Debt Buyers Limited v Bradford [2016] NZHC 1182 (3 June 2016)

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BETWEEN	DEBT BUYERS LIMITED Plaintiff
AND	DONNA LEA BRADFORD First Defendant
	JASON ALEXANDER HEWETT and DONNA LEA BRADFORD as trustees of the Jasdee Trust Second Defendants
	ROBERT BURNES TRUSTEE LIMITED as former trustee of the Jasdee Trust _{Third Defendant}

Hearing:	1 June 2016
Appearances:	A Ho/Ms Cherkashina for the Plaintiff DJG Cox for the Third Defendant
_Judgment:	_{3 June 2016}

DEBT BUYERS LIMITED v D L BRADFORD, J A HEWETT AND ROBERT BURNES TRUSTEE LIMITED [2016] NZHC 1182 [3 June 2016]

[1] The plaintiff (Debt Buyers) has applied for summary judgment against the third defendant (RBTL), a solicitor trustee company and former trustee of the Jasdee Trust, through which entity former clients of Mr Burnes, (of Robert Burnes & Associates solicitors), purchased a property and for which purpose those clients borrowed funding.

[2] It is pleaded that on 29 May 2007 the defendants agreed to borrow $663,570 from Property Finance Securities Limited (PFSL). Security was provided by way of a mortgage over the property purchased at Logan Drive, Waiuku (the Waiuku property).

[3] On 2 June 2007 PFSL assigned its rights and interest in the loan and mortgage to the New Zealand Guardian Trust Company Limited (NZ Guardian), who soon after transferred those interests to a Nominee.

[5] On 10 May 2012 the Nominee exercised its rights as mortgagee and sold the property for $520,000. After costs and disbursements were deducted and the balance was paid to NZ Guardian a shortfall of $252,581.59 (the shortfall) is claimed to be due.

[7] On 29 August 2014 PFSL assigned its right, title and interest in the loan to Debt Buyers. Debt Buyers claim for the amount outstanding and payable by the defendants, including interest and for default interest, totals $450,271.48.

[8] The first and second defendants have taken no steps in this proceeding and on

$450,271.48 plus interest at the rate of 18.4 per cent from 16 November 2015 to the date of judgment, being $38,032.50.

[9] It is clause 15.3(c) of the loan agreement which is the focus of submissions on behalf of RBTL. RBTL is a company. Clause 15.3 appears to preclude RBTL for consideration as a limited liability trustee. Therefore it may be liable to meet the amount claimed and although it may not have any assets, the actions of its shareholder/director Mr Burnes may be the subject of claims against him.

[10] While acknowledging that paragraph 32 of the parties’ memorandum of mortgage refers to a limited liability trustee not assuming personal and unlimited liability it is Debt Buyers’ position that such limitation refers only to entities named in the loan agreement or memorandum as a limited liability trustee – which RBTL was not.

[11] Debt Buyers believes that RBTL has no defence to the claim and therefore seeks summary judgment. Debt Buyers relies upon clause 15.3(c) which prevents RBTL from claiming limited liability as a trustee. Debt Buyers and RBTL adopt different positions regarding relevant clauses of the loan agreement and the memorandum of mortgage signed on 29 May 2007. Those documents were signed on behalf of RBTL by Ms Franich, then, a legal executive of Robert Burnes & Associates.

15.1 If the Borrower or the Covenantor is a limited liability trustee its liability to the Lender is not personal and unlimited but will be limited to an amount equal to the value of the assets of the trust under which it has entered into this agreement as a trustee that are available to meet its liability under this agreement or the Securities.

15.3 The Borrower or the Covenantor (as the case may be) will be a limited liability trustee if:

(a) It is not a settlor, beneficiary, or object (under a power of appointment) of the trust; and

(b) It has not executed this agreement or any of the Securities in its personal capacity as well as in its capacity as trustee; and

(a) Representation of trustees: If any party granting this security or entering into any secured agreement is entering into it as the trustee of a trust then that person represents and warrants to the security holder that:

(i) powers: the party has the power under the instrument under which the party holds property on trust to enter into this instrument and/or each secured agreement;

(ii) proper purposes: the entry into this instrument and/or the secured agreements is for a proper purpose and for the benefit of the trust under which the party holds property;

(iii) right to be indemnified: the party has the right to be indemnified from the assets of the trust and that right has not been lost or impaired by any action of the party including the entry into this instrument and each secured agreement; and

(iv) all trustees approve or assent: all of the persons who are trustees of the relevant trust have approved and have signed or assented to this instrument and each secured agreement.

(b) Trustees have full and unlimited personal liability: Unless a party granting this security has been named in this instrument or in any secured agreement as a limited liability trustee (in which case the provisions of clause 32(c) will apply) every party granting this security has full and unlimited personal liability for the repayment of the secured moneys and the compliance with all obligations in this instrument and in any secured agreement.

(c) Limited liability trustees: If a party granting this security has been named in either this instrument or in any secured agreement as a limited liability trustee the liability of that party is not personal and unlimited but will be limited to an amount equal to the value of the assets of the trust under which that party has entered into this instrument as a trustee that are (or, but for default would be) available to meet that party’s liability for the secured money (the “limited amount”) unless the right of that party as a trustee to be indemnified from the assets of the trust has been lost and, as a result, the security holder is unable to recover from that party the limited amount.

[14] To succeed with its summary judgment application Debt Buyers needs to satisfy the Court that RBTL has no defence to its claim. In the particular circumstances of this case RBTL must satisfy the Court there is a sufficient basis to rebut any presumption that RBTL contracted personally and not as a “trustee” in order to be relieved of any responsibility beyond the extent of the trust assets.

[15] It is the case of Debt Buyers that none of the language used in the loan agreement is sufficient to indicate that RBTL’s liability is limited. In particular because clause 15.3(c) expressly provides that corporate trustees will not be afforded limited liability. Mr Ho for Debt Buyers submits the loan agreement does not differentiate between a company and a professional trustee company; that the word “company” encompasses RBTL which has not provided any documents or evidence of an intention of limiting its liability when the loan was negotiated.

[16] Regarding Mr Burnes’ affidavit evidence Mr Ho refers to Mr Burnes statement that he “assumed that the standard limitation of liability for limited liability trustees in clause 15.1 of the loan agreement applied to a professional trustee company in the same way that it applied to an individual professional trustee, as is normally the case”.

[17] Mr Ho comments that Mr Burnes made a wrong assumption; further, and because it can be presumed that a contracting trustee has full and personal liability¹, it is incorrect for Mr Burnes to assert that limited liability is “normally the case”. Likewise Mr Ho submits that claims on behalf of RBTL that there is a potential inconsistency between the loan agreement and the memorandum of mortgage is mistaken because as Asher J held in Debt Buyers Limited v Hancox²if there is any conflict between any provisions of the loan agreement with any security

[18] Mr Ho submits that clause 32(b) of the memorandum of mortgage creates a presumption of full and unlimited liability because RBTL was not named in either the memorandum of mortgage or in the loan agreement as a limited liability trustee. Also he notes RBTL executed both documents as trustee without expressly limiting its liability which it should have done if it was its intention to do so. While RBTL claims it is a professional trustee company it ought to have known then of the legal requirements to limit its liability such as executing any documents as a “limited liability trustee”, but that it failed to do so.

[19] RBTL’s case is that it was the common intention of the parties that it, as a professional trustee company, was to be a limited liability trustee. It says therefore that in all the circumstances it would be unconscionable to allow Debt Buyers to resile or depart from that common intention.

[20] It is RBTL’s position that the correct interpretation of the word “company” in clause 15.3(c) does not include a professional trustee company and that RBTL is a limited liability trustee pursuant to clause 15.1 of the loan agreement. Mr Burnes asserts that clause 32(c) of the memorandum of mortgage limits the liability of RBTL to an amount equal to the assets of the Jasdee Trust; that it was a common intention or assumption of the plaintiff and the trustees of the Jasdee Trust that RBTL was to be a limited liability trustee.

[21] In an affidavit in reply sworn by Mr Khov on behalf of Debt Buyers he has exhibited three examples of loan agreements completed by PFSL as lender in that same period as that loan agreement which is being considered in the present case.

[22] Mr Khov has exhibited these because they identify instances where corporate trustees have limited their liability by executing the loan agreement as a limited liability trustee and by amending or deleting clause 15.3(c) of the loan agreement.

[23] Mr Khov offers the view “that it is not common practice to assume that a corporate trustee’s liability is limited unless it is expressly included within the loan agreement and amended accordingly. In two of those three examples provided, there

is no clause 15.3(c). In the third clause 15.3(c) has a line through it and that deletion has been initialled.

[24] It is Debt Buyers submission that those changes have occurred at the request of Corporate Trustees i.e. to ensure recourse to limited liability is not precluded.

[25] Mr Ho’s submission is that there is no evidence of RBTL having taken steps to limit its liability in the way that other solicitor trustee companies may have in connection with those three examples provided by Mr Khov. In short, had a request been made by RBTL it would have been considered but there was none and in that outcome RBTL has acceded to its contractual position of not being able to claim trustee limited liability.

[26] Mr Ho submits that because the name RBTL includes the words ‘trustee limited’ that does not mean its liability is limited. Counsel refers to the decision of Baragwanath J in NZHP Holdings³where His Honour observed that in Hunt Bros v Colwell⁴Slesser LJ held that:

It is... clear now beyond dispute that the mere addition of the word ‘trustee’ by itself will not be sufficient to operate as a limitation of the liability which would otherwise arise on a person who, under a contract such as this, makes himself liable for the supply of material.

[27] While the primary thrust of RBTL’s defence is that a proper interpretation of the words “a company” in clause 15.3(c) of the loan agreement excludes an independent trustee company, if it is the Court’s view the words “a company” do in fact include an independent trust company then on behalf of RBTL it is submitted, either:

(a) RBTL is a limited liability trustee under the doctrine of estoppel by convention because it was the common assumption of the lender and

it would be unconscionable to allow Debt Buyers to resile or depart from that assumption; and/or

(b) Relief should be granted under the equitable remedy of rectification because it was the intention when the loan and security documents were executed that RBTL was to be a limited liability trustee and therefore that clause 15.3(c) should be rectified by inserting after “a company” the words “other than a professional trustee company”.

[28] In response Mr Ho submits there is no evidence of communications at the relevant time which provide a basis from which assumptions supporting those alternative arguments can be sustained. Regarding the claim of rectification Mr Ho draws support from the judgment of Associate Judge Bell in Featherstone Park

[29] In that judgment His Honour noted that before rectification could be ordered the Court needed to be satisfied that the parties formed and continued to hold a single corresponding intention of such an accord; that it continued to exist to the moment of execution of the formal instrument; and that it must be objectively apparent such that the document in question ought to be rectified.

[30] Debt Buyers rejects claims of customary practice noting there was no communication and certainly no correspondence between the parties indicating it was a matter for consideration or application.

[31] Likewise Mr Ho submits it is clear from the signed documents that there was

[32] RBTL’s position is supported by an affidavit of Ms Franich a legal executive who was formerly employed by the Robert Burnes & Associates from 2005 to 2013.

_{She confirms that on 21 May 2007 Robert Burnes & Associates received
a facsimile}

from a Mr Gough of the mortgage brokerage firm Mike Pero Mortgages advising that a home loan had been conditionally approved for the first and second defendants purchase of the Waiuku property.

[33] Thereupon Ms Franich telephoned Mr Gough and told him the purchase would be in the name of the Jasdee Trust. Mr Gough responded that he had a copy of the trust deed and would let the Bank know.

[34] Ms Franich deposes that on 29 May 2007 she signed the loan agreement, the mortgage instrument and the Auckland District Law Society memorandum of mortgage general terms and conditions. She did so as an authorised person on behalf of RBTL as trustee for the Jasdee Trust. Ms Franich deposes it was always her practice to check the loan agreement to see that it included a clause limiting the liability of the professional trustee to the value of the assets of the relevant trust, where the intended borrower trust includes a professional trustee.

[35] She assumes she must have overlooked what she states was the unusual wording of clause 15.3(c) which purports to exclude “a company” from the meaning of a “limited liability trustee” in the loan agreement. Had she noticed that exclusion she would have spoken to Mr Burnes to check whether RBTL could sign the loan agreement with that wording. She did not do so and says she must have assumed RBTL’s liability was limited to the assets of the trust in the usual way.

[36] Mr Burnes has also sworn an affidavit in opposition to the summary judgment application. He was admitted as a solicitor in 1964 and has been a sole practitioner trading as Robert Burnes & Associates since 1997. He incorporated RBTL in 2002 as a corporate professional trustee. He says it is a bare trustee with no assets. It is the corporate professional trustee of approximately 70 family trusts settled by clients of Robert Burnes.

[37] Mr Burnes says the use of the words “Trustee Limited” in RBTL’s name is

clearly intended to give notice to the world that the company is a corporate trustee.

[38] Mr Burnes says the Jasdee Trust was a typical discretionary family trust. It was settled by the first and second defendants whose beneficiaries included their children, siblings and parents. Following the establishment of the trust it purchased five properties in Auckland.

[39] Mr Burnes acted for Mr Hewett and Ms Bradford when they entered into an agreement to purchase the Waiuku property in May 2007. His instructions were to complete the purchase in the name of the Jasdee Trust.

[40] Mr Burnes deposes that RBTL had no involvement at all in the submission of Mr Hewett and Ms Bradford’s application for a home loan from PFSL for the purchase of the Waiuku property, and RBTL was never asked to provide any information concerning its financial position to PFSL, or its ability to repay any borrowing from PFSL by the Jasdee Trust. Mr Burnes states that had there been any intention on the part of PFSL that RBTL was to repay the loan to PFSL then PFSL would have sought information from RBTL as to its financial position.

[41] It is nine years since the loan document was signed. Mr Burnes cannot recall whether he reviewed the loan documentation from PFSL. He says it was his invariable practice to do so before the loan documentation was signed by clients; and that in particular where the intended borrowers included a professional trustee of a trust, it was his practice to check the loan agreement for the inclusion of a clause limiting the liability of the professional trustee to the value of the assets of the relevant trust.

[42] In this case he notes that clause 15.1 included a standard limitation of liability for a limited liability or professional trustee.

[43] He says if he had checked the loan documentation he did not notice the unusual wording of clause 15.3(c) which purports to exclude “a company” from the meaning of a “limited liability trustee”.

[44] He also observes that clause 32(c) of the Auckland District Law Society memorandum of mortgage terms and conditions included a standard limitation of the liability for professional trustees, which did not exclude companies.

[45] Mr Burnes deposes it makes no commercial sense why the limitation of liability in clause 15.1 should cover an individual professional trustee, but not a corporate professional trustee; that if he had noticed the loan agreement purported to exclude a company from the definition of the “limited liability trustee” in the loan agreement, he would have asked PFSL to confirm clause 15.3(c) did not include a professional trustee company. He always assumed RBTL’s liability was limited to the assets of the trust in the usual way.

[46] Mr Burnes deposes that Mr Hewett and Ms Bradford experienced financial difficulties in 2011 and thereafter all of the assets of the Jasdee Trust were sold privately or by mortgagee sale.

2012 because the trust was clearly insolvent and the trustees were unable to make unanimous decisions.

[48] Mr Burnes said RBTL received no communication from PFSL concerning the mortgagee sale of the Waiuku property, and he heard nothing further concerning the shortfall until RBTL was served with the current proceedings on 7 December 2015.

[49] On 18 December Mr Burnes wrote to the plaintiff’s solicitors and confirmed that RBTL was a limited liability trustee and had no assets in its own right. The response asserted that Debt Buyers’s preliminary view was that RBTL’s liability was limited to the extent of the assets of the Jasdee Trust. However by email dated 20

January 2016 Debt Buyers advised that based on clause 15.3 its position was that the liability of RBTL was personal.

15.3(c) clearly excludes RBTL from claiming limited liability; that it is clear from the judgment of Baragwanath J in NZHP Holdings⁶that the use of the word “trustee” by itself is not sufficient to operate as a limitation of liability but rather that there was a presumption in favour of personal liability which must be refuted if a person contracting as “trustee” is to be relieved of that liability beyond the extent of the trust assets.

[51] Debt Buyers says that there was no correspondence or communication between the parties regarding concerns with that clause and there is no evidence to support claims of custom or conventional practice except for that given by Mr Burnes.

[52] This Court does not think it is quite so straightforward. Although no challenge was made by RBTL to clause 15.3(c) at the time it does not necessarily follow that RBTL agreed that it would be liable in the event of a loan default. That is not what lawyer trustee companies do when agreeing to act as an independent trustee in the affairs of a client’s business. Mr Burnes’ evidence is that it was not what he consciously did in this case – nor would he have.

[53] It has been suggested that the apparent exclusion of companies from an entitlement to limited liability protection is unusual. In this case both sides have challenged the view of the other in that regard. Mr Burnes view may be characterised as one of self interest. Debt Buyers of course had nothing to do with the construction of the documents or of the circumstances giving rise to them being signed. Principles of contractual interpretation are involved. In the decision of the House of Lords in the case of Investors Compensation Scheme Limited v West

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) ... it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.

if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.

It is common for contractual language, like that of a statute, to offer more than one possible literal meaning. In that event a major consideration is what construction best conforms with settled legal principle and settled commercial practice and thus suggests the meaning most reasonably to be ascribed to contracting parties.

[55] Mr Ho submits the words of clause 15.3(c) were clear as is their natural meaning. However, that should not prevent consideration of an alternative option of conventional practice in circumstances where the use of those words contradicts usual business commonsense. In that regard it may be appropriate to review the established principles relating to the personal liability of an independent trustee who is not a settlor of the trust or has any rights of an interest in the assets of the trust.

[56] In this case and read in isolation the literal meaning of the words “a company” in clause 15.3(c) appears to suggest all companies would be excluded

from the definition of “limited liability trustee”. Perhaps that is not sufficient in this case. Perhaps an investigation is required into the background of the loan agreement and its meaning, the nature of the lending industry and relevant practices then applying; regarding the knowledge and experience of the parties and the overall commercial purpose of the contractual arrangements.

[57] Mr Cox for RBTL submits these considerations include understanding the nature and practices of the lending industry at the time; because a review of other aspects of the documents may indicate that the use of the words “a company” elsewhere demonstrates that those words were intended to mean “a company in trade”, and not a bare professional trustee company. In that regard he submits that the drafting of the definition of “limited liability trustee” in clause 15.3 has “gone amiss”. There was not, Mr Cox submits, any intention to bind RBTL to those same commitments of the Jasdee Trust because RBTL was not involved in the Waiuku property purchase or with borrowing enquiries. Mr Cox submits it defies common business sense to limit the liability of an individual independent trustee, but not an independent trustee company.

[58] Earlier the Court briefly reviewed the alternative defences raised on behalf of

[59] Regarding the former it is RBTL’s case that when the loan documentation was signed the parties acted on the common assumption that the liability of RBTL was a limited liability trustee within the limits provided in clause 15.1.

[60] Arguments regarding claims of equitable rectification consider whether the loan documentation contained the common intention that RBTL would be a limited liability trustee.

[61] It is not necessary for the Court to consider the detail of these options because of the Court’s view that the application for summary judgment should be dismissed.

[62] Debt Buyers was not a party to the circumstances which gave rise to those documents which are the main focus for present purposes. It is reasonable to infer from the copies of three other loan documents provided by Mr Khov that other professional limited liability trustees had been alert enough to the issues created by clause 15.3(c). Some evidence suggests some confusion and complication surround the exclusion of companies from limited liability trusteeship.

[63] This Court does not accept it is as plain as Debt Buyers contends. To the contrary this Court’s consideration is that the parties’ issues should be left for determination at trial.

[64] In these circumstances the Court does not consider it necessary to review the brief arguments of counsel concerning whether any judgment that Debt Buyers may have achieved upon its summary judgment application would have included interest that has accumulated since the shortfall has been unpaid. Those issues focus on whether or not the deeds of assignment by NZ Guardian Trust to PFSL and by PFSL to Debt Buyers assigned also the right to claim interest under the loan.

[65] In Her Honour’s consideration of the matter Mellon J in Debt Buyers Limited v Adamson⁹held that if NZGT had intended the assignment to include a right to claim interest then it needed to do so in clear terms, which it did not.

[66] Mr Ho submits Her Honour was wrong. It is not necessary for this Court to express a view regarding that opinion. Also, it is not clear if there has been any challenge to that judgment.

High Court of New Zealand Decisions

Debt Buyers Limited v Bradford [2016] NZHC 1182 (3 June 2016)

High Court of New Zealand

Debt Buyers Limited v Bradford [2016] NZHC 1182 (3 June 2016)