Trustees Executors Limited v Trustees Executors Limited [2012] NZHC 650 (4 April 2012)

Last Updated: 22 May 2012

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2011-404-4418 [2012] NZHC 650

BETWEEN TRUSTEES EXECUTORS LIMITED First Plaintiff

AND FOUNDATION CUSTODIANS LIMITED Second Plaintiff

AND FOUNDATION MORTGAGE SECURITIES LIMITED

Third Plaintiff

AND TRUSTEES EXECUTORS LIMITED Defendant

Hearing: 13 March 2012

Counsel: P.L. Rice - Counsel for Plaintiff

M.N. McIntosh and F. Mabbett - Counsel for Defendant

Judgment: 4 April 2012

_{JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL}

This judgment of Associate Judge Gendall is delivered on 4 April 2012 at 4.00 pm under r 11.5 of the High Court Rules.

Solicitors: Sanderson Weir, Solicitors, PO Box 856, Shortland Street, Auckland

_{Russell McVeagh, Solicitors, PO Box 10-214, Wellington}

TRUSTEES EXECUTORS LIMITED & ORS V TRUSTEES EXECUTORS LIMITED HC WN CIV-2011-404-

4418 [4 April 2012]

Introduction

[1] This is an application by the defendants for summary judgment concerning a claim over a mortgage lending business relationship. The ultimate issue in this case is who, of the parties involved, had responsibility for procuring lender’s mortgage insurance (“LMI”) for a particular loan that later defaulted. The claim here only arose because the insurer then declined to cover the default because of non- disclosure.

[2] The plaintiffs commenced proceedings against the defendant by filing a statement of claim on 15th July 2011, outlining causes of action in gross negligence and misleading and deceptive conduct. As I have noted, in the application before me, the defendant applies for summary judgment against the plaintiffs, on the basis that none of their causes of action can succeed.

[3] The application is opposed by the plaintiffs. They contend that the Court cannot be satisfied that there is a complete defence to their claims and that the issues require a full hearing and consideration of all the evidence.

Background

[4] The plaintiffs are respectively the trustee, asset custodian and trust manager of the FMS No. 1 Trust (“the Trust”), which carries out business in providing loans and taking security over residential property. The third plaintiff’s duties are set out at paragraph 3 of the Statement of Claim, and include arranging insurance and loan documentation for prospective loans.

[5] By an agreement dated 10 July 2006 (“the Delegation Agreement”), the third plaintiff delegated its duties to the defendant. The defendant is the mortgage management unit of the first plaintiff. In respect of “Credit Assessment and Loan Offer Services”, the Delegation Agreement states that where Approved Mortgage Managers are engaged, those managers will perform these services and the defendant does not need to duplicate performance.

[6] The Delegation Agreement went on to state that the defendant was not liable

_for:

(a) Losses suffered in connection with performing its duties, unless the result of gross negligence;

(b) Any indirect, special or consequential damage.

[7] Tasman Mortgages Limited (“Tasman”) was appointed as a mortgage originator and an Approved Mortgage Manager by the third plaintiffs under an “Originator Agreement”, which provided for Tasman to originate loans and to perform certain duties with respect to loan management. The defendant was not party to this agreement.

[8] Around 18 January 2008, Tasman received a loan application on behalf of Oriental Parade 360 Limited for a $1,000,000.00 loan to be secured by mortgage over a Wellington property and a personal guarantee of that company’s director and shareholder, Mr Daniel Robert Tremewan (Mr Tremewan). On the same day, Tasman applied for insurance cover (LMI) with Genworth Financial Mortgage Insurance Pty Ltd (Genworth) on behalf of the plaintiffs in respect of this loan. The insurance application included a duty of disclosure, which requires the insured to disclose every material circumstance which would influence the judgment of a prudent insurer in fixing the premium or determining whether to accept the risk. The application also provided that the lender, the Trust, is responsible for any non- disclosure by or through any mortgage managers. The insurers Genworth on 30

January 2008 notified Tasman that their application for cover was provisionally accepted, but it warned and reserved the right not to proceed should any adverse information come to light prior to receipt of the premium for the cover which was to be $9,800.00.

[9] On 30 January 2008, Tasman notified the defendant of the proposed loan and insurance cover, and on 4 February 2008 the defendant sent the relevant documentation to the borrower’s solicitors, asking them to advise of any matter which could adversely affect the second plaintiff’s interests as mortgagee. On 6

March 2008, the day before settlement of the loan, the borrower’s solicitor did

disclose to the defendant certain adverse information. Such information was disclosed in a letter faxed to the defendant at 9.39 am on 6 March 2006. The letter revealed that the guarantor of the loan Mr Tremewan was being sued in two sets of proceedings by two other lenders, and had provided a number of further personal guarantees in respect of other property transactions (the adverse information).

[10] The defendant claims that it notified Tasman of the adverse information on 7

March 2008, and received oral confirmation from Tasman that settlement of the loan advance should proceed regardless. The defendant further contends that it was not its duty to contact Genworth directly and confirm insurance cover, as the loan originated from Tasman.

[11] The defendant then recommended final draw down of the loan and the loan monies were advanced to the borrower. Soon after, the borrower defaulted on repayment of the loan and, after the sale of the property which was security for the loan, the plaintiffs suffered a shortfall loss of $606,014.11. Genworth then declined cover under the LMI on the basis that adverse information was not disclosed. The plaintiffs then commenced proceedings against the defendant to recover the loss.

[12] Essentially here, the plaintiffs plead two causes of action:

(a) The first alleges that, by not double-checking the LMI situation, the defendant was grossly negligent; and

(b) The second alleges that the defendant in a letter dated 7 March 2008 implicitly warranted to the plaintiffs that all relevant insurance disclosures had been made and that, because they had not been made, the defendant had misled and deceived under the Fair Trading Act

1986.

Defendant’s Application for Summary Judgment

[13] The present application relies on r 12.2(2) of the High Court Rules which provides that a court may give summary judgment against a plaintiff if the defendant

satisfies the court that none of the plaintiff’s causes of action can succeed. In this case, the defendant is required to show that both the claim in gross negligence and the claim for misleading and deceptive conduct under the Fair Trading Act have no prospects of success if the case went to trial.

[14] A defendant’s application for summary judgment is similar to a strike out application, the difference being that a summary judgment application requires affidavit evidence, and can be decided on material other than that in the pleadings. If the judge considers there to be material disputes of fact on the affidavit evidence, summary judgment must be refused.

[15] The Court of Appeal’s decision in Westpac Banking Corp v MM Kembla NZ Ltd[1]establishes that a defendant bears the onus of proving on the balance of probabilities that the plaintiff’s claims cannot succeed. The threshold for summary judgment is reasonably high, and will generally only be awarded where there is a complete defence to the plaintiff’s claim, or a clear answer to the claim which cannot be contradicted.[2]

[16] As I see the position, essentially the elements of the defendant’s case which

might amount to a “complete” defence here are:

(a) If it could establish that the defendant owed no duty of care, as responsibility had been entirely delegated to Tasman in respect of the loan at issue; and

(b) If it could show the action under s 9 of the Fair Trading Act 1986 is time barred.

[17] The first defence requires ascertainment of the defendant’s contractual and

tortious duties in a situation where an Approved Mortgage Manager deals with a

_{Loan, and involves a consideration of the significance of various forms of}

communication between the parties. The second defence requires ascertainment of the date on which a reasonable person would have discovered that loss was likely. Both matters are disputed by the parties and as I see it there is contradictory factual evidence before the Court with respect to each.

First Cause of Action: Gross Negligence

[18] The plaintiffs’ allege that the defendant, having become aware through the borrower’s solicitor of adverse information, was grossly negligent in approving the final draw down of the loan and releasing mortgage funds to the borrower without having proper confirmation that the insurer was informed of that adverse information and that LMI cover was still in place.

[19] Gross negligence requires a “major departure” from the standard of care expected.[3] In this situation, the defendant alleges that it owed no duty to the plaintiffs in respect of pre-settlement disclosure, and even if it did, its conduct was not sufficiently negligent as to constitute “gross negligence”. For these reasons, the defendant contends that the first cause of action cannot succeed.

[20] The defendant goes on to claim that any negligence here in failing to make full disclosure to the insurer rested with Tasman, as the agent of the third plaintiff. It contends that the third plaintiff appointed Tasman as an Approved Mortgage Manager, which relieved the defendant of their responsibility to perform the “Loan and Credit Assessment Services” in respect of loans managed by Tasman, as required by the Delegation Agreement. All matters relating to the LMI cover therefore became the responsibility of Tasman.

[21] In response, the plaintiffs maintain that the defendant should have checked the quality of the insurance cover, and ensured that all pre settlement conditions were met before approving final draw down of the loan. They say that the defendant retained an oversight role even with respect to loans originating from Tasman. In

_{reply, the defendant suggests there is no basis, in the Delegation Agreement or}

implied in contract, which would require them to perform an oversight/checking function of services performed by Tasman.

[22] At the outset, I need to say here that I am not satisfied that there is no possible cause of action for gross negligence which might lie here against the defendant. There is a reasonable argument for the plaintiffs that, even in respect of loans originated by Tasman, the defendant still retained a “gatekeeper” or oversight duty. There is at least a possible argument for the plaintiffs that the defendant had a final sign off duty with regard to all loans, before recommending the draw down to the first plaintiff.

[23] Given that the plaintiffs have a possible argument in terms of duty, in my view breach of that duty is arguable from the affidavit before the Court of Mr Woolley, a credit risk analyst for the defendant. It is clear from this that Mr Woolley received a fax containing the adverse information from the borrower’s solicitors dated 6 March 2008, and forwarded it by fax that same day to Tasman. Mr Woolley sent the same fax as an email attachment the following day to Ms Monita Chand at Tasman, and asked her if she was aware of the adverse information, whether it impacted on the borrower’s ability to be guarantor, and whether she could confirm that pre-settlement conditions had been met enabling full draw down of funds.

[24] In my view this email may ultimately be regarded possibly as telling of Mr Woolley’s oversight duty in respect of the loan. It might be said that final draw down was conditional on his receiving confirmation from Tasman that LMI cover was in place, and he had to ensure that everything was in order before he recommended settlement. This email might well be seen as inconsistent with the defendant’s current position, which now disclaims all responsibility in respect of these matters.

[25] It seems that without receiving specific written confirmation that the insurer Genworth had been notified of the adverse information and cover had been approved, Mr Woolley recommended draw down of the loan. He deposed in his affidavit evidence that he believes he would have received the necessary confirmation from Tasman, presumably via telephone, because without confirmation,

he claims he would never allow draw down of a loan and he would not have completed the required loan checklist form. He asserts that he did not obtain confirmation from Genworth directly simply because he had no relationship with that insurer.

[26] The defendant contends that Mr Woolley acted in good faith in alerting Tasman to the adverse information, and was not required to do more in this situation. I am not satisfied however at this early summary judgment stage of this proceeding that it can be said without question that these matters discharge the defendant of their duties in respect of the transaction. The defendant knew how crucial LMI cover was for these kinds of loan transactions. Mr Woolley clearly would have known that the consequences of deficient insurance could be grave for the plaintiffs. There is at least an argument that, in performing its oversight function, the defendant was required to do more to ensure that Genworth were in fact fully aware of adverse information and notwithstanding this specifically confirmed the grant of LMI cover. Referring the issue to Tasman and proceeding on the basis of what was at best, unrecorded oral confirmation, might well be seen as insufficient to relieve the defendant of their duty.

[27] While I don’t need to express a final view as to the nature of the duty owed, and whether that was breached to a sufficient standard to support an action in gross negligence here, I am satisfied that the plaintiff has at least a reasonable argument that adherence to the defendant’s duty required more in this situation. In addition, factual conflicts between the parties here in my view require proper examination at a full trial.

[28] On this basis alone, the defendant’s present application must be refused. In the interests of completeness, however, I will now turn to address briefly the plaintiff’s second cause of action.

Second Cause of Action: Misleading and Deceptive Conduct

[29] The plaintiffs claim that the defendant breached s 9 Fair Trading Act 1986, in that it engaged in misleading and deceptive conduct. The defendant in turn argues that the plaintiff’s cause of action under s 9 Fair Trading Act 1986 (the Act) is time

barred and has no prospect of success, relying on the statutory limitation contained in s 43(5) of the Act.

[30] The plaintiffs claim here is essentially that a letter from the defendant dated 7

March 2008 contained a representation that insurance cover was confirmed in accordance with the policy manual, which was false and misleading. Although parties dispute which policy manual the letter refers to, it seems that both Genworth’s and the defendant’s policy manuals require disclosure of every material circumstance. As the adverse information had not been disclosed to the insurer, which was likely to result in withdrawal of the LMI cover, it is said that this representation was misleading. The plaintiffs seek an order under s 43(2) of the Act directing payment of the $606.014.11 loss from the defendant.

[31] The defendant’s response is that the Fair Trading Act claim is time-barred and seems to rely on a limitation period outlined in Davys Burton v Thom[4]. In that case the Supreme Court determined the time period for lodging a claim begins to run when the plaintiff sustains some actual loss, harm or damage as a result of the breach of duty. The defendant argues that the relevant time was when the loan was settled without LMI cover, as that was fundamental to the depreciation of the loan as an asset for the plaintiff. Additionally, defaults on loan payments it seems started in May 2008, and it says in June 2008 it was evident that the property would sell for

less than the outstanding loan balance. Therefore, the defendant submits that the limitation period started to run at the end of June 2008 at the very latest. I disagree however, as I do not think that the Davys Burton v Thom analysis with respect to the Limitation Act 1950 can apply here to a claim under the Act, which prescribes a specific limitation period in slightly different terms. Section 43(5) as I see it can be taken as replacing the limitation period that would ordinarily apply for other claims

_{where a claim under the Act is made.}[5]

[32] Section 43(5) of the Act provides a limitation period of 3 years from the date at which the loss or damage, or the likelihood of loss or damage, was discovered or ought reasonably to have been discovered. Compared to the test in Davys Burton, as I see the position one might discover the likelihood of loss before loss is actually suffered, or one could discover loss or damage at a date after it is actually sustained. What is material is the actual or constructive date of discovery of future loss, or loss already suffered.

[33] The defendant claims that because the plaintiffs knew in mid 2008 (no later than 27 June 2008) of what it says was the likelihood of loss in respect of defaults on the loan, the limitation period expired 3 years later, at best for the plaintiffs, on 27

June 2011. As the action was commenced on 15 July 2011, any claim under s 9 is statute barred. In response, the plaintiffs contend that the likelihood of loss was only discoverable when the insurer gave notice that it was declining cover for material misrepresentation and this was not until January 2010. Up until that point, the plaintiffs believed they would be covered by insurance for the shortfall following the property sale and the enforcement of the personal guarantee.

[34] To enter summary judgment in favour of the defendants on this claim, I would need to be satisfied that the plaintiffs have no possible case under s 9 of the Act because the action is clearly time barred. The defendant would need to show here that there is no reasonable possibility that loss was first discoverable after 15

July 2008.

[35] In my view, obtaining summary judgment or strike out on the basis of the s

43(5) time bar is reasonably difficult to establish in light of the Supreme Court’s decision in Commerce Commission v Carter Holt Harvey.[6] That decision involved an appeal from a decision to strike out the plaintiff ’s claim on the basis of s 43 (5) of the Act, as it was time barred. The Supreme Court held that the time period starts to

_{run when the applicant discovers or ought to have discovered that loss or damage}

had already occurred, or is likely to occur in the future.[7] A strike out is only appropriate when the Court is quite satisfied when that occurred, so that the claim is so clearly statute barred that it should not proceed to trial.

[36] In this situation, parties dispute the time at which loss was discoverable. Discoverable in this context means the parties’ appreciation that loss was more probable than not.[8] The applicant needs to be aware that some loss or damage was likely to eventuate as a result of conduct that constitutes or would constitute a contravention of the Act.[9] In the present case I am not satisfied to the requisite standard that the plaintiffs claim is clearly time barred. There is no conclusive evidence that the potential for future loss was reasonably discoverable before 15 July

2008, as the plaintiffs had no knowledge at that time that insurance cover would be declined. Thus, although the plaintiffs may have appreciated the likelihood of a shortfall on the sale of the property and enforcement of the personal guarantee, they believed at that time they were insured for such events. There is an argument available to the plaintiffs that they could not have ‘discovered’ the likelihood of any actual loss until January 2010. That said, it is clear in my view that this limitation defence here is not a matter which is appropriately determined on a defendant’s summary judgment application.

[37] The defendant also appears to suggest here that the plaintiffs’ claim under the Act cannot possibly succeed because Tasman was the agent of the plaintiffs for the purposes of obtaining LMI cover from Genworth. Therefore, Tasman’s knowledge of adverse information and the fact that it had not been disclosed to Genworth it is said can be imputed to the plaintiff. The defendant’s case is that with that knowledge, the plaintiffs cannot later claim that they were misled by a statement containing a contrary representation. On this, the defendant’s rely on the Court of Appeal’s

_{decision in Bartle v GE Custodians Ltd,}[10] _{where it was held that Tasman acted as an}

agent for GE in arranging mortgage insurance for mortgages it originated.[11] Even putting to one side the factual differences in the arrangements in that case, the Supreme Court on appeal as I see it expressed reservations about the Court of Appeal’s conclusions on agency, but did not decide the point after finding that Tasman’s knowledge was not materially greater than that of GE.[12]

[38] For these reasons, I am also not satisfied that this agency argument suffices as a complete defence to the claim under s 9 of the Act. There is an argument available to the plaintiffs that Tasman was an independent party and not an agent of the plaintiffs in respect of obtaining mortgage insurance.

[39] For these reasons also, I find that the matter is not an appropriate one for a defendant’s summary judgment application. The plaintiff’s claim under the Act and all the evidence to support this claim in my view needs to be fully and properly tested at a substantive trial.

Conclusion

[40] It will be apparent from the conclusions I have expressed above that the

defendant’s present summary judgment application fails and is dismissed.

[41] As to costs, the plaintiffs have succeeded in opposing this application and I see no reason why they should not be entitled to costs here. Costs are therefore awarded to the plaintiffs against the defendant on this application on a category 2B basis together with disbursements as fixed by the Registrar.

_{‘Associate Judge D.I. Gendall’}

---

[1] [2001] 2 NZLR 298.

[2] At [60].

[3] R v Hamer [2005] 2 NZLR 81.
[4] Davys Burton v Thom [2008] NZSC 65 at [46].

[5] Commerce Commission v Carter Holt Harvey [2009] NZSC 120, which interprets s 43(5) of the Act, does not refer to Davys Burton or Limitation Act more generally.

[6] Commerce Commission v Carter Holt Harvey [2009] NZSC 120.

[7] At [27].
[8] At [30].
[9] At [9] per Elias CJ.
[10] Bartle v GE Custodians [2010] NZCA 174.

[11] At [245].

[12] GE Custodians v Bartle [2010] NZSC 146 at [62].