LEONARD BYRNE AND PATRICIA ANN BYRNE Defendants
Hearing: 28 February 2012
Appearances: Mr B Upton for plaintiff
Mr S Houliston for defendants
Judgment: 6 March 2012
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
6.03.12 at 5 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date...............
Solicitors:
Simpson Grierson, Private Bag 92518, Wellesley Street, Auckland - ben.upton@simpsongrierson.com
McVeagh Fleming, Albany – shouliston@mcveaghfleming.co.nz
ASB BANK LIMITED V BYRNE HC AK CIV-2011-404-4053 [6 March 2012]
Background
[1] This is an application for summary judgment. The defendants purchased two sections in the Pacific Cliffs Development in Whangaparaoa: numbers 6 and 22
Pacific Cliffs Drive. The defendants paid $950,000 and $700,000 for the respective properties. The defendants borrowed $1,380,000 from the plaintiff, ASB Bank Ltd (―ASB‖) to fund the purchase, secured by standard ASB mortgages. The loan agreements were entered into on 31 October 2005 and 4 November 2005.
[2] The developments failed, and the defendants defaulted on their repayment obligations in July 2010. The plaintiff sold both properties at mortgagee sales. There is no dispute that they followed the proper notice procedure under the Property Law Act 2007.
[3] The defendant obtained valuations from Albion Banks Valuation Ltd. As at
20 September 2010, 6 Pacific Cliffs Drive was valued at $445,000 for a forced mortagee sale, and 22 Pacific Cliffs Drive was valued at $320,000.
[4] The plaintiff engaged Barfoot and Thompson to advise on the marketing of the properties and to provide initial sales estimates. On 15 February 2011, their initial sales estimates for mortgagee sales were $470,000 for 6 Pacific Cliffs Drive, and $350,000 for 22 Pacific Cliffs Drive. These figures were later revised downward. Barfoot and Thompson advised the defendant to engage in an intense four-week sales campaign involving press advertising in three publications (the New Zealand Herald, Property Press North Shore and Rodney Times Outlook), internet advertising, signage, open homes and internal referrals. The plaintiff was also advised to sell the properties by auction.
[5] Number 6 Pacific Cliffs Drive was eventually sold for $506,000 on 3 May
2011. Number 22 Pacific Cliffs Drive sold for $267,000 on 13 April 2011. The plaintiff has now applied for summary judgment for the balance of the debt. The defendants oppose this application by contending that the plaintiff breached its duty of reasonable care under s 176 of the Property Law Act 2007 to obtain the best price reasonably obtainable.
Summary judgment principles
[6] Rule 12.2 of the High Court Rules 2008 requires that in order for an application for summary judgment to succeed, the plaintiff must satisfy the Court that the defendants have no defence. The Court of Appeal in Krukziener v Hanover Finance Ltd summarised the principles as follows:1
The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3. The court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as, for example, where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341. In the end the court’s assessment of the evidence is a matter of judgment. The court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corporation Ltd v Patel (1987) 1
PRNZ 84 (CA).
Principles relating to s 176 of the Property Law Act 2007
[7] Section 176 of the Property Law Act 2007 provides:
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.
...
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
[8] In Public Trust v Ottow, Asher J summarised the applicable principles as follows:2
(a) A mortgagee has no duty at any time to exercise the powers of sale or possession. In default of any provision to the contrary in the mortgage, the power of sale is for the benefit of the mortgagee, who can sell at any time in accordance with the mortgagee’s convenience.3
(b) The mortgagee’s duty of care is to take reasonable care to obtain the best price reasonably obtainable at the time of sale.4
(c) It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained.5
(d) A mortgagee is under no obligation to improve the property or increase its value.6
(e) 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.7
(f) A mortgagee does not have any general duty to maintain properties prior to sale.8
(g) Following the service of a Property Law Act notice there is no duty on a mortgagee to keep a guarantor informed of sales activities.9
2 Public Trust v Ottow [2009] NZHC 2904; (2010) 10 NZCPR 879 (HC) at [17].
Civ 1409, [2004] 1 WLR 997 at [14].
4 Agio Trustees Co Ltd v Harts Contributory Mortgages Nominee Co Ltd (2001) 4 NZ ConvC
193,480.
4 Agio Trustees Co Ltd v Harts Contributory Mortgages Nominee Co Ltd (2001) 4 NZ ConvC
193,480.
5 Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 at 1355B; Silven Properties, above n 3, at
[14].
6 Silven Properties, above n 3, at [16].
7 Moritzson Properties Ltd v McLachlan (2001) 9 NZCLC 262,448 at [61].
8 Silven Properties, above n 3, at [16].
9 G Merel & Co Ltd v Barclays Bank Ltd (1963) 107 SJ 542.
(h) The mortgagee is not entitled to sell in a hasty way at a knock-down price sufficient to pay the debt, which because of the speed of sale leads to a lower price than could otherwise be obtained.10
(i) Proper care must be taken to expose the property to the market and to obtain the best price reasonably obtainable.11
[9] These comments were supplemented by Associate Judge Faire in Westpac
New Zealand Ltd v Wiltshire.12 I have outlined the relevant ones:
(a) The duty is a duty to take reasonable care. It does not necessarily follow that the best price reasonably obtainable will be achieved.
(b) The duty has to be measured at the time of the sale. The duty arises at the time the decision to sell is made. There is thus a need to analyse the steps taken once the decision to sell is made, up to the time of sale.
(c) When deciding for the purposes of s 176 whether reasonable care has been taken, the steps taken by the mortgagee and those acting with it must be looked at in the round. The issue is a commercial one, to be viewed in practical commercial terms.13
(d) Assistance in determining the issue of whether reasonable care has been taken can be found by considering the following:
i. 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.14
10 See Palk v Mortgage Services Funding Plc [1993] Ch 330 (CA) at 337–338.
10 See Palk v Mortgage Services Funding Plc [1993] Ch 330 (CA) at 337–338.
11 Harts Contributory Mortgages Nominee Co Ltd v Bryers HC Auckland CP403/IM00, 19
December 2001 at [43](d) and (f).
12 Westpac New Zealand Ltd v Wiltshire HC Hamilton CIV-2010-419-1675, 22 November 2011 at
[22].
13 Apple Fields v Damesh Holdings Ltd [2001] 2 NZLR 586 (CA).
14 Tse Kwong Lam, above n 5.
ii. 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.
iii. 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.
iv. 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.
v. 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.
vi. For the breach of duty to be actionable there must be proof of damage.
[10] The following steps were taken by the Court in Ottow as constituting reasonable efforts to obtain the best reasonably obtainable price:15
(a) The appointment of a reputable real estate agent to market the property.
(b) Obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property.
15 At [31].
(c) Marketing over a reasonably long period of time.
(d) An extensive advertising and promotional campaign. (e) A properly conducted auction.
(f) A sale price that, given all the circumstances, can be reconciled with expert opinion as to value.
Defendants’ submissions
[11] The defendants must demonstrate to the Court that there are some realistic grounds upon which they are able to defend the claim brought against them. They do not, of course, need to establish that the defence that they put forward is ―likely‖ to prevail against the plaintiff’s claim at any trial; rather, just that there is a real question to be tried.
[12] In their defence, the defendants submit that the plaintiff acted in breach of s
176 of the Property Law Act when selling the two properties at Whangaparaoa. At the hearing before me, Mr Houliston for the defendants responsibly advised me that the defendants no longer seek to establish that there had been a breach of the s 176 duty in regard to both sections, and he confined his arguments to the circumstances in which 22 Pacific Cliffs Drive was sold.
[13] The defendants assert that the property sold at a price so greatly undervalued, that in conjunction with other points made, they have an arguable defence that the plaintiff breached its obligations under s 176.
[14] The defendants obtained evidence from a registered valuer — a Ms Vicki Phillips. Ms Phillips was critical of aspects of the sale process and the outcome obtained in respect of 22 Pacific Cliffs Drive. Her criticisms were based on her valuation of 22 Pacific Cliffs Drive as having a market value of $700,000 as at 30
September 2011. She opined that the sale price of $267,000, even under forced sale circumstances, was ―unreasonably lower than the market value (sale price approximately 38% of market value)‖. However, a defence is not made out just
because a registered valuer has given an opinion that the properties sold for too low a price.
Plaintiff ’s submissions
[15] Mr Upton (for the plaintiff) was critical of the evidence put forward by the defendants. He noted that the valuation was not a contemporaneous one, and that Ms Phillips did not provide an actual forced sale valuation. He submits that it is inappropriate simply to extrapolate a market valuation after the event and add a discount. He submitted (correctly, in my opinion) that Ms Phillips’ view was premised on a materially false assumption: in her report, Ms Phillips had stated that
22 Pacific Cliffs Drive had been valued at $1,050,000 in 2005. This is incorrect; the property had been valued and sold for $700,000. Mr Upton also noted that Ms Phillips, whilst attributing a market value of $700,000 to 22 Pacific Cliffs Drive (the same as the original sale price and valuation in 2005), also expressed the contrary view that the land value component of properties today within the coastal Gulf Harbour area is less than that of 2005. These two propositions are contradictory: if the land value component of the property in 2011 is lower than in 2005, it would be expected that the valuation in 2011 would also be lower.
[16] I was also referred to evidence showing that the median marketing period for properties around the time in question was 40 days. While this is more than the four weeks provided for in this case, it is still very substantially less than the ―excess of six months‖ that Ms Phillips contended would have been reasonable.
The matters in dispute
[17] In this case, the Court is confronted with a not-unusual situation, where opinion had been obtained from registered valuers by both sides, with the equally familiar outcome that the valuers could not agree as to what the proper sale price that ought to have been obtained was. In cases of this kind, the Court in summary judgment is required to deal with the matter in a number of stages. First, it assesses the evidence on each side to determine whether there is a real dispute concerning issues of value. If it accepts that there is the Court must then consider whether the evidence of value forthcoming from the defendant would, if accepted, generate an
inference (either on its own or in conjunction with other evidence) that there has been
a breach of the mortgagee’s duty under s 176.
[18] Based on Ms Phillips’ valuation, the defendants argue that the amount recovered on mortgagee sale was markedly less than what might have been expected, even after allowing for the fact that a mortgagee sale will generally be at a discount to the market value of the property.
[19] This general criticism was attributed to the following alleged failures in the plaintiff’s conduct of the sale: the duration of the marketing programme was too brief, as the plaintiff should have allowed up to six months rather than the four weeks actually provided for; and although the agents retained by the plaintiff operated on the North Shore, they may not have had the necessary experience to enable them to understand the Hibiscus Coast market.
[20] I will now discuss the marketing programme that was undertaken and assess the submissions of either side in context. It must be borne in mind that the adequacy of the price obtained for the sale of 22 Pacific Cliffs Drive should be examined in the light of market conditions as at the date of the auction sale, 13 April 2011.
The marketing programme
[21] Ms Phillips criticised the plaintiff for not listing the property on the ―Property Guru‖ database. She considered that a mortgagee owing the mortgagor a duty to take reasonable care to obtain the best price reasonably obtainable at the time of sale would allow for a reasonable period of advertising and promotion which, in her view, would be in excess of six months in the circumstances of the present case.
[22] A registered valuer, Mr Clapcott, gave evidence for the plaintiff. He said that in September 2010 (approximately seven months before the auction took place), he was instructed to value 22 Pacific Cliffs Drive both on the basis of what the fair market value was for the property on a willing buyer and willing seller basis, as well as an estimate of value in forced sale circumstances. He deposed that he calculated the forced sale value by applying a 35 per cent discount to the market value. For his market value, he adopted the figure of $475,000, resulting in an estimated mortgagee
sale value of $320,000. I have had difficulty tying this latter figure to the 35 per cent discount on market value that Mr Clapcott used in his report. As I understand, a 35 per cent discount would result in an expected forced sale of a little over $308,000. In the overall context of this case though, that is not an important detail.
[23] Mr Clapcott said that the rate of discount that he applied to the market value was higher than his normal 35 per cent discount because there was limited demand for the large number of sites for sale in the Pacific Cliffs development. He ascribed this surplus of sites as being due to the bankruptcy of the property developer, James Peters. It is relevant to note that Mr Clapcott did not predict any problem with the potential saleability of the property because of the small size of the section — a matter that other witnesses adverted to.
[24] Mr Davis was one of the real estate agents engaged to market the property. He set out the steps that his firm took to market the property as instructed by the plaintiff. In the usual way, he stated that a marketing plan (dated 15 February 2011) had been prepared and annexed a copy to his affidavit. For marketing purposes, the agency estimated the forced sale value of 22 Pacific Cliffs Drive at $350,000. He also stated that his company recommended that the property be sold by auction under
―the mortgagee sale banner‖, that marketing should be for a four-week period, and also gave detailed recommendations as to how the sale should be advertised. He deposed that his firm marketed the property from 15 February 2011 until the date of sale, 16 March 2011. Without going into the detail of the publicity that was organised, it seems to have been of adequate coverage and to have been placed in the correct media.
[25] Mr Davis annexed to his affidavit the marketing reports that his company had provided to the plaintiff leading up to the auction. There were four such reports. The fourth report included a ―Pre-Auction Summary‖ on 15 March 2011, which recorded that some of the people who had inspected the property expressed concerns about a major excavation that had been carried out on the site, that there was little optimism that future gains could be made from property, and that the market conditions in Whangaparaoa were difficult. He noted that there were two parties who had
indicated their intention of attending the auction for 22 Pacific Cliffs Drive. He also made the following comment:
There has in the last ten days been listed for sale a section very similar to number 22 Pacific Cliffs Drive for $300,000. The market feedback and taking this into consideration would indicate that our original estimates are now considerably higher than what can reasonably be expected to be achieved. A more likely achievable figure could well be [in] the early
$200,000 range.
He considered that in the light of the marketing work that had been done, the prices achieved at auction would reflect the current values of the properties under the prevailing conditions.
Discussion of whether there is an arguable defence that the defendant breached its duty
[26] I now consider the various submissions made on both sides and the evidence offered by them.
[27] I have considered the strongest point the defendant can advance as the basis for an arguable defence — that the price at the mortgagee sale was lower when compared with the market valuation. The amount realised was $267,000 which is no more than 83 per cent of the $320,000 forced sale valuation that Mr Clapcott had reached.
[28] There are three possibilities. The first is that the Clapcott valuation was too high. However, that valuation was consistent with the market estimate the agents had prepared as part of their marketing plan. If a valuation level of approximately
$320,000–$350,000 was accurate for a forced sale, then it would seem that the agents and valuers overvalued the property on a forced sale basis by something in the vicinity of 20 per cent. However, such variations in valuation could be explicable on the ground that the market was a fluid one. As the auction date approached, the agents did in fact warn the plaintiff that, notwithstanding the earlier estimate, having tested the market, the property might now only realise $200,000-$250,000 on a forced sale basis. This estimate was given on the eve of sale following the marketing of the property and the receipt of feedback from potential buyers.
[29] At this point I must raise several concerns with Ms Phillips’ estimate. First, Ms Phillips does not set out the extent of her experience as a registered valuer. While there is no disputing that she has sound academic qualifications, the matter of how much practical experience a valuer has must be a matter that is of interest to the tribunal assessing her evidence. Secondly, her calculation is based upon a mistake, as Mr Upton pointed out. On one hand, Ms Phillips considered the land value components of properties in the area had fallen since 2005, yet on the other, her valuation in 2011 is the same as the 2005 valuation.
[30] I agree that even if Ms Phillips’ estimate of value is put to one side for those reasons, there is still a considerable margin of difference between what Mr Clapcott and the agents estimated the property would reach at forced sale and the ultimate price the property was sold.
[31] The defendants were critical of the duration of the marketing program of four weeks. That is a legitimate point to advance. They submitted through their counsel that too short a marketing period could result in the property not being properly exposed to potential purchasers so that the best possible price is not obtained. Ms Phillips gave evidence about the duration of the marketing campaign as well which she thought was too brief. While accepting that in principle too short a marketing period might depress the value received for the property, nonetheless in the particular circumstances of this case I think it would be unsafe for the Court to adopt Ms Phillips’ evidence that six months would have been a reasonable period for a marketing campaign. Ms Phillips’ evidence overlooks that this was a sale pursuant to a security under a lending arrangement that was substantially in arrears. Further, there was a high probability that the security would not cover all of the liabilities. The amount owing under the security was increasing quickly because penalty interest was being charged against the accounts. Against that background, what is now proposed could almost be described as leisurely progress towards realisation.
[32] It is possible that even if one rejects as untenable the six-month marketing programme as being required to meet the standard of reasonableness, some lesser period than six months but more than four weeks might have been ideal. Unfortunately, there is no evidence assisting the Court on this issue. I note also that
in similar cases involving marketing campaigns of around four weeks, the Court either held that period to be sufficient or at least it did not comment adversely on a marketing program of that duration.16
[33] If one keeps firmly in mind that a mortgagee is not expected to obtain some ideal standard when exercising the power of sale, but instead, is required to do no more than take only reasonable steps to get the best price. Adopting that as the correct approach, the following factors would seem to be persuasive.
[34] First, the plaintiff had obtained the advice of a reputable real estate agency and experienced real estate agents. As stated in Westpac New Zealand Ltd v Wiltshire,17 appointing a competent agent will go a long way towards discharging the obligation under section 176. I do not accept that the agents can be criticised as not having the requisite expertise to advise on sales in the Hibiscus Coast area merely because they are described as being North Shore-based agents. In other words I do
not accept that it is reasonable to suggest that only agents actually working on the Whangaparaoa peninsula would have the necessary expertise to advise. As I have noted this view was advanced by Ms Phillips. It is not supported by detailed and convincing reasons. It seems to me to be nothing more than an unsupported assertion. Secondly, the four-week marketing programme emanated from the agents themselves, who considered that marketing the properties for a longer period could in fact be detrimental. Thirdly, a recommendation of a four-week marketing programme is not self-evidently inadequate. Fourthly, as I have mentioned already, this was not a case where it was obvious that sufficient security was held to ensure that the debt would be paid in its entirety. It is hardly likely that, in those circumstances, the plaintiff would give its assent to an excessively short or otherwise defective marketing programme, because it would be the plaintiff who would suffer any shortfall if the marketing programme resulted in the secured property being sold
too cheaply.
16 Public Trust v Ottow, above n 2 (four weeks); ASB Bank Ltd v Anderson HC Christchurch CIV-
2009-404-2522, 24 March 2010 (six weeks); Westpac New Zealand Ltd v Singh HC Auckland
CIV-2011-404-2434, 22 December 2011 (four weeks).
17 Westpac New Zealand Ltd v Wiltshire, above n 12, at [22].
[35] I next address the plaintiff’s failure to use the ―Property Guru‖ website. First, I would be sceptical that in light of all of the publicity given to the sales programme (such as publicising it on, inter alia, www.realestate.co.nz and TradeMe, to the total of eight different internet and hard copy forums over the four-week period, as well as signage, information sheets and brochures, open sections, and distributing listing details throughout Barfoot and Thompson’s 65 branches) that the omission to list on one additional website could have such a degree of influence on the outcome sufficient to make it that unreasonable for the mortgagee not to have used that website. More likely, different realtors have different professional views on how to go about marketing properties. This is an illustration of the type of divergence of view that can occur.
[36] By way of concluding comment, I observe that it seems likely to me that the market for sections such as 22 Pacific Cliffs Drive fell precipitously between the date when Mr and Mrs Byrne purchased the property in 2005 and when the mortgagee sale took place some six years later. No doubt this was due to market conditions generally, but the problem was aggravated by the developer’s insolvency. The fact that the scale of the loss of value was not anticipated by the valuer and agents is understandable if they were taken by surprise in a volatile market. This conclusion is reinforced by the fact that the plaintiff followed what seemed to be an unremarkable process leading up to the mortgagee sale. On the face of it, the plaintiff’s conduct could not be criticised as being deficient or ill-advised. Despite all the reasonable steps taken, it would seem that $267,000 was a proper reflection of the market for the sale of the section on a forced sale basis.
[37] It is my view that the evidence provided by the parties on all of these matters, and the inferences that the Court is entitled to draw, do not leave the Court with real doubt or uncertainty as to whether the plaintiff has met its obligations under s 176 of the Property Law Act.18
[38] Taking a realistic and robust approach to the plaintiff’s application, I am unable to accept that there is anything in the circumstances which the defendants can
point to as constituting a defence that ought to go to trial.
18 Krukziener v Hanover Finance Ltd, above n 1, at [26].
[39] The plaintiff is entitled to judgment. I accept that the quantum of such judgment is correctly stated in Mr Upton’s memorandum as to the indebtedness of the defendants (filed at the hearing before me on 28 February 2012). Specifically I enter judgment as follows:
a) For a first cause of action against the defendants
i) Amount claimed as set out in the statement of
claim $718,425.79
(ii) Interest on the sum of $718,425.79 at the rate of 5.75 per cent per annum, compounding on the 10th of every month, from 5 May 2011
until 28 February 2012 (the hearing date) $27,500.62
Total $745,926.41
[40] If counsel are unable to agree as to the matter of costs and disbursements, they are each to file memoranda not exceeding three pages within 14 days of the date
of this judgment.
J.P. Doogue
Associate Judge
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