Debt Buyers Limited v Hancox [2015] NZHC 668 (7 April 2015)

Last Updated: 21 April 2015

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IN THE HIGH COURTOF NEW ZEALAND TAURANGA REGISTRY

CIV-2014-470-185 [2015] NZHC 668

BETWEEN	DEBT BUYERS LIMITED Plaintiff
AND	LYNLEY JAYNE HANCOX Defendant

Hearing:	24 March 2015
Appearances:	R Catley for Plaintiff No appearance for Defendant
Judgment:	7 April 2015

_{JUDGMENT OF ASSOCIATE JUDGE R M BELL}

This judgment was delivered by me on 7 April 2015 at 11:30am

Pursuant to Rule 11.5 of the High Court Rules

.................................................

Registrar/Deputy Registrar

Solicitors:

Brent J Norling/Anna Cherkashina, Auckland, for Plaintiff

Sharp Tudhope Lawyers (Rebecca Catley) Tauranga (as agent) for Plaintiff

DEBT BUYERS LIMITED v HANCOX [2015] NZHC 668 [7 April 2015]

[1] This is an undefended summary judgment application in a claim for

$1,253,473.55, being the alleged shortfall after a mortgagee’s sale plus accrued interest. When it was first called on 23 February 2015, I was not satisfied that the plaintiff was entitled to judgment. The plaintiff has filed further affidavits and a memorandum. I was concerned about three matters:

[a] The verifying affidavit was sworn before an in-house lawyer. [b] The loan had not been accelerated.

[c] The basis for charges of $5,338.13 (a special servicing fee) and

$750.00 (an administrative fee).

The plaintiff has remedied defect [a] and has given evidence to prove [c], but on [b], acceleration, it has not shown that the defendant does not have a defence to its claim.

The verifying affidavit

[2] Steven Khov, a director of Debt Buyers Ltd, swore the verifying affidavit. The lawyer who took the affidavit is Alden Ho. My concern was that the affidavit did not comply with r 9.85(2) of the High Court Rules:

9.85 Authority to take affidavits in New Zealand

...

(2) No affidavit, other than one sworn in respect of a non-contentious proceeding, may be read or used if it was sworn before a solicitor who, at the time of taking it, was acting as—

(a) the solicitor of a party to the proceeding; or

(b) a partner in, or a solicitor employed or engaged by, the firm of the solicitor of a party to the proceeding; or

(c) the agent of the solicitor of a party to the proceeding.

[3] Mr Ho is a lawyer employed by Waterstone Insolvency Ltd, an insolvency practice. It is not an incorporated law firm. The directors of Waterstone Insolvency Ltd are Steven Khov and Damien Grant. Waterstone Insolvency Ltd’s in-house legal

team includes Brent Norling (team leader), Anna Cherkashina and Alden Ho. They regularly appear on Waterstone Insolvency Ltd’s court proceedings.

[4] The solicitors on the record in this proceeding are Brent Norling and Anna Cherkashina. Debt Buyers Ltd’s address for service is the office of Waterstone Insolvency Ltd. Mr Khov is a director of both Debt Buyers Ltd and Waterstone Insolvency Ltd.

[5] In response to my concern, Debt Buyers Ltd advised that while Mr Norling and Ms Cherkashina were its in-house counsel, Mr Ho was not, and he was therefore independent of Debt Buyers Ltd.

[6] Pragmatically, Mr Khov has sworn a fresh verifying affidavit before another lawyer. The second affidavit meets the requirement of r 9.85. Notwithstanding that, Debt Buyers Ltd contends that the original affidavit also complied. The matter therefore needs a ruling.

[7] A debt-collecting proceeding claiming $1,253,473.55 is not a non- contentious proceeding under r 9.85. A solicitor who takes an affidavit for a summary judgment application in a contentious proceeding must not be barred under r 9.85(2). The purpose of the rule is to ensure that the lawyer who takes an affidavit in a contentious proceeding is independent. That independence is required to give greater assurance that lawyers taking affidavits have satisfied themselves that deponents have read the affidavit, signed it, and are satisfied as to the truth of its contents.

[8] I find that Mr Ho is the agent of the solicitor of a party to the proceeding under r 9.85(2)(c). Mr Ho is a member of the same legal team as the solicitors on the record. In his employment with Waterstone Insolvency Ltd, Mr Ho is subordinate to Mr Norling. The employment relationship is sufficient to establish agency between Mr Ho and the solicitors on the record. Given that the deponent and the solicitor on the record are his superiors in Waterstone Insolvency, Mr Ho is not an independent lawyer in the position to question the assertions of a deponent. If Debt Buyers Ltd wishes to enlist some of Waterstone Insolvency Ltd’s staff into its

own organisation for legal proceedings, it must accept that other lawyers in Waterstone Insolvency Ltd are barred under r 9.85 from taking affidavits in its proceedings. For these reasons I find that the original verifying affidavit was inadmissible, but that the defect has been cured by Mr Khov’s second affidavit.

Was the defendant’s loan accelerated?

[9] Ms Hancox is sued under a loan contract with a call-up acceleration clause. While Ms Hancox defaulted, the lender did not give her notice calling up the balance payable under the loan. The plaintiff says, however, that that does not matter, because the mortgage given to secure the loan allows for automatic acceleration.

Facts

[10] Debt Buyers Ltd is suing as assignee of a debt Ms Hancox is said to owe

Propertyfinance Securities Ltd.

[11] On 12 April 2006 Ms Hancox borrowed $871,125 from Propertyfinance

Securities Ltd. The loan agreement has this call-up acceleration clause:

5.2 If the Borrower is in default under this agreement, then, without prejudice to its other rights and remedies, the Lender may do one or more of the following (but without being required to do so):

...

(c) require the Borrower to immediately repay the loan, pay all accrued interest on the loan and pay all other amounts payable under this agreement or any one or more of the securities or any other loan agreement between the Lender and the Borrower. ...

[12] As security for the loan, Ms Hancox gave a mortgage over her property in Mount Maunganui. The mortgagee is Propertyfinance Funding Nominees Ltd. The plaintiff has not explained the connection between Propertyfinance Securities Ltd and Propertyfinance Funding Nominees Ltd, but I infer that Propertyfinance Funding Nominees Ltd held the mortgage as nominee or trustee for Propertyfinance Securities Ltd.

[13] The term of Ms Hancox’s loan was 30 years. For the first two years, each month she was to pay interest only. For the remaining 28 years she was to make monthly payments of principal and interest.

[14] In October 2006 the amount of the loan was increased to $960,750. The term was not extended. Under the variation, she was to pay interest only for the next

18 months, but for the remaining 28 years she was to make monthly payments of principal and interest.

[15] By May 2008 Ms Hancox was in default under the loan agreement. Propertyfinance Funding Nominees Ltd served on her a notice under s 119 of the Property Law Act 2007, requiring her to remedy the defaults by 23 June 2008. The amount required to remedy the defaults was $24,680.48, being arrears as at 8 May

2008. Apparently Ms Hancox did not remedy the defaults in time. Propertyfinance Funding Nominees Ltd sold the property under its mortgage for $556,000. It received net proceeds of sale of $525,450.94 in November 2008.

[16] In addition, Propertyfinance Securities Ltd has charged $750.00 for “administrative costs and fees” and $5,338.13 for “Standby Servicers special servicing fee”.

[17] There is no evidence that before the sale was completed Propertyfinance Securities Ltd or Propertyfinance Funding Nominees Ltd wrote to Ms Hancox calling up the balance of the loan under cl 5.2.

[18] On 1 June 2010, Standby Servicers Ltd, apparently acting for Propertyfinance Securities Ltd, wrote to lawyers acting for Mr Hancox saying that the shortfall payable by Ms Hancox following the sale was $552,537.14.

[19] In August 2014, Propertyfinance Securities Ltd assigned debts under its loan book to Debt Buyers Ltd. Those apparently included Ms Hancox’s debt. Debt Buyers Ltd’s evidence includes a copy of a notice of assignment of debt and security sent to Ms Hancox in late August 2014.

[20] On 11 September 2014, Debt Buyers wrote to Ms Hancox, requiring her to pay $1,253,473.55, as the amount outstanding under the loan.

Effects of failure to call up loan

[21] In ANZ Bank NZ Ltd v Boyce, I dealt with a lender’s failure to give notice after default under a call-up acceleration clause.¹ I apply the principles in that case. A call-up acceleration clause is to be distinguished from an automatic acceleration clause, where, upon default by the borrower, the balance under a loan becomes immediately repayable without any action on the lender’s part. Under a call-up acceleration clause, the lender has a discretion whether to call up the loan. If the loan is secured by a mortgage over land, the lender may not accelerate without first giving the borrower a notice under ss 119 and 120 of the Property Law Act 2007 and

the borrower fails to remedy the defaults in time. A notice under s 119 is not a notice calling up the balance of the loan under the loan agreement. Where there is a call-up acceleration clause, the balance under the loan does not automatically fall due upon failure to remedy the defaults within the time given in the s 119 notice. Accordingly, where there is a call-up acceleration clause, in the absence of any call- up, the lender will be able to sue only for payments that have already fallen due.

[22] If the lender sells the mortgaged property under its mortgage, s 185 of the Property Law Act allows the mortgagee to recover from the proceeds of sale all amounts secured by the mortgage, whether or not they have fallen due before completion of the sale. In cases where the proceeds of sale are not enough to pay all the sums under the loan, then, except to the extent that s 185 applies, the loan will remain unaccelerated. Except to the extent that the mortgagee has recovered out of

the proceeds of sale, the balance under the loan will not have fallen due.²

[23] In cases where the mortgagee has recovered from the sale proceeds more than the accrued arrears, the balance of the proceeds will go towards payments to fall due later. In those circumstances, the mortgagee will have been pre-paid. The borrower

_{will no longer be in default under the loan, but will be in credit.}

¹ _{ANZ Bank NZ Ltd v Boyce [2014] NZHC 3185.}

² At [20]-[24].

[24] Now for this case. Debt Buyers Ltd accepts that cl 5.2 of the loan agreement is a call-up acceleration clause, not an automatic acceleration clause. It also accepts that between the date in the s 119 notice for remedying defaults, 23 June 2008, and the date of completion of the sale (apparently 4 November 2008), Propertyfinance Securities Ltd and Propertyfinance Funding Nominees Ltd did not give Ms Hancox notice accelerating the loan.

[25] Debt Buyers Ltd assumes, however, that the loan was accelerated. It has not given evidence as to how much of the proceeds of sale is to be allocated towards loan instalments that have fallen due before completion of the sale, and how much was to be applied towards the amounts still to fall due. I set out some figures, but they must be considered provisional in the absence of clearer evidence from Debt Buyers Ltd.

[26] The amounts that had fallen due by the time the sale was completed appear to be:

Amount due at 8 May 2008, claimed in s 119 notice $24,680.48.

_{Six instalments of $9,446.16 falling due on the}

29^th day of the months of May to October inclusive $56,676.96

Monthly interest as at 4 November 2008 $6,854.60

Penalty interest as at 4 November 2008 $35,946.26

_{Extra charges on sale $6,088.13}

_{Total: $130,246.43}

[27] That would appear to leave $395,204.51 to go towards payments still to fall due. Immediately after the sale, Ms Hancox was no longer in default. She was in credit.

[28] Aside from my uncertainty whether the $130,246.43 and $395,204.51 are correct, the evidence does not allow me to work out for how far into the future further instalments payable under the loan contract had been pre-paid out of the proceeds of sale. Interest would not be chargeable because Propertyfinance Securities Ltd already had the use of the funds. More evidence would be required to

work out what period of time would be covered by the pre-payment. It is only when those pre-payments have been all used up that Ms Hancox would be required to make any further payments under the term loan. Only if she then defaulted could Propertyfinance Securities Ltd use that fresh default to accelerate.

[29] I do not regard the letter of Standby Servicers Ltd of 1 June 2010 as a call-up notice under cl 5.2 of the loan agreement. For Ms Hancox, it is arguable that she was not in default at the time of that letter, because of the pre-payments from the proceeds of sale.

[30] Similarly, I do not read the letter of demand of Debt Buyers Ltd of

11 September 2014 as a call-up notice. The letter presupposes that the loan had already been accelerated in 2008. It is not a notice calling-up the loan because of fresh defaults occurring since then.

The ADLS all obligations mortgage

[31] Notwithstanding these matters, Debt Buyers Ltd says that it is not bound by cl 5.2 of the loan agreement. It can, instead, rely on provisions of the Auckland District Law Society all obligations mortgage incorporated into the mortgage.³ It refers to these:

19 When default occurs

Default occurs if:

(a) breach of obligation to pay money: any party granting the security fails to pay any part of the security monies in accordance with clause 3(a)(i)and 3(b).

...

20 Rights and powers of securityholder on default

(a) Rights and powers generally: If default occurs, the securityholder may at any time or times thereafter, in addition to any rights, remedies or powers otherwise conferred upon the securityholder by law, exercise all or any of the following rights and powers separately or any two (2) or more of them concurrently -

3. The Auckland District Law Society all obligations mortgage is registered in the South Auckland Land Registry Office under No. 2002/4119 and is expressly referred to in the operative clause of the mortgage.

(i) call up the balance of the secured monies in accordance with

clause 21; ...

21 Accelerating payment of secured monies on default

If default occurs, the secured monies will become due and payable by the party granting the security in accordance with the provisions in any agreement relating to their payment and, to the extent that there is no agreement then:

( a) in respect of any land, immediately upon expiry of a notice served under s 92 of the Property Law Act 1952 without the need for any notice or demand.⁴ ...

[Emphasis added]

[32] Debt Buyers Ltd submits that cl 21 allows automatic acceleration “without the need for any further notice or demand” and therefore cl 5.2 does not apply. It also refers to this part of cl 1.1 of the loan agreement:

1.1 If there is any conflict between any provision in the Loan Schedule

& Disclosure Statement for Consumer Credit Contracts and the

Standard No-Nonsense Loan Terms, for this agreement for any of the Securities, the Lender may determine which provision prevails.

It says that in light of the conflict between cl 5.2 of the loan contract and clause 21 of the mortgage, it is entitled to rely on the automatic acceleration provision in cl 21(a).

[33] I do not accept that interpretation of cl 21. It provides, first, that secured monies will become due and payable by the party granting any of the securities in accordance with the provisions of any agreement relating to their payment. The loan agreement in this case does provide for the secured monies to become payable by call-up upon default under cl 5.2. The rest of cl 21 applies only to the extent that there is no agreement. But as there is agreement, because of cl 5.2, the automatic acceleration provision in cl 21(a) does not apply. There is no conflict between cl 5.2 of the loan agreement and cl 21 of the ADLS all obligations mortgage because they can be read consistently.

[34] In summary, Debt Buyers Ltd has sued Ms Hancox for all monies allegedly payable under the loan, even though the loan was not accelerated. Cl 5.2 continues

4. The reference to s 92 of the Property Law Act 1952 is now to be read as a reference to s 119 of the Property Law Act 2007. See Property Law Act 2007, ss 366 and 367.

to apply, notwithstanding the provisions of the ADLS all obligations mortgage. In the absence of acceleration, Debt Buyers Ltd needs to prove when Ms Hancox became bound to start fresh payments under the loan agreement. That is when the pre-payment of principal from the proceeds of sale had been all used up. Debt Buyers Ltd has not proved that. On the evidence available, it is not possible to say whether Ms Hancox is in default under the loan agreement, and, if she is in default, for how much.

[35] Accordingly, Debt Buyers Ltd has not satisfied me that Ms Hancox does not have a defence to its cause of action.

Extra charges

[36] Debt Buyers Ltd has provided evidence explaining the charges of $5,338.13 (a special servicing fee) and $750.00 (administrative costs and fees), a total of

$6,088.13. The special servicing fee was paid to Standby Servicers Ltd for its work as agent for Propertyfinance Securities Ltd in selling the mortgaged property between July and October 2008. Propertyfinance Securities Ltd has also charged Ms Hancox $750.00 for its costs in instructing and supervising Standby Servicers Ltd. I accept that those costs are recoverable under cl 9 of the loan agreement.

Outcome

[37] The summary judgment fails because Ms Hancox has an arguable defence because of the failure to give notice calling-up the loan. I accordingly dismiss the summary judgment application. I invite Debt Buyers Ltd to file a memorandum

_{setting out its proposals for dealing with the matter from now on.}

Associate Judge R M Bell