ANZ Bank New Zealand Limited v Lumsden [2014] NZHC 370 (5 March 2014)

Last Updated: 26 March 2014

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2013-441-000406 [2014] NZHC 370

BETWEEN ANZ BANK NEW ZEALAND LIMITED Plaintiff

AND BRUCE IAN LUMSDEN Defendant

Hearing: 20 February 2014

Appearances: S Barker for Plaintiff

S Smith for Defendant

Judgment: 5 March 2014

_{JUDGMENT OF ASSOCIATE JUDGE MATTHEWS}

[1] The plaintiff (the Bank) sues the defendant (Mr Lumsden) under a guarantee he gave to the Bank in respect of advances the Bank made to a partnership of which he was a member. The partnership developed 10 residential sections at Waimarama, a coastal settlement in Hawkes Bay, the Bank advancing the cost of so doing. Sales at prices sought by the partnership did not eventuate as expected. In July 2010 the partnership defaulted on its obligations under one of the banking facilities, triggering a notice of demand. This was followed by notices under the Property Law Act 2007 calling up a mortgage held by the Bank over the unsold sections, in August 2010.

[2] The partnership did not repay the balance of its indebtedness to the Bank, nor did Mr Lumsden honour his guarantee.

[3] By October 2010 the partnership had sold lots 4, 5 and 10, yielding net proceeds to the Bank of some $870,000. No sales were made from then until

_{December 2011.}

ANZ BANK NEW ZEALAND LTD v B I LUMSDEN [2014] NZHC 370 [5 March 2014]

[4] Notwithstanding the partnership and Mr Lumsden’s defaults, the Bank did not proceed at once to exercise its right to sell the remaining secured sections. In July 2011 it obtained a valuation for the sections from Logan Stone Limited, which assessed both market value and forced sale values for the remaining seven unsold lots. I return to consider this valuation in more detail later in this judgment.

[5] In November 2011 it sought marketing proposals from three real estate agencies including Tremains, which, though its agent Ms A Small, had been engaged by the partnership for the previous year to market the sections. In that period it had negotiated the sale of lot 10 to which I have referred, and also presented offers for lots 1, 2 and 3 for figures ranging between $320,000 and $350,000 all of which were rejected by the partnership.

[6] The Bank selected Tremains as the firm to market the sections, approved their recommended marketing and advertising proposals, and put the sections on the market for sale by tender. On 2 December, before this process commenced, lot 2 sold for $283,000. From 3 December to the end of January the approved marketing campaign took place. Tenders closed on 1 February. All six remaining sections sold, but well below the values assessed by Logan Stone under forced sale conditions. The full debt to the Bank was not recovered.

[7] The Bank sues Mr Lumsden for $1,450,482.22 under the partnership facility to which I have referred, plus interest from 23 October 2013 to the date of judgment. It also sues him for $31,881.93 owing under an account in his own name. Liability for the latter sum is not in dispute, though Mr Lumsden says that sales of the sections should have yielded enough to repay all indebtedness.

[8] Mr Lumsden does not dispute the validity of his guarantee, but he says that the Bank has failed to honour the duty imposed on it by s 176 of the Property Law Act 2007, which is in the following terms:

176 Duty of mortgagee exercising power of sale

(1) A mortgagee who exercises a power to sell mortgaged property, including exercise of the power through the Registrar under section

187, or through a court under section 200, owes a duty of reasonable

care to the following persons to obtain the best price reasonably obtainable as at the time of sale:

(a) the current mortgagor: (b) any former mortgagor: (c) any covenantor:

(d) any mortgagee under a subsequent mortgage:

(e) any holder of any other subsequent encumbrance.

(2) A mortgagee who exercises a power to sell mortgaged property may not become the purchaser of the mortgaged property except in accordance with section 196 or an order of a court made under section

200.

[9] Mr Lumsden says that in placing all the remaining seven sections on the market for sale by tender at once the Bank failed to take account of the small market for such properties in the Hawkes Bay in which, at the time, there were limited buyers, which led to poor prices being tendered, and he also says that the Bank should have had in place reserves to ensure that the prices received were within “a rational amount” of the valuations the Bank had obtained. Mr Smith also submits that when the tenders were assessed the Bank must have known that the process had yielded offers well below expectations and should have reconsidered before accepting them.

[10] The Bank, however, says that it followed the sale process that it was advised to follow, and that it has complied with all obligations imposed on it by law, thus complying with the duty set out in s 147. The Bank therefore seeks judgment against Mr Lumsden on a summary basis, maintaining that he does not have a defence to its claim.

The principles of summary judgment

[11] Rule 12.2 of the High Court Rules provides:

12.2 Judgment when there is no defence or when no cause of action can succeed

(1) The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to [a cause of action in the statement of claim or to a particular part of any such cause of action].

(2) ...

[12] The principles the Court is to apply on an application for summary judgment are summarised in Krukziener v Hanover Finance Ltd:¹

[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ

84 (CA).

[13] In Auckett v Falvey,² Eichelbaum J said:

On a summary judgment application, the onus is on the plaintiff to show that there is no defence. On the present facts, the plaintiffs are able to pass an evidential onus to the defendants by exhibiting the contract which on its face, entitles them to the remedy they now seek. The defendants are then in a position of having to demonstrate a tenable defence. However, the overall position concerning onus on the application is that at the end of the day the question is whether the plaintiffs have satisfied the Court as to the absence of a defence.

[14] I take from these authorities that the correct approach of the Court to analysis of the case is:

(a) Does the evidence for the plaintiff establish a position which on its face would entitle them to the remedies they now seek?

(b) If so, has the defendant demonstrated a tenable defence?

(c) The onus which shifts to the defendant is an evidential one only; the burden of proving that the defendant does not have a defence rests

_{throughout with the plaintiff.}

¹ _{Krukziener v Hanover Finance Ltd [2008] NZCA 187 at [26].}

² Auckett v Falvey HC Wellington CP296/86, 20 August 1986.

[15] If this case were to proceed to trial, the Court would consider whether the plaintiff had established the requisite elements of its claim on the balance of probabilities, the civil standard of proof. It will be immediately apparent from r 12.2 and from the passages quoted from Krukziener v Hanover Finance Ltd and Auckett v Falvey that the onus on the plaintiff, on an application for judgment on a summary basis, is substantially greater. The reason is also self evident. Entering judgment on a summary basis deprives those against whom allegations are made of a full trial at which both the plaintiff’s and the defendant’s versions of events would be fully aired in oral evidence, including cross-examination.

Principles applying to the duty under s 176

[16] In Public Trust v Ottow,³ Asher J summarised the principles applicable to a

mortgagee’s duty under s 176 as follows:

(a) A mortgagee has no duty at any time to exercise the powers of sale or possession. In default of any provision to the contrary in the mortgage, the power of sale is for the benefit of the mortgagee, who can sell at any time in accordance with the mortgagee’s convenience.

(b) The mortgagee’s duty of care is to take reasonable care to obtain the

best price reasonably obtainable at the time of sale.

(c) It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained.

(d) A mortgagee is under no obligation to improve the property or increase its value.

(e) A mortgagee sale for a price less than the current market value assessed by valuers does not, of itself, establish a breach of duty, although a large discrepancy may indicate a failure to take reasonable care.

(f) A mortgagee does not have any general duty to maintain properties prior to sale.

(g) Following the service of a Property Law Act notice there is no duty on a mortgagee to keep a guarantor informed of sales activities.

(h) The mortgagee is not entitled to sell in a hasty way at a knock-down price sufficient to pay the debt, which because of the speed of sale leads to a lower price than could otherwise be obtained.

(i) Proper care must be taken to expose the property to the market and to obtain the best price obtainable.

[17] Asher J also identified steps which indicate that a mortgagee has made reasonable efforts to obtain the best reasonably obtainable price.⁴ These are:

1. The appointment of a reputable real estate agent to market the property.

2. Obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property.

c) Marketing over a reasonably long period of time.

d) An extensive advertising and promotional campaign. e) A properly conducted auction.

6. A sale price that, given all the circumstances, can be reconciled with expert opinion as to value.

The issue

[18] Mr Smith does not take issue with any of the Bank’s actions in relation to steps (a), (b) and (d). His case is directed to the remainder. He says the sections should not all have been tendered at once, and a sale process should have been put in place which took due account of the market conditions and the warning that selling

all the sections in a short space of time would reduce achievable prices. By reference to the sixth of the identified elements, he says that sale prices were not achieved which, given all the circumstances, can in any way be reconciled with the expert opinions which the Bank had properly obtained as to the value of the sections.

[19] Mr Barker says there is no obligation on the Bank not to place all the remaining sections on the market at the same time, nor to reject any of the tendered prices and revisit the sale process.

[20] Therefore, whilst in broad terms the issue in this case is whether the Bank has complied with its duty under s 176, in the particular circumstances of this case the focus is on whether the Bank should have acted differently in two material respects, in order to fulfil its duty. First, should the Bank have placed all seven of the remaining sections on the market at the same time (in the event six only went to tender as I have said) and secondly, having received tenders at prices very substantially below the price estimated by both the valuer and the real estate agent, should the Bank have taken the sections back to the market some other way in order to endeavour to obtain higher prices, or have acted in some way other than the way it did.

The assessed values of the sections, and the results of the tender

[21] The advice given to the Bank by a registered valuer in November 2010 was that each of the remaining seven lots had a market value, and a different market value if sold under forced sale circumstances. As well, when giving a proposal to the Bank for sale of the sections, the appointed real estate agency also gave an assessment of likely sale prices, in the knowledge that a mortgagee sale was proposed.

[22] In the event, the sale prices achieved fell well short of these, as is readily

_{demonstrated in the following table:}

Market valuation Forced sale valuation assessed by valuer

Forced sale price assessed by agent

Sale price

_{Lot 1 $290,000 $247,000 $275,000 $153,000}

Lot 2 $300,000 $255,000 $275,000 $283,000 (see below)

_{Lot 3 $310,000 $264,000 $284,000 $121,000}

_{Lot 6 $330,000 $281,000 $260,000 $175,000}

_{Lot 7 $320,000 $272,000 $258,000 $152,000}

_{Lot 8 $300,000 $255,000 $243,000 $135,000}

_{Lot 9 $390,000 $332,000 $355,000 $180,000}

[23] I have included lot 2 in the table. However, it was sold the day before the tender process was opened, and represents the closest sale of any of the sections, in time, to the tender process for all sections which was adopted by the Bank.

[24] There are variations in the assessed values presented by the registered valuer and the real estate agent; in general, however, the assessed values are within around

$20,000 of each other, in some cases above and in some cases below. Little turns on this. Valuations, or considered estimates of likely sale price by real estate agents, are predictions based on a range of factors, and they can vary depending on the weight given to the factors being considered, by those making the assessments. For present purposes, the assessments are broadly the same.

[25] The sale prices achieved, however, are in all cases except lot 3 just over half

the registered valuer’s assessed forced sale values. Lot 3 sold for just under half.

Given this it is little wonder that Mr Lumsden says that something has gone seriously wrong with the process, and the Bank has not fulfilled its duty. But that is not to say that the Bank has not done so. The situation it was in was far from simple.

[26] In the registered valuer’s report there are a number of passages which Mr Smith says put the Bank on notice of facts it should have taken into account when arranging a marketing programme:

2.0.2 In undertaking the valuation of the property we have considered the current demand and supply for vacant lifestyle and residential properties within the Hawkes Bay region, together with the quality of properties being offered on other potentially competing developments. We have also then made adjustments for the subject property’s location, its views, aspect, and popularity of the area within Hawkes Bay compared to other proposed and existing developments, in particular coastal developments.

2.0.3 We have also considered the likely realisation period that will be involved to sell the properties in the current economic conditions. Because of the softening coastal and lifestyle markets the realisation period of these properties may be extended or alternatively price reduction if the vendor has to achieve a sale within a shorter time frame.

2.0.4 Waimarama was also subject to a weather bomb in April 2011 that created flooding, slips and storm surges to the general Waimarama settlement. This has dampened interest in an already soft market. Waimarama is still recovering from this event and requires further remedial work to reinstate roads and amenity areas.

2.0.5 ... The timing of [the development’s] completion and release onto the market will be impacted on significantly due to the slowing economy and international credit crunch. The market conditions have resulted in buyers becoming more discerning and less impulsive which means properties that are over priced or less appealing will be overlooked for sites with good features and that are attractively priced.

2.0.6 Lightning Ridge has a range of sites and range of price points which may cater for a wide range of the market. The majority of the market appears to be operating at the entry point level for vacant sections which is below where Lightning Ridge asking prices are currently pitched.

2.0.7 A key factor that impacts directly on this property is that the marketing period that the property has been marketed for to date has also coincided with a continued retrenchment of the market. As a result price expectations and marketing programmes have tended to lag shifts in the market. This has resulted in asking prices continually viewed as being optimistic despite being reviewed.

[27] Mr Smith says that this was fair warning to the Bank that the market for the sections was soft, for identified economic and physical reasons, and that if sales were sought within a relatively brief timeframe lower prices would be achieved. He says this means prices below the forced sale assessments, because other factors drive down prices under forced sale circumstances as a matter of course. He says, therefore, that in order to fulfil its duty, the Bank should have marketed the properties over an extended time, rather than all at once. His complaint lies not in the marketing period itself, but in the fact that the marketing period related to all the sections rather than to a lesser number of them, with a further marketing period ensuing after its close, for further sections. Drip feeding the sections onto the market in this way would have avoided the reduction in achieved sale prices about which the Bank was warned.

[28] Mr Barker accepts that the Bank received the comments and advice which I have quoted but says that selling all the sections at once by a tender process was merely a continuation of the selling process adopted by the partnership, which had all the sections on the market from the time they were developed.

[29] This submission fails to recognise the obvious difference between market forces which prevail in a forced sale environment, and the forces which prevail outside that environment. This difference is recognised in the two sets of figures provided by the valuer. I accept that the Bank was fully warned that if it proceeded to market all the sections in a short period of time a further reduction would occur. The effect of the mortgagee sale process on prices is well demonstrated by a comparison of prices achieved for lots 1, 3 and 6 to 9 with the price achieved the day before the process started for lot 2 at about 10 per cent above the valuer’s forced sale valuation, and just above the forced sale estimate given by the real estate agent.

[30] Mr Barker submits that the Bank as mortgagee, the borrower as mortgagor, and the guarantors all shared interest in obtaining the best price possible for a property being sold under forced sale conditions. This is recognised in Harts

_{Contributory Mortgages Nominee Company Ltd v Bryers,}⁵ _{where the Court said:}

⁵ Harts Contributory Mortgages Nominee Company Ltd v Bryers HC AK CP403-IMOO,

19 December 2001 at [43].

It is not lightly to be assumed that the mortgagee has acted in a way that was contrary to its own interests as well as the interests of others.

[31] He says that the discrepancy between a sale price and a valuer’s opinion does not mean that a breach of duty of care has occurred. He relies on Mitchell v Trustees Executors Ltd:⁶

(a) a discrepancy between the sale price and the valuer’s opinion may, not must, establish that a breach of duty of care has occurred. We agree. As Asher J stated in Public Trustee v Ottow, a sale for a price less than the current market value assessed by valuers does not of itself establish a breach of duty.

(b) ...

(c) If the mechanism adopted for the mortgagee sale properly tested the market, then the results obtained at auction, rather than the opinion of the valuer, must be taken as demonstrating what the market value of the property was.

[32] Based on these propositions Mr Barker’s position is that the Bank followed the correct procedure, established the market value as a result, and that the valuer was simply wrong with his earlier assessment.

[33] Mr Smith accepts the principles in these cases but not Mr Barker’s submission. He says that taking that approach would lead to a position where a valuation could be ignored with impunity and may as well not be obtained. He notes that the Court of Appeal in Mitchell allowed for the possibility of a valuer’s opinion establishing that a breach of duty of care has occurred. This was also accepted by Asher J in Public Trust v Ottow. At [33] His Honour stated that a failure to achieve an assessed valuation price at a mortgagee sale is not in itself any indication of a breach of the mortgagee’s duty of care, nor does a failure to achieve a price that a mortgagor believes a property should achieve give rise to an inference that a

mortgagee has breached its duty to take reasonable care.⁷ However, His Honour then

said:

Of course, a sale at a price which is much less than the assessed value, when there is no explanation for the discrepancy, can indicate a failure to take reasonable care.

⁶ _{Mitchell v Trustees Executors Ltd [2011] NZCA 519 at [68].}

⁷ Wallace v Bank of New Zealand HC AK CIV-2009-404-3534, 1 July 2009, Wylie J at [54].

[34] Mr Smith says that the prices obtained were much less than the values assessed by both the valuer and the real estate agent, and furthermore they were much less than the price obtained just the day before the sales programme started, for lot 2. There is no explanation for the discrepancy apart from the factors identified by the valuer which formed the basis of its warning to the Bank. This, he says, indicates a failure to take reasonable care, and he says this is sufficient to raise a defence to summary judgment being entered on this claim.

[35] Mr Barker says that if Mr Lumsden holds this view he should have produced evidence in support of his contention that a different sale process should have been followed in order for the Bank’s duty to be fulfilled, but did not take the opportunity to do so. Mr Smith’s answer to this is that the Bank’s application fails on the basis of the Bank’s own evidence.

[36] All the cases cited to me concerned the sale of one property. No case was cited where the duty under s 174 or the principles enunciated have been discussed in the context of a mortgagee sale of several similar properties, such as the six remaining sections under consideration. Nor has my own research identified any case where the duty and applicable principles have been considered in this context.

[37] Both counsel accept that the market for sections of this type had been adversely affected by the fallout from the global financial crisis and by the damaging weather patterns in the area a comparatively short time before the sale process. The Bank says that notwithstanding these factors the Bank was entitled to elect the time at which it sold. It also says that its duty must be seen in the context of the way in which the borrower was handling the loan, three key aspects of which were a lack of communication by the borrower or Mr Lumsden with the Bank as to its intentions, the fact that it was not paying interest, and the fact that it had turned down three offers from buyers at figures well above assessed market valuations. In effect the Bank says it had no realistic choice but to proceed, as its credit position was worsening.

[38] I accept that these facts are elements of the context in which the alleged breach of duty should be assessed. Other factors are the two sets of expected forced

sale prices, the sale price of lot 2, the registered valuer’s advice on the effect of a short selling period for all sections, and the actions of the Bank on receipt of the tenders. As well, another agency (Bayleys) recommended an auction of the sections with the least desirable being offered first. The reason for advising this course of action is not given in Bayleys’ marketing proposal, but may be germane to the issue of whether the Bank breached its statutory duty in this case as it would have involved competitive bidding for each section alone, albeit that there would have been a series of auctions on the same day.

[39] In my opinion, the manner in which the Bank’s duty should have been complied with when selling a number of similar properties at the same time should be decided on the basis of evidence at trial, which would no doubt include careful consideration of the contextual facts I have identified. Had there been just one property offered for sale, I would have found without hesitation that the Bank had fulfilled its duty to Mr Lumsden, but the results of the sales in this case are sufficiently far from the actual sale price of lot 2 and projections of both the independent valuer and the selling agent to raise a real doubt that following the procedures normally followed for sale of one property sufficiently fulfilled the statutory duty in this case. The proffered explanation for the price discrepancies – that the valuations were wrong – is not, in the circumstances of this case, acceptable at face value, given the sale price of lot 2. As Asher J said, it can indicate a failure to take reasonable care. I am not satisfied that the defendant does not have a defence to at least part of the Bank’s claim.

Should summary judgment be entered for liability only?

[40] The Court can enter judgment for liability, where a plaintiff has failed to establish that a defendant does not have an arguable defence in relation to the quantum of the claim. Mr Barker submits that if I formed the view that there was an arguable defence based on the sales of the sections having yielded proceeds well below those that were expected, that goes to quantum, and Mr Lumsden’s liability under his guarantee is not in issue. Mr Barker also says that neither liability nor quantum is in issue on the second cause of action, the personal debt of Mr Lumsden.

[41] During argument, Mr Smith said that judgment should not be entered at all. He said that a full examination is required, at trial, of the sale process as it is not sufficiently established that Mr Lumsden has any liability under his guarantee at all.

[42] The facts do not support that position. As the table I have set out above indicates, had all the tendered sections sold at figures assessed by the valuer or by the real estate agent, $1,651,000 or $1,675,000 would have been received. The prices achieved were $738,000 less than the valuation, and $762,000 less than the agent’s estimate, about half of the residual debt. The sum owing to the Bank under the guarantee, including interest which has accrued since the claim was filed, now exceeds $1.5m according to Mr Barker.

[43] Further, the Bank did not have a duty to achieve the entire estimated proceeds of sale under forced sale conditions. In all the cases to which I have referred, establishing that there is no expectation that pre-market valuations of themselves indicate a breach of duty by a mortgagee, the courts have found that where sales at prices up to approximately 80 per cent have been achieved, mortgagees were acting in accordance with their duties. However one looks at it, therefore, Mr Lumsden’s assertion that if the sales process had been undertaken differently he would not have any residual indebtedness to the Bank is unsustainable, and by a wide margin.

[44] I invited supplementary memoranda from counsel on this issue, and

Mr Smith now responsibly accepts that entry of judgment on liability is appropriate.

[45] In my opinion Mr Lumsden is in breach of his contract of guarantee, and the Bank is entitled to summary judgment against him for liability on the first cause of action. It is also entitled to judgment for the sum claimed on the second cause of action.

Outcome

[46] I enter judgment for the Bank against Mr Lumsden: (a) For liability on the first cause of action

(b) for the sum of $34,301.35 on his sole trader account with the Bank,

(c) for interest on that sum from 23 October 2013 thus:

(i) On the sum of $25,000 per annum, at the rate of 6.44 per cent per annum;

(ii) on the sum of $9,301.35, at the rate of 20.74 per cent per annum.

(d) I declare that Mr Lumsden is liable to pay interest from the date of judgment to the date of full payment:

(i) on the sum of $25,000 at the rate of 14.9 per cent per annum;

_{(ii) on the sum of $9,301.35 at the rate of 26.90 per cent per annum.}

Costs

[47] The Bank documentation contained specific contractual provisions in relation to costs. It has succeeded in part only in relation to the first cause of action. It has succeeded entirely on the second, but much less complex, cause of action. I invite counsel to discuss costs, but if agreement cannot be reached memoranda may be filed:

(a) By the Bank within five working days;

(b) by Mr Lumsden within a further five working days. I will then decide costs on the papers.

[48] The proceeding is adjourned to the List at Napier on 15 May 2014 for directions in relation to interlocutory steps and trial on quantum.

J G Matthews

Associate Judge

Solicitors:

Buddle Findlay, Wellington. Lawson Robinson, Napier.