Tolhopf v Kitchin [2013] NZHC 3122 (26 November 2013)

Last Updated: 12 February 2014

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV 2011-411-000703 [2013] NZHC 3122

BETWEEN SANDRA JEAN TOLHOPF Plaintiff

AND MICHAEL PHILIP KITCHIN Defendant

Hearing: 23, 24 September 2013 (closing submissions received 10

October 2013 and 11 November 2013)

Appearances: J L Bates for Plaintiff

M E G Macfarlane for Defendant

Judgment: 26 November 2013 at 2.30pm

_{(RESERVED) JUDGMENT OF ANDREWS J}

This judgment is delivered by me on 26 November 2013 at 2.30pm pursuant to r 11.5 of the High Court Rules.

..................................................... Registrar / Deputy Registrar

Solicitors/Counsel:

Gresson Grayson Limited, Hastings

Sainsbury Logan & Williams, Napier

TOLHOPF v KITCHIN [2013] NZHC 3122 [26 November 2013]

Introduction

[1] The plaintiff, Ms Tolhopf, owns a house property at Havelock North. In May

2005, the property was used as security for a loan to fund a property development. Ms Tolhopf alleges that the defendant, Mr Kitchin, agreed to pay both interest and principal on the loan, and that she would be no worse off in cash terms when the development was completed, but has failed to do so in full. She claims against Mr Kitchin for the shortfall between payments she made, and reimbursements made by Mr Kitchin. Mr Kitchin denies liability to Ms Tolhopf in the amount sought by her.

[2] The central issues to be determined are whether there was an agreement as alleged by Ms Tolhopf and, if so, what were the terms of that agreement? A further relevant issue is whether Ms Tolhopf and Mr Kitchin were parties to a partnership (known as the Pukeora Partnership) with a third person, Mr Rosser, and his wife. If they were parties to the Pukeora Partnership with Mr and Mrs Rosser, a further issue is what effect, if any, that has on any agreement between Ms Tolhopf and Mr Kitchin?

Factual background

[3] The following is a brief summary of relevant events, to set out the salient background facts. There is no real dispute concerning the matters set out below. It will be necessary to refer to other matters, which were in contention, when discussing the issues.

[4] In early 2005, Ms Tolhopf renewed an earlier acquaintance with Mr Kitchin. He was at the time receiving ACC payments after having suffered an injury, and had recently been diagnosed as suffering from leukaemia. The acquaintance developed into friendship, then a de facto relationship. Mr Kitchin moved into Ms Tolhopf’s home in May 2005. Ms Tolhopf had been working as a nurse, but had had to take off time for illness. Ms Tolhopf owned her own home in Havelock North, and owed about $30,000 to the ASB Bank, secured by a mortgage over her home (“the original ASB loan”).

[5] In the course of her early visits to Mr Kitchin, Ms Tolhopf learned that he had interests in a forestry project, and was involved in a property development project with Mr Rosser, in central Hawkes Bay. Mr and Mrs Rosser were present on one occasion when Ms Tolhopf visited Mr Kitchin, and there was some discussion of property devlopments.

[6] Ms Tolhopf drove Mr Kitchin and Mr and Mrs Rosser to look at several properties in central Hawkes Bay. One such property was a vacant section at Scenic Road, Pukeora (“the Scenic Road property”), which Ms Tolhopf understood Mr Rosser and Mr Kitchin had bought during 2004, and intended to build on. On another occasion, Ms Tolhopf drove Mr Kitchin to look at a section at Kyle Road, Waipukurau (“the Kyle Road property”).

[7] On 29 April 2005, Ms Tolhopf signed an application for a loan of $224,000 from Wizard Home Loans.¹ An interest-only loan of $224,000, for 25 years, was subsequently accepted. It was secured by a mortgage over Ms Tolhopf’s home (“the Wizard loan”).

[8] On 11 May 2005, Ms Tolhopf and Mr Kitchin settled the purchase of the Kyle Road property. The purchase price was $120,000. It is evident from the review of transactions undertaken after the dispute arose that the entire purchase price was paid from the Wizard loan.² Ms Tolhopf’s ASB loan was repaid, and the balance of the loan ($72,226) was initially paid into Ms Tolhopf’s bank account, but then returned to Wizard the same day. Between May 2005 and April 2006, Ms Tolhopf drew down the balance of the loan in amounts of between $5,000 and $30,000, to a total of $73,000. This money was used, in the main, to pay for modifications to Ms

Tolhopf’s home to accommodate Mr Kitchin’s special needs, improvements to the

driveway, and overseas travel by Ms Tolhopf and Mr Kitchin to Turkey.

[9] By about July 2005, Ms Tolhopf and Mr Kitchin had progressed the Kyle

_{Road development to the point of having put in foundations, framework, and a roof.}

1. Wizard Home Loans changed its name, as from 9 May 2009, to AMS Mortgage Services. In this judgment, references will be to Wizard, only.

² The review of transactions was undertaken by Mr Edwards, a chartered accountant. See [18]

and [19], below.

They then had insufficient funds for further work. Mr Rosser put money into the project. Ms Tolhopf and Mr Kitchin both worked on building the house, engaging sub-contractors on occasion. Mr Kitchin’s son-in-law and grandson also worked on the project.

[10] On 25 November 2005, Ms Tolhopf and Mr Kitchin transferred their half shares in the Kyle Road property to themselves and Mr Rosser, each holding a one- third share.

[11] On 12 December 2005, Ms Tolhopf, Mr Kitchin, and Mr Rosser signed an acceptance of a Business Flexible Facility from the National Bank. The facility was capped at $132,000, and was secured by a mortgage over the Kyle Road property.³

The limit was increased to $202,000 in January 2006, before being increased again in April 2007 to $277,000, and subsequently in November 2007 to $360,000.

[12] Financial statements were prepared for the Pukeora Partnership for the years ending 31 March 2006, 2007, and 2008. The partners were named as Ms Tolhopf and Mr Kitchin, and Mr Rosser. The statements record a loss for each year. Ms Tolhopf claimed a half share of the loss allocated to herself and Mr Kitchin in her own tax returns.

[13] In November 2006, the Kyle Road property was subdivided into two lots, the house under construction being on one of the lots. The resulting vacant lot was bought by Mr Kitchin for $85,000. A partial release of the National Bank mortgage was obtained to enable the sale to proceed.

[14] On 20 February 2008, Wizard gave Ms Tolhopf notice that there were outstanding arrears of $4,346.68 on the Wizard loan. On 28 February 2008, Mr Kitchin recorded in a document that the outstanding balance owing to the National Bank was $366,294 exclusive of interest. Mr Kitchin also recorded that “the debt

_{with the National Bank ... includes the [Scenic Road property]”.}

³ Mr Rosser said in evidence that the National Bank facility was secured over the Scenic Road property. However, it is clear on the documentary evidence that it was secured by a mortgage over the Kyle Road property.

[15] On 7 March 2008, an agreement for sale and purchase was signed by Mr Kitchin and Mr Rosser (as vendors) and Mr Rosser (as purchaser) for the purchase of the Kyle Road property by Mr Rosser or his nominee for $420,000 (GST inclusive). The sale was settled on 28 March 2008. After payments required to discharge the National Bank mortgage ($373,529), and to clear GST liabilities ($46,560) and costs, a balance of $1,873.05 remained.

[16] Wizard sent Ms Tolhopf a notice pursuant to s 119 of the Property Law Act

2007 on 23 March 2009. At that time payments of interest were outstanding for December 2008 and January, February, and March 2009, totalling $8,102.48. Costs of $690 on the notice were also payable.

[17] In December 2010, Ms Tolhopf repaid the Wizard loan, having obtained replacement funding from the ASB Bank. The amount required to pay the Wizard loan was $208,391.75. The balance of her new ASB loan, at the date of the hearing before me, was $202,000.

[18] A chartered accountant, Mr Edwards, has undertaken a review of the financial transactions concerning the Wizard loan and the Kyle Road development, and produced a report. As a result of his analysis of the Wizard loan, Mr Edwards concluded that 60 per cent of the loan was applied to the Kyle Road development, and 40 per cent was applied by Ms Tolhopf for purposes other than the development.

[19] Mr Edwards’ report assumes that Ms Tolhopf and Mr Kitchin were members of the Pukeora Partnership with Mr and Mrs Rosser. Mr Edwards identified the financial contributions by each of Ms Tolhopf and Mr Kitchin and their respective shares of the losses suffered. He set out the payment required to be made by Mr Kitchin to Ms Tolhopf in order to achieve equality as between them, under three different scenarios. In his evidence, Mr Edwards commented that he was not privy to any agreement, or the terms of any such agreement, reached between Ms Tolhopf and Mr Kitchin before embarking on the Kyle Road development.

Was there an agreement between Ms Tolhopf and Mr Kitchin?

Introduction

[20] Ms Tolhopf alleges that her agreement to use her home as security for the

Wizard loan was based on an agreement between herself and Mr Kitchin that:

(a) The funds raised by her would be used for the Kyle Road development;

(b) Mr Kitchin would repay the Wizard loan within six months; and

(c) Until such time as the Wizard loan was repaid, Mr Kitchin would meet all interest charges.

Evidence

[21] In her evidence, Ms Tolhopf said that Mr Kitchin had told her that he had personal assets (including his forestry interests) that could be used to repay the Wizard loan, if the proceeds of the sale of the Kyle Road property were insufficient to meet loan repayments. In particular, she said, Mr Kitchin told her that she would be no worse off if the sale proceeds did not cover the Wizard loan. Ms Tolhopf also said that Mr Kitchin had the skills and expertise to manage the development and to build the house, but no available cash. She was able to raise money by using her home as security, but could not afford to pay interest on a loan.

[22] Ms Tolhopf referred to a “Suggested Joint Venture Agreement” prepared by Mr Kitchin. The first version of this document appears to have been prepared on or before 14 April 2005. The second version, which is identical except for the addition of allowances for contingencies and insurance, and the clauses headed “Unforeseen Events”, and “Disputes Resolution”, and was prepared later in April 2005. The document reads as follows:

SUGGESTED JOINT VENTURE AGREEMENT FOR DISCUSSION DATED 14/4/05

BETWEEN Sandy Tolhopf of [address] AND Michael Kitchin of [address]

Preamble: Over the past two months Sandy and Michael have discussed how they might work together in the business of developing a desirable lifestyle property with the objective selling the property at a profit and sharing the proceeds equally.

Both parties bring sufficient skills to the JV to make the project work and having found a desirable central Hawkes Bay site have resolved to proceed on the basis that finance is available and that a fair and equitable agreement is satisfactorily in place after both parties have taken separate advice.

Time of agreement. SIX months from the date of signing with the provision to extend the JV on a month to month basis for a maximum of six further months.

Subject to finance the parties agree to proceed with signing a sale and purchase agreement to buy Lot 1 CT135835 Kyle Road some 3km south of Waipukurau.

PROGRESS:

(1) Obtain sale and purchase agreement. (2) Organise finance.

(3) Sign of on agreement between parties.

(4) Complete site plan.

(5) Arrange for power telephone and water. (6) Obtain building permit.

(7) Negotiate price for construction. (8) Appoint builder.

(9) Appoint sub-trades. (10) Landscape.

(11) Fence pony paddocks and horse yard.

(12) Tack room and small stable/mower shed. (13) October/Nov 05 offer for sale.

Cost estimates

Land $120,000

Driveway $6,000

Fences $3,500

Power $10,000

Water & tel $2,500

Design fees $12,000

2,200 m2 @ $1,000 $220,000

Septic tank $6,000

Water tank and pump $3,500

Landscape $2,500

Contingencies $10,000

Insurance $2,500

Estimated cost $400,000

Interest @ 9% $12,000

Value $450 to $550,000

Michael Kitchin built a similar house to this in 1993. That house recently sold for $735,000 in the Havelock North area.

The section in Kyle Road has location and is surrounded by quality houses. Waipukurau house prices are rising as are land values.

Security offered to lenders. JV Lot 1) CT 135835

MP Kitchin Lot 2 Mangapapa SD 45 ha planted in 11 year pinus radiata pruned and thinned valued by Morice & Associates CT to be advised.

Sandra Tolhopf, 4 Brookvale Road, Havelock North CT to be advised.

UNFORSEEN EVENTS

In the event of death or serious illness of either party trustees will have been instructed to complete the project backed by insurance in place with Axa and Sovereign in the case of MPK and with ASB mortgage protection insurance in the case of Sandra Tolhopf.

This clause is to ensure that the estates of either party are protected.

DISPUTES RESOLUTION

Any dispute will be settled by arbitration if necessary.

[The document is not signed or dated.]

[23] Regarding this document, Ms Tolhopf said that there was in fact no agreement to share profit equally; she said the aim of the project was to create an income and work for Mr Kitchin. She also said that, notwithstanding the reference to using the Kyle Road property and Mr Kitchin’s forestry interests as security, only her own home was used as security for the Wizard loan. However, she said, Mr Kitchin referred to the forestry interests when saying he would repay the loan.

[24] Mr Kitchin’s evidence was that Ms Tolhopf had arrived unexpectedly when Mr and Mrs Rosser were visiting him, and heard him and the Rossers discussing property developments. He further said that Ms Tolhopf was keen to be involved, and offered to help finance a development project. He said Ms Tolhopf was never asked to put up any money, but insisted that she should have a financial interest. He said she offered to put in $200,000.

[25] Mr Kitchin accepted in his oral evidence that he had told Ms Tolhopf that he would “do right by her” and that she would be no worse off at the end than she was when the project started.

[26] Mr Rosser also gave evidence concerning his visit to Mr Kitchin. His evidence was that Ms Tolhopf was interested in and supportive of the development, but he could not say that anything got to the stage of discussing an equity interest. In his oral evidence he said that no “agreement as such” was reached during the visit, but property development was widely canvassed between all four of himself and Mrs Rosser, Mr Kitchin, and Ms Tolhopf.

Submissions

[27] Mr Bates submitted that the evidence established that Mr Kitchin and Ms Tolhopf had agreed orally that she would use her home as security for a loan that enabled the Kyle Road development to proceed, and that Mr Kitchin would meet interest payments then repay the loan principal. As a result of the agreement, he submitted, Mr Kitchin avoided having to put up his forestry interests as security for the loan, he obtained employment and income, and Ms Tolhopf had the expected benefit of not having to return to work fulltime and, at the end of six months, no mortgage over her home. On the strength of that agreement, he submitted, Ms Tolhopf drew down the Wizard loan monies.

[28] Mr Macfarlane submitted that there was no such agreement; that “general statements” made by Mr Kitchin were not evidence of an agreement between Mr Kitchin and Ms Tolhopf that he would be responsible for payment of the Wizard loan. He submitted that Ms Tolhopf had converted positive talk about how Mr Kitchin would “look out for her” into a legal obligation which never existed.

Discussion

[29] I accept Mr Bates’ submissions and find that Mr Kitchin and Ms Tolhopf had an oral agreement concerning the Wizard loan. Where there is variance between the evidence of Ms Tolhop and Mr Kitchin, I accept the evidence of Ms Tolhopf. Mr Kitchin’s evidence was inconsistent, and in certain material respects (in particular as to whether an agreement was reached in the first meeting with the Rossers) not supported by Mr Rosser. I am satisfied on the evidence that at the time Ms Tolhopf applied for the Wizard loan, gave her home as security, and drew down on the loan,

it was pursuant to an agreement with Mr Kitchin that they would buy the Kyle Road section and develop it by building a house on it, for sale.

[30] It is apparent from the evidence that absent the availability of Ms Tolhopf’s home as security, Mr Kitchin would not have been able to secure funding for the property development, in which he was keen to be involved. In answer to a question from the Court as to why his forestry interests had not been put up as security (notwithstanding having been identified as being available in the “Suggested Joint Venture Agreement”), Mr Kitchin responded that Wizard “didn’t take security over that sort of thing”. He went on to say “It’s hard enough to get the bank to provide funding to harvest [the forestry interest] at the moment.”

What were the terms of the agreement between Ms Tolhopf and Mr Kitchin?

Introduction

[31] The next issue, leaving aside for the moment any issue as to whether Ms Tolhopf was a member of the Pukeora partnership, is as to the terms of the agreement between her and Mr Kitchin. Was it agreed that Mr Kitchin would meet all interest charges, and repay the Wizard loan in its entirety? Or was it agreed that Mr Kitchin would meet interest and principal to the extent that it was used for the Kyle Road development, or that he would meet only a half-share of that amount?

Evidence

[32] Ms Tolhopf’s evidence was that Mr Kitchin agreed to take responsibility for the entire Wizard loan; the agreement was, she said, that she would be no worse off after the project was completed. Mr Kitchin would meet all of the interest charges until the loan was repaid, and he assured her that he had sufficient personal assets in land, forestry interests, and life insurance to repay the advance if, at the end of the six month period, the development had not been completed and the property sold. Ms Tolhopf said that Mr Kitchin was “very insistent” on the point.

[33] It was put to Ms Tolhopf in cross-examination that Mr Kitchin had agreed only that he would be responsible for “his” half of the funds borrowed, and the

interest on that amount, but the rest was her own responsibility. Ms Tolhopf’s response to that was that she “never, ever, ever” heard Mr Kitchin say he would pay only half of the loan. Ms Tolhopf went on to refer to her annual income at the time ($23,000), on which she was supporting herself and her three daughters.

[34] Mr Kitchin’s evidence was that he had agreed to be responsible for only half of the Wizard loan; that is, to the extent, only, that Ms Tolhopf had funded his half share. He said he had never agreed that any other part of the Wizard loan was his responsibility, and that the portion of the loan spent on what he described as Ms Tolhopf’s personal expenditure was never his responsibility.

[35] Mr Kitchin further said that because of their relationship, he tried to help Ms Tolhopf with servicing the entire loan, and not just part of it, but he never promised to service the whole loan. He said that while he made it clear to Ms Tolhopf, many times, that he would try to help her as much as possible, he never accepted a legal liability to do so.

Submissions

[36] Mr Bates submitted that Ms Tolhopf’s evidence should be preferred. He submitted that it made commercial sense that Mr Kitchin had assumed responsibility for the whole Wizard loan, because Ms Tolhopf was bearing the entire risk of losing her home, while Mr Kitchin was able to undertake the project, and drew wages from it. Mr Kitchin was living with Ms Tolhopf rent-free, and Ms Tolhopf’s home had been modified in order to accommodate Mr Kitchin’s special needs. Further, he submitted, Mr Kitchin was confident that the Kyle Road project would be a success.

[37] It was untenable, Mr Macfarlane submitted, that Mr Kitchin had accepted responsibility for repaying Ms Tolhopf ’s original ASB loan, or that he would fund improvements to her house and driveway, or the overseas travel. Mr Macfarlane further submitted that, at most, Mr Kitchin had agreed that he would be responsible for Ms Tolhopf’s half share of the 60 per cent portion of the Wizard loan that was spent on the Kyle Road development.

[38] Mr Macfarlane submitted that there was no good reason why Mr Kitchin would have agreed to repay Ms Tolhopf’s original ASB loan, or to fund the modifications to her home. He further submitted that Ms Tolhopf could give no credible explanation for Mr Kitchin’s agreeing to take over the original ASB loan. While he acknowledged that consideration had passed between Ms Tolhopf and Mr Kitchin in respect of the Kyle Road development, he submitted that there was no consideration for Mr Kitchin’s accepting liability for Ms Tolhopf’s personal expenditure.

[39] Mr Macfarlane submitted that Ms Tolhopf had accepted that Mr Kitchin had made contributions to the household when he was living with her, and that she was solely responsible for the overseas travel costs.

Discussion

[40] I accept Ms Tolhopf’s evidence that there was no agreement with Mr Kitchin that he would be responsible for only his share of that portion of the Wizard loan that was used for the Kyle Road development. It is clear from her evidence that Ms Tolhopf would not have agreed to put up her home as security in the absence of Mr Kitchin’s agreement that she was to be “no worse off as a result”. I reject Mr Kitchin’s evidence that he only ever agreed to take responsibility for a half share of the Wizard loan funds used for the Kyle Road development.

[41] However, I conclude that Mr Kitchin’s agreement that Ms Tolhopf was to be “no worse off” cannot be taken as agreement that he was to be responsible for the entire loan. Had there been no Kyle Road development, Ms Tolhopf would still have been responsible for the original ASB loan. Further, Ms Tolhopf acknowledged that she was solely responsible for the overseas travel, and that the costs of modifications to the house and driveway were both of benefit to herself, and offset (at least to some extent) by Mr Kitchin’s contributions to the household.

[42] Accordingly, I conclude that Mr Kitchin agreed to be responsible for the Wizard loan expenditure on the Kyle Road development. Mr Edwards calculated that $134,906.67 (principal) and $131,336.60 (interest) should be apportioned to the

Kyle Road development. That is the appropriate starting point for considering Mr

Kitchin’s liability to Ms Tolhopf.

Was Ms Tolhopf a member of the Pukeora Partnership?

Introduction

[43] The third issue is whether Ms Tolhopf became a member of Pukeora Partnership by taking up a one-half share together with Mr Kitchin. If the answer to that question is “yes”, then it is necessary to consider what effect her membership of the partnership has on Ms Tolhopf’s claim against Mr Kitchin.

Evidence

[44] Ms Tolhopf’s evidence was that, on the occasion when she first met Mr Kitchin and the Rossers together, it was clear that Mr Kitchin and Mr Rosser were involved in some way in property, but there was no discussion whatsoever about her being part of any business arrangement. She further said that the discussions about the Kyle Road development concerned herself and Mr Kitchin, only. Mr Kitchin never said that Mr Rosser would be involved. Ms Tolhopf understood that Mr Kitchin and Mr Rosser “had bought their property at Scenic Road”, but she did not like that property and was not interested in it.

[45] In her cross-examination, Mr Macfarlane put to Ms Tolhopf that as she had claimed her share of the Pukeora Partnership losses against her personal income, she had to have been a member of the partnership with Mr Kitchin and Mr Rosser. Her response was to accept she was in a partnership “as from when Mr Rosser introduced funds to Kyle Road, not before”, and that “all [her] money had gone by then anyway, and [she] had no choice”.

[46] Mr Kitchin’s evidence was that Ms Tolhopf was a member of the Pukeora Partnership from the first meeting with the Rossers. He said that they had a joint interest in the partnership. His evidence was that Ms Tolhopf “must have known” she was a member of the partnership. He referred to “things to do with the Bank, the transfer of the Kyle Road title into Murray Rosser’s name, the registration of the

partnership with the IRD ... the presentation of the partnership statements, and the taking of her share of the partnership losses by [Ms Tolhopf] in her own tax returns and account”.

[47] In answer to questions put to him in cross-examination, Mr Kitchin said that he “always maintained we were acting as a four-way informal partnership.” Mr Kitchin later accepted that no formal agreement was reached at the first meeting with the Rossers, but said there was “a great deal of enthusiasm”.

[48] Mr Rosser’s evidence was that he could not say that “things got as far as a discussion on [Ms Tolhopf] having an equity interest at the first meeting.” He said that when Mr Kitchin told him in a telephone conversation that he and Ms Tolhopf had looked at the Kyle Road section, which Mr Kitchin said was a better prospect than Scenic Road, he suggested that the sensible thing to do was to have “both couples” contribute equally in a partnership which would involve both Scenic Road and Kyle Road. He confirmed in cross-examination that no agreement was reached at the first meeting, but said that “it was widely canvassed between all of us that we would get involved in a form of property development”.

Submissions

[49] Mr Bates submitted that Mr Kitchin’s assertions that Ms Tolhopf was a member of a partnership with himself and the Rossers did not establish that there was a partnership. He referred to the observation of Chambers J in his judgment in Clark v Libra Developments Ltd, concerning an issue as to whether the parties in that case were in a partnership:⁴

The statements of evidence and answers in cross-examination are replete with conclusory statements such as “I was clear we had a partnership” or the converse. Whether or not there was a partnership is not for a witness to assert; that is a legal question to be determined by the Court on the basis of what the parties said and did.

[50] Mr Bates submitted that the fact that Mr Kitchin prepared the “Suggested

_{Joint Venture Agreement” in April 2005, recording in the document that “over the}

⁴ Clark v Libra Developments Ltd [2007] 2 NZLR 709 (CA) at [51]. Chambers J delivered a dissenting judgment, but the judgment of the majority did not express a contrary view on this point. Leave to appeal to the Supreme Court was dismissed: [2007] 2 NZLR 709 (SC) at [13].

past two months” he and Ms Tolhopf had “discussed how they might work together in the business of developing a desirable lifestyle property”, and the absence of any reference to a partnership, the Rossers, or the Scenic Road property in that document, all pointed totally against Mr Kitchin’s assertion that a partnership was formed in early 2005. He submitted that at the time they bought the Kyle Road property and began the development, it was a project in which only Ms Tolhopf and Mr Kitchin were involved.

[51] Mr Bates further submitted that it was as late as November/December 2005, when one-third of the Kyle Road property was transferred to Mr Rosser, and Ms Tolhopf was required to sign the National Bank loan documents, that any intermingling of Ms Tolhopf’s affairs with the Rossers could be demonstrated.

[52] Mr Macfarlane submitted that it was clear on the evidence that, from the outset, Ms Tolhopf and Mr Kitchin, and Mr and Mrs Rosser, were in a partnership for developing both the Kyle Road and Scenic Road properties. He submitted that Ms Tolhopf had accepted that she expected to share in the profits of property development, adopted the financial statements of the Pukeora Partnership and claimed tax losses against her own income from “year one”. He submitted that she had “merged her interest in the partnership with Mr Kitchin so that, as between them, their respective contributions were taken into account.

Discussion

[53] I accept that, on the evidence, there was a partnership between Ms Tolhopf and Mr Kitchin, and the Rossers, from the time Mr Rosser put money into the Kyle Road property, and became a joint owner of the property; that is, in November/December 2005. However, I am also satisfied, on the evidence, that at the time the Kyle Road property was purchased (and the Wizard loan put in place) only Mr Kitchin and Ms Tolhopf were involved; it was a joint venture between the two of them, only. I reject Mr Kitchin’s evidence that Ms Tolhopf agreed to be in a partnership at the first meeting with the Rossers. His claim that there was such an agreement was not supported by Mr Rosser, and is inherently unlikely.

[54] That conclusion is supported by the evidence that it was Ms Tolhopf and Mr Kitchin who looked at the property, and bought it, in their names only. Further, the “Suggested Joint Venture Agreement” provides for participation in the Kyle Road development by Ms Tolhopf and Mr Kitchin, only. It makes no reference to Mr and Mrs Rosser, or to any other property. I note that Mr Kitchin’s response, when this was put to him in cross-examination, was that the document did not exclude the Rossers, or other development properties. I have no doubt that, had Mr Kitchin intended, when he drafted it, that the document was to refer to the Rossers and other developments, he would have ensured that it did so.

[55] Ms Tolhopf accepted that she was a member of a partnership which included the Rossers from November/December 2005. Did the partnership include the Scenic Road development? Ms Tolhopf was adamant in her evidence that it did not; she did not want to be in a venture with Mr Rosser, she did not like the Scenic Road property, and never had any intention of being involved in any development of it. The Scenic Road property was not used as security for the National Bank lending, it was the Kyle Road property that was given as security. Ms Tolhopf was not recorded on the title to the Scenic Road property as one of the owners.

[56] The only apparent indication that Scenic Road was included in the partnership of which Ms Tolhopf was a member, is the fact that it is listed as an asset in the Pukeora Partnership accounts. I do not consider this to be determinative as to Ms Tolhopf’s membership of a partnership that included Scenic Road. Although she claimed her share of the losses set out in the partnership accounts, Ms Tolhopf had no specific knowledge of the accounts, and did not sign them.

[57] In the circumstances, I accept Mr Bates’ submission that the Scenic Road property was disconnected from Ms Tolhopf. This conclusion is supported by Mr Kitchin’s typed note of 28 February 2008, in which he stated that Ms Tolhopf had “been saddled with a share of the mortgage” at Scenic Road, which was “lumped in with the mortgage” of Kyle Road. Mr Kitchin went on to say that this was “not part of her arrangement”.

[58] Accordingly, I conclude that Ms Tolhopf was a member of a partnership with Mr Kitchin and the Rossers for the development of the Kyle Road property, only, from November/December 2005.

What effect does her membership of the partnership have on Ms Tolhopf ’s

claim against Mr Kitchin?

Introduction

[59] The consequence of my conclusion that Ms Tolhopf was a member of a partnership with Mr Kitchin and the Rossers for the development of the Kyle Road property from November/December 2005, is that I must now turn to consider whether that defeats her claim against Mr Kitchin.

Submissions

[60] Mr Bates submitted that, in the event the Court found that Ms Tolhopf was a member of a partnership, the agreement between herself and Mr Kitchin displaced the presumption set out in s 27(a) of the Partnership Act 1908, that the partners in a partnership are entitled to share equally in the capital and profits of the business of the partnership and must contribute equally to the losses. Mr Bates also submitted that Mr Kitchin accepted that he had an obligation to leave Ms Tolhopf no worse off than she was before the Kyle Road development began.

[61] While Mr Macfarlane argued strenuously that Mr Kitchin did not agree to meet the interest and principal on the Wizard loan, he accepted that if the Court were to find there to be such an agreement, then Mr Kitchin could be held liable to Ms Tolhopf. He submitted, however, that such an outcome would be “extraordinary”.

Discussion

[62] Section 27 of the Partnership Act 1908 provides, as relevant:

27 Rules as to interest and duties of partners

The interests of partners in the partnership property, and their rights and duties in relation to the partnership, shall be determined, subject to any agreement (express or implied) between the partners, by the following rules:

(a) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm:

...

[63] Clearly, s 27 allows for agreements between partners as to the liability for losses. The agreement between Mr Kitchin and Ms Tolhopf, which I have found to have been reached, is such an agreement, and it displaces the presumption of equal sharing of losses.

[64] I do not accept Mr Macfarlane’s submission that this results in an extraordinary outcome. In allowing her house to be used as security for the Wizard loan, Ms Tolhopf put her only asset of any substance “on the line”. It enabled the purchase of the Kyle Road property, and it enabled Mr Kitchin to undertake the Kyle Road development, and to have employment and an income while the house was being built on the property. Had the sale of the house resulted in a profit, there would have been no question of Mr Kitchin having any liability to Ms Tolhopf.

[65] Accordingly, I conclude that Mr Kitchin’s agreement with Ms Tolhopf that he would be responsible for the Wizard loan expenditure on the Kyle Road development displaced the statutory presumption of equal sharing. Mr Kitchin is liable to Ms Tolhopf under their agreement.

What must Mr Kitchin pay Ms Tolhopf?

[66] The final question is as to the amount Mr Kitchin must pay Ms Tolhopf. As noted at [42], above, Mr Edwards calculated that Ms Tolhopf’s total expenditure on the Wizard loan (to the extent it was used for the Kyle Road development) was

$266,243.27, comprising $134,906.67 principal, and $131,336.60, being interest to

1 December 2011. From that must be deducted Mr Kitchin’s reimbursement payments, totalling $82,012.27. The amount payable by Mr Kitchin (inclusive of interest to 1 December 2011) is, therefore, $184,231.00. Mr Kitchin must also pay interest as from 1 December 2011, at 5.75 per cent per annum (the rate identified by Mr Edwards).

Result

[67] I find that Mr Kitchin is liable to Ms Tolhopf under the agreement between them, in relation to principal and interest on the Wizard loan, to the extent that it was used for the Kyle Road development. Mr Kitchin is ordered to pay Ms Tolhopf

$184,231.00, and to pay interest on that sum at 5.75 per cent per annum as from

1 December 2011.

[68] Costs should follow the event. Should counsel not be able to agree as to costs, then memoranda may be filed: on behalf of Ms Tolhopf within 10 days of this judgment, and on behalf of Mr Kitchin within a further 10 days. Unless counsel

_{indicate that a hearing is sought, a decision as to costs will be made on the papers.}

Andrews J