Ginger Corporation Limited v Bramwell Grossman [2014] NZHC 1301 (10 June 2014)

Last Updated: 15 July 2014

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2014-441-000025 [2014] NZHC 1301

BETWEEN	GINGER CORPORATION LIMITED Plaintiff
AND	BRAMWELL GROSSMAN Defendant

Hearing:	3 June 2014
Appearances:	G Paine for Plaintiff J M Morrison for Defendant
Judgment:	10 June 2014

_{RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITH}

[1] The plaintiff is a financier. It applies for summary judgment against the defendant firm of solicitors on liability, with quantum to be assessed by trial.

Background

[2] On 4 July 2011 the plaintiff advanced $120,000 to a company called Rainbow Industries Limited (Rainbow). The advance was secured by a third mortgage registered over the titles to three units situated in Taupo. There was a personal guarantee provided by Mr Bartells, a principal of Rainbow.

[3] The first and second mortgagees were F M Custodians Limited and Karamu Finance Co Limited. The defendants are a firm of solicitors who acted in a mortgagee sale of the three units on instruction from the first and second mortgagees, in December 2012. Apparently by inadvertence, a copy of the notice required by section of 119 of the Property Law Act 2007 (the Act) to be served on Rainbow prior to the mortgagee sale was not served on the plaintiff as subsequent

_{mortgagee prior to the mortgagee sale. It was common ground that the failure to}

GINGER CORPORATION LIMITED v BRAMWELL GROSSMAN [2014] NZHC 1301 [10 June 2014]

effect service on the plaintiff constituted a breach of s 121 of the Act, which provides immaterial part as follows:

121 Copy of notice under section 119 must be served on former mortgagor, covenantor, subsequent mortgagee, and caveator

(1) A copy of the notice served under section 119 must, as soon as possible, be served (whether by the mortgagee or receiver) on the following persons if either the mortgagee or receiver has actual notice of the name and address of the person

...

(c) any mortgagee under a subsequent mortgage, and any holder of any other subsequent encumbrance, over the mortgaged land if—

(i) the subsequent mortgage or other subsequent encumbrance is registered

(2) A failure to comply with this section does not prevent—

(a) any amounts secured by the mortgage from becoming payable;

or

(b) the exercise of the mortgagee's power to enter into possession of the mortgaged land; or

(c) the exercise of the receiver's power to manage the mortgaged land or demand and recover income from it; or

(d) the exercise of the mortgagee's or receiver's power to sell the mortgaged land.

(3) However, if there is a failure to comply with this section, the mortgagee is liable in damages for any loss arising from that failure.

[4] The plaintiff says that it was unaware of the mortgagee sale until after the sale had taken place.

[5] The effect of the mortgagee sale was to extinguish the plaintiff’s interest in

the land as third mortgagee.

[6] By September 2013, the amount owing to the plaintiff by Rainbow with interest was said to be approximately $179,000.

[7] The guarantor of the plaintiff’s loan is insolvent. In 2013 he made a formal proposal to his creditors under subpart 2 of Part 5 of the Insolvency Act 2006, and

the statement of assets and liabilities which accompanied the proposal showed assets of only $4,550 and total debts and contingent liabilities of approximately of

$1.6 million.

[8] According to an affidavit sworn by Mr Throp, a partner in the defendant firm, the amount owing to F M Custodians Limited as first mortgagee at the time of the mortgagee sale was $389,000, and the amount owing to Karamu Finance Company Limited as second mortgagee was $176,000. Creditors’ debts secured over the three units which ranked ahead of the plaintiff, therefore totalled $565,000.

[9] Mr Throp’s evidence was that the first and second mortgagees obtained a valuation report from Veitch Morison Valuers Limited on the three properties before they proceeded with the mortgagee sale. The report was dated 31 October 2012. The valuation report accorded each of the units a market value of $127,500, being

$382,500 for the three units. The report also put a value on each unit on a forced sale basis. The forced sale valuation figures ranged between $95,000 and $102,000, giving a range for the three units together of $285,000 - $306,000.

[10] The properties were advertised for sale at auction, but were passed in. Subsequently, their sale was negotiated to Twin Peak Holdings Limited, which owned other units in the same Motel complex. Mr Throp deposed that Twin Peak Holdings Limited was the only interested party. The three units were sold to Twin Peak Holdings Limited at a total price of $250,000. The $250,000 went to the first mortgagee, which still suffered a shortfall on the amount owing to it of $139,000. The second mortgagee recovered nothing from the sale.

[11] In its claim, the plaintiff alleges that the defendants, as solicitors acting for the first and second mortgagees in the mortgagee sale, owed the plaintiff a duty of care as third mortgagee to ensure that the plaintiff was fully and fairly informed of all steps the prior mortgagees were taking to enable the plaintiff to take whatever steps it considered necessary to protect its advance to Rainbow. The plaintiff alleges the defendants’ negligence has caused it loss, and in its statement of claim, seeks an inquiry into damages.

[12] In a draft statement of defence submitted with Mr Throp’s affidavit, the defendants admit that as solicitors to the first and/or second mortgagees they owed a duty to ensure their clients’ compliance with, inter alia, s 119 of the Property Law Act 2007, including service of a notice on the plaintiff as third mortgagee. They further admit that the plaintiff was not served with a copy of the s 119 notice. The draft defence pleads that the mortgagee sale resulted in losses of approximately

$315,000 to the first and second mortgagees, and that for the plaintiff to have gained anything from the sale, the units would have to have been sold for a total figure in excess of $565,000.

[13] In a reply affidavit for the plaintiff, its director Mr Michael Smith noted the apparent concession of negligence in Mr Throp’s affidavit and asserted

5 On that basis alone I understand judgment should be entered against the defendant for liability leaving quantum to be determined at a subsequent hearing.

[14] Mr Smith went on to say in his reply affidavit:

7 Acknowledging the price the property was sold for at the mortgagee sale, there was a real or substantial chance that [the plaintiff] may have purchased the property for a slightly higher price than [sic] at it was sold which may have meant [the plaintiff] would be in a position to do something further with the property as owner. Thus it is a loss of a real substantial chance.

[15] The draft statement of defence does not concede that the admitted duty of care was a duty owed by the defendants to the plaintiff. At the hearing, Mr Morrison advised that that issue might have to be argued in due course, but for the purposes of the summary judgment application the defendants were content to rely on the submission that they have an arguable case that any breach of duty on their part has not caused the plaintiff any loss.

Legal principles applicable to summary judgment applications

[16] Rule 12.2 of the High Court Rules provides that the Court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence.

[17] Rule 12.3 provides that the Court may give judgment on the issue of liability, and direct a trial of the issue of amount (at the time and place it thinks just), if the party applying for summary judgment satisfies the Court that the only issue to be tried is one about the amount claimed.

[18] Reading rules 12.2 and 12.3 together, it is implicit that judgment cannot be entered under rule 12.3 unless the plaintiff satisfies the court that the defendant has no defence on liability.

[19] The principles to be applied in considering an application for summary judgment have been clearly established.¹ In considering the plaintiff ’s application I propose to apply the following general principles, which apply to all applications by a plaintiff for summary judgment:

(a) The plaintiff must satisfy the Court that the defendants have no arguable defence (on liability) to the claim brought against them. The issue is whether there is a real question to be tried.

(b) It is generally not possible to determine disputed issues of fact based on affidavit evidence alone, particularly when issues of credibility arise. Issues of law, even though they may be complex, can, however, be determined in an application for summary judgment.

(c) Although the Court should adopt a robust approach, nevertheless summary judgment may be inappropriate where the ultimate determination turns on a judgment that can only properly be reached after a full hearing of all the evidence.

Application of summary judgment principles in this case

[20] The plaintiff does not allege that the defendant acted as its solicitors. The claim is brought solely in the tort of negligence.

¹ Pemberton v Chappell [1987] 1 NZLR 1 (CA); Grant v New Zealand Motor Corporation Ltd [1989] 1 NZLR 8 (CA) and Westpac Banking Corporation v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA).

[21] It is trite law that there can be no liability in the tort of negligence unless or until the plaintiff establishes that it has suffered some loss.²

[22] In this case, I do not think the evidence reaches the point where the plaintiff can say that the defendants have no reasonably arguable case that the plaintiff has suffered no loss. I bear in mind Mr Throp’s evidence that the three units were initially passed in at auction, and that the eventual buyer was the only interested party. Mr Smith’s evidence in his reply affidavit is essentially speculative. On the face of it, the properties at the time of sale were worth no more than $250,000 (the price paid by the only interested buyer). If the plaintiff had paid (for example)

$260,000 to acquire the units, it would have suffered an immediate loss of $10,000.

[23] For the plaintiff, Mr Paine recognised that damage is an essential ingredient in the tort of negligence. He submitted that in this case, it is beyond reasonable argument that the plaintiff lost the chance of achieving a better financial outcome because it was not forewarned of the mortgagee sale. He referred to the decision of McGechan J in Gregory v Rangitikei District Council³. In that case, the learned

Judge referred to three New Zealand cases, Gartside v Sheffield Young & Ellis⁴,

Takaro Properties Ltd v Rowling⁵, and Craig v East Coast Bays City Council⁶in support of the proposition that loss of the chance of a benefit can constitute sufficient damage for the purposes of a cause of action in negligence⁷. The Judge in Gregory noted that a plaintiff must of course prove on the balance of probabilities that the defendant caused the loss of a chance. Once that is proved, the Judge held that the valuation of the lost chance, involving as it does the weighing of contingencies, is a further and separate matter.

[24] For the defendants, Mr Morrison relied on the Court of Appeal’s analysis of

_{“loss of a chance” cases in Benton v Miller & Poulgrain (A Firm).}⁸

² Refer, for example, to Askin v Knox [1989] 1 NZLR 248 (CA) at 254: “...it is familiar law that, for the purposes of negligence in breach of a duty of care imposed by the law of torts, a cause of action does not accrue before damage is suffered”.

³ _{Gregory v Rangitikei District Council [1995] 2 NZLR 208 (HC).}

⁴ _{Gartside v Sheffield Young Ellis [1983] NZCA 37; [1983] NZLR 37 at 47 (CA).}

⁵ _{Takaro Properties Ltd v Rowling [1986] 1 NZLR 22 (CA) at 61-64.}

⁶ _{Craig v East Coast Bays City Council [1986] 1 NZLR 99 (CA) at 109.}

⁷ _{Gregory v Rangitikei District Council at above n3, at 230-231.}

⁸ Benton v Miller & Poulgrain (A Firm) [2005] 1 NZLR 66 (CA).

[25] In Benton, the defendants conducted certain transactions for Mr and Mrs Benton without giving any advice as to the implications of the transactions under the Matrimonial Property Act 1976. Following the Bentons’ separation, Mr Benton was obliged to pay Mrs Benton $90,000 to settle her property claims. He argued that if the defendants had advised him properly he would have asked Mrs Benton to sign an agreement under s 21 of the Matrimonial Property Act, declaring the relevant property to be his separate property. He further contended that Mrs Benton would have signed such an agreement, and that the defendants’ negligent advice had therefore caused him loss.

[26] The majority in the Court of Appeal (Glazebrook and William Young JJ) held that uncertainties as to how Mr Benton would have acted had proper advice been given, are to be dealt with on an all or nothing basis and decided on the balance of probabilities, while uncertainties as to how Mrs Benton would have reacted if she had been requested by Mr Benton to sign a s 21 agreement fell to be determined on loss of a chance principles. The majority held:⁹

In making a “loss of chance” assessment, broad judgments are called for. At one end of the spectrum, very low probabilities are unlikely to be reflected in an award of damages. So if the chance of avoiding an adverse event is as low as say one in ten, a Court will probably reject the claim rather than fix damages at ten percent of the cost to the plaintiff associated with those adverse events. At the other end of the spectrum that approach is sometimes, but not always, adopted. So a 90 percent chance of avoiding an adverse event may result in either complete recovery of all losses associated with that adverse event (on the theory that the chance of not avoiding those losses was sufficiently speculative to be able to be ignored) or alternatively a discount of ten percent for contingencies.

[27] In this case, Mr Paine submitted that had the plaintiff been made aware of the mortgagee sale it is entirely possible that it could have purchased the property at slightly over $250,000, which would have extinguished the first and second mortgages and left the plaintiff the owner of the units for somewhere around the units’ values.

[28] For the defendants, Mr Morrison submitted that the plaintiff has lost nothing through being unable to purchase the units at the mortgagee sale. Even if it had

⁹ Benton v Miller & Poulgrain (A Firm), above n8, at [50]

purchased the units for, say, $260,000, there is nothing in the evidence to show that that would have produced a financial gain for the plaintiff. And of course the plaintiff still has its $260,000. He submitted that there is nothing in the evidence to suggest that, given the opportunity, the plaintiff would have elected to invest the

$260,000 in these particular units, as opposed to investing the money in some other form of investment.

Discussion

[29] Applying the approach adopted by the majority of the Court of Appeal in Benton v Miller & Poulgrain (A Firm), it will be for the plaintiff to prove on the balance of probabilities how it would have acted if it had received advance notice of the mortgagee sale. The plaintiff says that the lack of prior notice deprived it of the chance of bettering its position by purchasing the property from the first mortgagee. But I do not think it can be said on the evidence which is available at this stage that it is beyond reasonable argument for the defendants that the plaintiff would have

elected not to purchase the property had it received prior notice of the sale,¹⁰ and/or

that the plaintiff’s chances of improving its financial position by buying in would have been so low that the Court at trial would be justified in finding that the plaintiff has suffered no loss.

[30] The questions of whether the plaintiff would have purchased the units, and if it would have, whether its prospects of making some financial gain could be assessed at a level high enough that the Court would not reject the claim altogether, are not questions which are suitable for resolution on a summary judgment application. It might be, for example, that the defendants will be able to adduce evidence at trial of conditions in the property market at the time, or alternative investment opportunities that were then available, which would lead the Court to conclude that the plaintiff would probably not have decided to buy the units. There is simply insufficient evidence at this stage for the Court to find that those possibilities do not raise serious

_{questions, which should go to trial in the ordinary way.}

¹⁰ That distinguishes this case from Gregory, where the Court found as a fact that it was more likely than not that the plaintiff would have succeeded in purchasing the relevant property ahead of the party to whom the council eventually sold it.

[31] The application for summary judgment is accordingly dismissed. The defendants are entitled to costs, which I award on a scale 2B basis, together with disbursements as fixed by the Registrar.

Associate Judge Smith

Solicitors:

Hughes Robertson, Wellington for Plaintiff

Bramwell Grossman, Hastings for Defendant