Szembrener v Pepper New Zealand (Custodians) Limited [2014] NZHC 324 (28 February 2014)

Last Updated: 4 April 2014

IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY

CIV-2014-488-000002 [2014] NZHC 324

BETWEEN MARZENA JOZEFA SZEMBRENER Plaintiff

AND PEPPER NEW ZEALAND (CUSTODIANS) LIMITED First Defendant

RICHARD GARY QUINN Second Defendant

ROCHELLE DIANNE STEPHENS and

SHAYNE THOMAS STEPHENS Third Defendants

Hearing: 26 February 2014

Appearances: M C Frogley for Plaintiff

A Barker for First Defendant

W Akel and N R Hall for Second and Third Defendants

Judgment: 28 February 2014

_{JUDGMENT OF VENNING J}

This judgment was delivered by me on 28 February 2014 at 2.15 pm, pursuant to Rule 11.5 of the

_{High Court Rules.}

Registrar/Deputy Registrar

Date...............

Solicitors: Brookfields, Auckland Beca & Co, Auckland Simpson Grierson, Auckland

Copy to: A Barker, Auckland

SZEMBRENER v PEPPER NZ (CUSTODIANS) LTD & ORS [2014] NZHC 324 [28 February 2014]

Introduction

[1] The plaintiff seeks an injunction order restraining Pepper New Zealand (Custodians) Limited (Pepper) from completing settlement of a contract to sell a property at 1229 Puketona Road, Paihia (the property) to either the second or third defendants pending determination of this proceeding.

Background

[2] The plaintiff has owned the property since October 2005. To purchase it she borrowed $420,000 which is now secured by way of a mortgage in favour of Pepper. Since November 2011 and following the death of her husband, the plaintiff failed to make regular monthly payments to Pepper. On 30 May 2013 Pepper served a Property Law Act Notice on the plaintiff. The notice expired unremedied.

[3] Pepper then determined to take the property to a mortgagee auction.

[4] Pepper obtained a registered valuation of the property which assessed the market value as at July 2013 at between $600,000 to $675,000 (inclusive of GST and chattels) but on a forced sale, at a range of between $430,000 and $480,000. Pepper instructed the New Zealand Property Auction company (NZPA) to manage the auction. NZPA in turn instructed Mr Robertson of L J Hooker to conduct the auction. It fixed the initial reserve price at $490,000.

[5] The auction was held on 27 September 2013. Bidding opened at $280,000 and moved to $320,000 where it stopped. There were two bidders, the second defendant Mr Quinn (who was bidding on behalf of the third defendants, his daughter and son-in-law), and one other. Mr Robertson paused the auction and placed a call to NZPA. NZPA advised that $320,000 was not acceptable. A reduced reserve was discussed. Unfortunately it appears a misunderstanding arose between Mr Robertson and NZPA. Mr Robertson thought NZPA had approved a new reserve price of $350,000 whereas NZPA considered they had authorised a reserve of

$450,000.

[6] When the bidding resumed it reached $335,000 (Mr Quinn’s bid). There were no further bids forthcoming from the other bidder. Mr Robertson then took Mr Quinn into a side room as the highest bidder at that point. (He had previously done the same with the other bidder who held the highest bid when the auction had stalled earlier). Mr Robertson told Mr Quinn words to the effect that $350,000 would “own” the property. Mr Quinn checked with his daughter and son-in-law that they were comfortable with that price. The auction resumed. Mr Quinn made a bid of

$350,000. Despite Mr Robertson’s efforts no further bids were forthcoming from the other party.

[7] Mr Quinn and Mr Robertson then completed the memorandum of sale. After the memorandum had been signed the auctioneer was approached by the sales person and manager and told that NZPA had agreed to sell the property for $450,000, not

$350,000. Mr Quinn insisted on proceeding and insisted his deposit cheque be accepted.

[8] Correspondence then followed between the parties’ solicitors. Pepper considered itself bound to the agreement. Its solicitors advised the plaintiff’s solicitors of that on 8 October 2013. Settlement was due for 21 October 2013.

[9] However, a notice of claim had been lodged against the title to the property by the estate of the plaintiff’s husband. Pepper sought to cancel the agreement on the basis of that notice in accordance with clause 17.1 of the agreement. The clause provided that if a notice was registered and if the vendor was, in those circumstances, unable to obtain a release of the notice by the date of completion, the vendor could cancel the agreement. That matter went to arbitration. The arbitrator determined Pepper was not able to cancel the agreement in reliance on the clause. Pepper subsequently again confirmed that it accepted it was therefore bound by the agreement to sell to Mr Quinn or his nominee, the third defendants.

[10] The plaintiff then issued these proceedings on 12 February 2014. She seeks an order setting aside the agreement with the second and third defendants and an injunction restraining Pepper from completing the sale. In the alternative she seeks

damages of not less than $150,000 on the basis of a previous offer that she says she received to purchase the property at $500,000.

Principles

[11] The principles to apply on an interim injunction application such as this are well settled. The Court considers whether there is a serious question to be tried and if there is, whether damages will be an adequate remedy, and in that context, where the balance of convenience lies. The balance of convenience can have a very wide ambit. Ultimately the grant or refusal of an interim injunction will be determined by

where the overall justice lies.¹

[12] In the event damages are an adequate remedy for the plaintiff an injunction should not normally be granted.²

Serious question to be tried

[13] In the first cause of action the plaintiff alleges that the auctioneer, Mr Robertson, had no authority to accept a lesser price than $450,000 (the lack of authority claim). There was accordingly no valid contract.

[14] In the second cause of action the plaintiff alleges that it was a breach of the agency agreement between Mr Robertson and Pepper for him to disclose the reserve price of $350,000. The auction was not validly conducted. Mr Quinn knew that and the sale should be set aside (the improper conduct claim).

[15] Next the plaintiff pleads that the executors of the estate of her deceased husband had lodged a claim against the title to the property and notes that Pepper sought to cancel the contract pursuant to a clause in the conditions of sale (the notice

_{of cancellation claim).}

¹ _{Klissers Farmhouse Bakeries Ltd v harvest Bakeries Ltd [1985] 2 NZLR 129.}

² American Cyanamid Co v Ethicon Ltd [1975] UKHL 1; [1975] AC 396, [1975] 1 All ER 504.

[16] In the fourth cause of action the plaintiff alleges that Pepper breached its common law duty to act in good faith and also breached its statutory duty under s 103A of the Property Law Act 2007. Damages are sought.

[17] In the fifth and final cause of action the plaintiff alleges that Pepper has acted unconscionably and in breach of reasonable standards of commercial practice. She seeks an order reopening the loan agreement. Again damages are sought.

[18] The notice of cancellation claim and the fourth and fifth causes of action can be put to one side for present purposes. Mr Frogley accepts the notice of claim has now been withdrawn. Pepper’s attempt to cancel the agreement in reliance on the limited provisions of cl 17.1 of the sale and purchase agreement is of no significance. Pepper never sought to set aside the agreement on the basis that its agent had no authority to make the agreement.

[19] As the fourth and fifth causes of action seek damages they cannot support the injunction sought.

[20] That leaves the lack of authority and improper conduct claims.

[21] In his initial submissions in support of the injunction Mr Frogley raised three arguments to support those causes of action against Pepper:

(a) first, that no contract eventuated from the auction;

(b) second, that the impropriety of Pepper and/or its agents was brought

to Mr Quinn’s notice during and after the auction; and

(c) that the auction was not conducted in good faith with the consequence that the second and third defendants could not be regarded as bona fide purchasers for value.

[22] The first submission above, (a), relates to the lack of authority claim. The second and third, (b) and (c), relate to the improper conduct claim.

Did a contract eventuate from the auction – the lack of authority claim

[23] In reliance on the authority of McManus v Fortesque³ Mr Frogley submitted that when a property is put up for auction subject to a reserve there is no contract if the auctioneer by mistake purports to accept a bid lower than a reserve price.

[24] McManus is however distinguishable. In that case the auction was completed but before any memorandum of sale was signed, the auctioneer realised he had made a mistake as to the reserve. The auctioneer refused to sign the memorandum of sale. It was argued that he was obliged to do so but the Court held he had no such duty where, by mistake, he had purported to accept a bid lower than the authorised reserve. That is quite different to the present case. A memorandum of agreement was signed on behalf of Pepper by its agent and Pepper has confirmed that it has ratified that contract.

[25] In his written submissions Mr Frogley also referred to the case of Fay v Miller, Williams & Co⁴ to support the submission that the contract for sale with Mr Quinn did not bind Pepper and Pepper was entitled to repudiate the contract. This submission again is met by the short response that Pepper has confirmed the contract and thereby ratified the actions of its agent.

[26] Mr Frogley suggested that when Pepper purported to ratify the contract in the email from its solicitors of 8 October 2013 it was not fully aware of the circumstances. Whether that is correct or not, the relevant facts relating to the auction are now before the Court and must have been known to Pepper for some time. Pepper supports the second and third defendant’s argument the agreement is binding. It has ratified the contract. Such a ratification is equivalent to an express

prior authority: Presentaciones Musicales SA v Secunda.⁵ Ratification is

retrospective in its effect. The contract ratified is regarded as having been made not at the time of ratification but at the time the unauthorised act was done: Bolton

_{Partners v Lambert and Presentaciones Musicales SA v Secunda.}⁶

³ _{McManus v Fortesque [1907] 2 KB 1.}

⁴ _{Fay v Miller, Williams & Co [1941] 2 All ER 18.}

⁵ _{Presentaciones Musicales SA v Secunda [1994] Ch 271.}

⁶ Bolton Partners v Lambert (1889) 41 Ch D 295 (CA), and Presentaciones Musicales SA v

Secunda.

[27] I note that Mr Baker made submissions in response to the plaintiff’s reliance on McManus v Fortesque and Fay v Miller, Williams & Co that, even if the auctioneer may not have had actual authority to sell the property, in any event he had apparent or ostensible authority. Given the ratification by Pepper it is unnecessary to consider those submissions further.

[28] I conclude the plaintiff does not have a seriously arguable case for trial on the issue of Mr Robertson’s authority to sell the property to the second and third defendants on behalf of Pepper.

The conduct of the auction – the improper conduct claim

[29] Recognising the difficulty that Pepper’s ratification of its agent’s actions created for the plaintiff Mr Frogley restructured his arguments before the Court to emphasise the improper conduct claim. He submitted that Mr Robertson’s actions amounted to bad faith. He should not have disclosed the reserve. Effectively the sale had been conducted as a private negotiation and as such Pepper had breached its duty to the plaintiff mortgagor. Mr Quinn as a real estate agent himself must have known Mr Robertson had acted improperly.

[30] In support of the submission Mr Frogley referred to a number of authorities. In Goldcel Nominees Pty Ltd v Network Finance Ltd⁷ Murphy J in the Supreme Court of Victoria considered that the obligation on a mortgagee to act in good faith with regard to the interests of the mortgagor imported a subjective element of honesty, fairness and lack of fraud or collusion into the mortgagee sale process. The Court set aside the sales by the mortgagee in that case. However, while the general proposition is non contentious, the facts of the case are quite different. The sales in that case were effectively negotiated by private treaties prior to auction, with the

purchasers having special connections to the mortgagee’s agents. The present

_{situation is quite different to that.}

⁷ Goldcel Nominees Pty Ltd v Network Finance Ltd [1983] 2 VR 257.

[31] Next, in Barns v Queensland National Bank Limited & Anor⁸ the High Court of Australia confirmed that a mortgagee must not wilfully or recklessly deal with a property in such a manner that the interests of the mortgagor are sacrificed. In that case the High Court confirmed the findings of the first instance jury that the sale was not made bona fide. The mortgagee had agreed with a mortgagor not to put into effect his power of sale for a time but subsequently, and following a quarrel between an officer of the mortgagee and the mortgagor, immediate notice was given of the intention to exercise the power. The mortgagee then sold the mortgaged properties at auction for the amount of the debt alone. There was evidence the properties were worth considerably more, the property was insufficiently advertised, and the reserve price was disclosed before and at the auction. The High Court confirmed that in the circumstances the sale was not made bona fide but recklessly. Judgment was entered for the mortgagor for the difference between the real value of the properties and the price realised at the auction. Quite apart from the significantly different facts in that case it is notable that the end result was a judgment for damages rather than an order setting the sale aside.

[32] Next, Mr Frogley referred to another High Court of Australia case Pendlebury v Colonial Mutual Life Assurance Society Ltd.⁹ In that case the Court confirmed the mortgagee had entirely disregarded the interests of the mortgagor in selling the land. Again, significantly, the remedy directed was an inquiry as to damages.

[33] Then Mr Frogley referred to the case of Corbett v Halifax plc & Ors.¹⁰ The mortgagee bank had sold Corbett’s property at mortgagee sale. Unknown to the bank one of its employees had devised a plan to buy the property because of his familiarity with it. That was in breach of the bank’s instructions to its selling agents. The property had also been sold below the best price attainable. The English Court of Appeal confirmed that equity would not intervene to set aside a conveyance of a legal estate made pursuant to a statutory power of sale unless there was some

_{element of impropriety or bad faith on the part of the mortgagee in the exercise of}

⁸ _{Barns v Queensland National Bank Limited & Anor [1906] HCA 26; [1906] 3 CLR 925.}

⁹ _{Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 677.}

¹⁰ Corbett v Halifax plc & Ors [2003] 4 All ER 180.

the power. Moreover the Court confirmed that a completed sale by a mortgagee was not liable to be set aside merely because it had been at an undervalue, impropriety was a pre-requisite. The Court reaffirmed that the purchaser would not be protected if he or she had actual knowledge of the impropriety. However, the Court of Appeal confirmed that the sale was not to be set aside, but rather directed judgment for the mortgagors for a monetary sum representing the difference in value.

[34] In the case of O’Kane v Rooney¹¹ Deeny J in the High Court of Justice of Northern Ireland granted an injunction preventing the respondents from accepting an offer and entering a contract because he considered the mortgagee (or its agents) had acted improperly. The Judge was satisfied that, despite an offer by the purchasers in a tender process to increase the figure they offered, they were told not to do so as they would be able to secure the property at that price.

[35] The principles discussed in the cases are generally not in issue. A mortgage has both statutory and common law duties to act in good faith when realising its securities. However, as Mr Frogley conceded, each case must of course turn on its facts. The facts of the present case are quite different to the authorities relied on by the plaintiff. As Mr Barker submitted it is relevant in this case that, unlike in Goldcel Nominees Pty Ltd v Network Finance Ltd for example, there was a public auction. There is no suggestion the property was not properly marketed beforehand. The reserve price was not disclosed to Mr Quinn prior to the auction. Mr Quinn had no prior knowledge or advantage over the other participants in the auction, particularly the other bidder. Indeed, on Mr Quinn’s evidence the auctioneer took the other bidder aside first when the auction stalled initially and at a stage where the other bidder was the over bidder to Mr Quinn.

[36] At its highest point on the evidence the plaintiff’s complaint is that the auctioneer communicated to Mr Quinn that $350,000 would buy the property. But I consider that leads nowhere. On the evidence, although the auctioneer told Mr Quinn that $350,000 would buy it, following that the parties returned to the auction room and the auction process continued. The auctioneer confirmed the property was

_{on the market for sale and Mr Quinn bid $350,000. The other bidder was present}

¹¹ O’Kane v Rooney [2013] NIQB 114.

and had the opportunity to overbid but did not do so. There were no more bids. Again, unlike the case of Barns v Queensland National Bank Ltd & Anor and O’Kane v Rooney, the best possible price was achieved as a result of the auction process. Rather than a private agreement for sale as suggested by Mr Frogley the sale followed the auction. The price was achieved as a consequence of the auction process. Shortly put, the property would not have been knocked down and sold to Mr Quinn if the other bidder had overbid Mr Quinn’s offer of $350,000.

[37] Mr Frogley submitted that if Mr Robertson had applied the reserve of

$450,000, the property would have been passed in, and may subsequently have sold for $450,000. But the answer to that submission is that Pepper has accepted the actions of its agent and confirmed the sale. That submission does not impeach Mr Quinn’s (or the third defendants’) right to the property. At best it may support a damages claim by the plaintiff against Pepper.

[38] While I accept the plaintiff’s claim in the second cause of action might survive a strike-out it cannot be categorised as a particularly strong claim particularly in relation to the relief sought to support the injunction of an order setting aside the sale to the second and third defendants.

Balance of convenience

[39] I turn to the balance of convenience. It is worthwhile setting out in full what Lord Diplock said in American Cyanamid Co v Ethicson Ltd concerning the adequacy of damages and the balance of convenience: ¹²

... [t]he governing principle is that the court should first consider whether if the plaintiff were to succeed at the trial in establishing his right to a permanent injunction he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant's continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable at common law would be adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff's claim appeared to be at that stage. If, on the other hand, damages would not provide an adequate remedy for the plaintiff in the event of his succeeding at the trial, the court should then consider whether, on the contrary hypothesis that the defendant were to

¹² American Cyanamid Co v Ethicon Ltd, above n 2, at 510.

succeed at the trial in establishing his right to do that which was sought to be enjoined, he would be adequately compensated under the plaintiff's undertaking as to damages for the loss he would have sustained by being prevented from doing so between the time of the application and the time of the trial. If damages in the measure recoverable under such an undertaking would be an adequate remedy and the plaintiff would be in a financial position to pay them, there would be no reason this ground to refuse an interlocutory injunction.

[40] Mr Frogley submitted that if the Court declined to grant an injunction at this stage damages would not be an adequate remedy for the plaintiff. The plaintiff would lose the opportunity to have the sale to the second and third defendants set aside. Section 184 of the Property Law Act 2007 would give them an indefeasible title once the property was conveyed to them. The plaintiff and her daughter would lose their home.

[41] However, the submission has to be seen in the context that the unfortunate reality of the situation is that, given the plaintiff’s existing default under the mortgage obligations, that was going to happen in any event. The plaintiff was going to lose her home. There was no dispute or issue that Pepper was entitled to sell the property as mortgagee. The plaintiff had herself agreed to the property going to auction. The issue is what she expected to receive from the sale.

[42] The question has to be asked what an interim injunction would practically achieve. It would prevent Pepper settling the sale to the second and third defendants. If ultimately the plaintiff succeeded and had the sale set aside then at best she would be in the position she was in immediately prior to the auction except that further interest would have accrued on the already substantial debt she owed Pepper. Inevitably the plaintiff would face a further mortgagee sale. Mr Frogley suggested that the plaintiff might be able to retain the equity in the property referring to the valuation and her evidence that she had turned down an offer of $500,000 for it. He also suggested she might be able to refinance the property.

[43] However the best evidence what the property was actually worth was the public auction conducted by L J Hooker in September. There was no suggestion that the property was not properly marketed in advance of that auction. Despite that marketing and despite the rising property market at the time the property only

attracted a limited number of parties to the auction and, in the end result, only two bidders. To the extent the plaintiff says she has lost her equity that is a monetary claim in any event.

[44] As to the prospect of the plaintiff refinancing and retaining the property, there is no evidence to suggest that that is a realistic prospect at all. Indeed such evidence that there is before the Court is to the contrary. The plaintiff acknowledged in her own affidavit in support of this application that she had agreed the property would be auctioned and that prior to the auction she was told she owed approximately

$430,000, (which would have included some of the auction costs). As in Pasquarella v National Australia Finance Ltd¹³ there can be no realistic prospect of the plaintiff retrieving the position financially.

[45] Next, Mr Frogley realistically conceded that if indeed the property had sold for $450,000 then the parties would not be before the Court. Ultimately I consider the plaintiff’s claim is for damages. They are readily assessed as the difference between the purchase price of $350,000 and the price that the plaintiff says the property was worth. I note that damages was the relief granted in a number of the cases relied on by Mr Frogley.

[46] I conclude that in the circumstances damages would be an adequate remedy for the plaintiff. Pepper is able to pay damages. On Lord Diplock’s analysis, that is an end of the matter.

[47] However, assuming for the moment that damages would not be an adequate remedy for the plaintiff, if the defendants succeed at trial would they be adequately compensated by the plaintiff’s undertaking as to damages? The answer must be no. In the event that the plaintiff failed and was unable to set aside the agreement the second and third defendants would have a substantial claim for damages against Pepper and/or the plaintiff. The plaintiff would not be in any position to pay damages to either defendant. Pepper would be entitled to be indemnified by the plaintiff in relation to any claims by the second and third defendants but the

_{indemnity would be worthless.}

¹³ Pasquarella v National Australia Finance Ltd [1987] 1 NZLR 312.

[48] The suggestion that there is adequate security in the property to meet such damages is unrealistic given that Pepper was only able to achieve $350,000 at a public auction after a two month marketing campaign. The plaintiff owes well in excess of $420,000 with interest accruing at a default rate.

[49] In reliance on the observations in O’Kane v Rooney Mr Frogley suggested that perhaps a pragmatic approach might be to grant an injunction as that would effectively force Pepper to put the property up for auction again. As a matter of principle an injunction should not be granted on such a basis. But in any event, practical issues arise. The second and third defendants might not be willing to pay

$350,000 for the property given their current situation. Given the lack of interest at the last auction the plaintiff may end up worse off. That is admittedly speculative but it is no more speculative than suggesting the property would sell for more.

[50] Considering the balance of convenience generally, Mr Frogley submitted the second defendant was not a bona fide purchaser. He had actual knowledge of the improper conduct of the auction so that his equity (and that of the third defendants) should not prevail over the plaintiff mortgagor’s equity.

[51] Mr Frogley also submitted that the Court should send a message that it would not countenance such a practice by real estate agents and that notice should be given a proper genuine public auction must be conducted, that justice of the case warranted interim relief.

[52] With respect to those submissions I consider that, even on the most favourable view of it from the plaintiff’s perspective, the evidence does not support any finding that there was any collusion between the auctioneer and Mr Quinn nor any improper action by either the second or third defendants. At most the auctioneer mistook the reserve price and, at a time the bidding had stalled, advised Mr Quinn what it was. In the circumstances however, there is little difference between what took place in this case and the usual practice of an auctioneer confirming the reserve has been met and the property is for sale. It was always open to the other bidder to overbid Mr Quinn’s bid of $350,000. The plaintiff’s complaint really is that the

property should have been passed in because it did not reach $450,000. For the reasons discussed above that leads to a claim for damages.

[53] Consideration of the status quo does not advance the plaintiff ’s position either. On one view, the status quo was that the plaintiff was not going to retain her property, and it was going to be sold.

[54] Standing back and looking at the matter overall I am satisfied that the interests of justice do not support the grant of the injunction sought in this case.

Result

[55] The application for an injunction is dismissed.

Costs

[56] I reserve the issue of costs. There may be express provisions in the security which deal with costs between the plaintiff and the first defendant. I note the plaintiff is not in receipt of legal aid. Costs on a 2B basis (with allowance for one counsel) would seem appropriate between the second and third defendants and the

_{plaintiff. However if counsel cannot agree, memoranda may be exchanged.}

Venning J