Ellis v Johnson [2017] NZHC 348 (7 March 2017)

Last Updated: 30 March 2017

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2016-404-2389 [2017] NZHC 348

IN THE MATTER	of the Insolvency Act 2006
IN THE MATTER	of the Bankruptcy of Richard Owen Johnson
BETWEEN	TAMARIE VELVET ELLIS Judgment Creditor
AND	RICHARD OWEN JOHNSON Judgment Debtor

Hearing:	10 February 2017
Appearances:	R C Knight and T Chubb for Judgment Creditor J B Murray for Judgment Debtor
Judgment:	7 March 2017

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE [Interim judgment]

This judgment was delivered by me on

07.03.17 at 10 a.m, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date...............}

ELLIS v JOHNSON [2017] NZHC 348 [7 March 2017]

[1] The plaintiff is a New Zealand citizen who resides in New Zealand. The defendant was born in the United States of America, and is a citizen and resident of that country. After marrying and living in the United States, the parties lived in New Zealand until their relationship ended. Mr Johnson, the defendant, then returned to the United States. The parties have been engaged in lengthy and rancorous disputes concerning relationship property and other matters. There have already been a number of decisions given by the High Court.

[2] The decision of Courtney J in Re Ellis, ex parte Johnson was the first.¹ This was an application for an order pursuant to s 55 of the Judicature Act 1908 for an order to arrest and imprison a defendant. Mr Johnson came to New Zealand for the primary purpose of visiting the couple’s children in September 2016. Shortly before Mr Johnson returned to the United States in late September, an application was made for his arrest. It was declined. While it is relevant background, it needs to be remembered that the material matters that an applicant for an arrest order in such a case has are quite different from those which are engaged when considering whether or not the departure of the party to the civil proceeding committed an act of bankruptcy by leaving New Zealand. The differences are so apparent that I do not intend to spend time discussing them further. The judgment of Courtney J therefore does not provide any assistance in the context of this case.

[3] The next judgment was that of Asher J in Johnson v Johnson.² In that case, the Court was concerned with an application that Ms Ellis had filed for orders relating to matrimonial property. Mr Johnson applied for an order staying those proceedings. In essence, the parties had assets both in New Zealand and Oregon. If determined by a New Zealand Court, the Property (Relationships) Act 1976 (“PRA”) would govern those assets. Mr Johnson argued that the New Zealand Court should not determine issues relating to most of the PRA assets because the parties’ claims to those assets had already been determined by the Circuit Court of the State of Oregon. He claimed issue estoppel applied.

[4] The Judge did not accept the arguments put forward by Mr Johnson. His conclusion was that the judgment in the Oregon Court had been obtained as a result of false statements which were recklessly made. Therefore, the Oregon judgment did not give rise to an issue estoppel, having been obtained by fraud.³

[5] The Judge then went on to consider the relationship property issues. He concluded that both of the parties had appropriated cash assets that were part of the divisible property. In the case of Mr Johnson, the Judge concluded that a total of US $269,132.84 had been acquired. The Judge took the view that Mr Johnson had taken those monies to ensure that he was in control of them and that Ms Ellis would

not be able to access them.⁴

[6] The Judge recorded that Mr Johnson said that the money had been transferred to trusts in the United States and that it was no longer under his control. It was instead being held by trustees for the benefit of the couple’s children. The Judge made orders ordering Mr Johnson to pay a sum or transfer property to Ms Ellis to compensate her for the transfers. The approach he took was that the monies that Mr Johnson had transferred to unknown third parties were to be treated as having

been dissipated by him under s 18C of the PRA⁵ and that Ms Ellis should receive

compensation for their non-availability for division.

[7] In a subsequent judgment, Asher J concluded that the result of the compensatory order meant that Ms Ellis was owed $169,215.22, plus use of money interest of $38,121.61 and costs of $114,787.70. He entered judgment against Mr Johnson for those amounts.

[8] On 25 August 2016, counsel for Ms Ellis wrote to the solicitors for Mr Johnson appending a copy of the sealed judgment to their letter and making demand for payment. This was followed by a bankruptcy notice, which was issued by the High Court on 21 September 2016. They also filed an adjudication application on 22 September 2016 based on the grounds that Mr Johnson was about

to leave the country. Mr Johnson’s proposed departure was also the basis for the

application for the order to arrest and imprison that Courtney J dealt with.

[9] On 26 September 2016, the bankruptcy notice was served on Mr Johnson. On the same day, a process server attempted to serve Mr Johnson with adjudication proceedings at the place where he was residing. He would not answer the door but the process server said that she could clearly hear his voice with the distinctive accent from outside the building. That evidence is not directly refuted by Mr Johnson. It may be that it was in the nature of reply evidence. However, he could have sought leave to file an affidavit refuting it. Nor did he require the process server who had given the evidence to be made available for cross-examination.

[10] The following day, 27 September 2016, Mr Johnson left New Zealand. He has not returned. He has since been served with the adjudication proceedings out of the jurisdiction and has filed an intention to oppose the adjudication proceedings. That application, together with an application to set aside the bankruptcy notice, was heard by me on 10 February 2017.

[11] In the meantime Mr Johnson has filed a notice of appeal seeking to reverse the orders that Asher J made for the order for a compensatory adjustment to be made in the PRA proceedings and consequent orders setting aside the interests and costs orders that the Judge made.

[12] The questions that arise for determination following the hearing before me are these. First, in respect of the application for adjudication, the defendant denies that he has committed an act of bankruptcy as described in s 20 of the Insolvency Act 2006 (“IA”), which is to the following effect:

20 Departure from New Zealand

A debtor commits an act of bankruptcy if the debtor takes any of the following steps with intent to defeat or delay his or her creditors:

(a) departs, attempts to depart, or prepares to depart, from New

Zealand:

(b) if the debtor is already outside New Zealand, remains there.

The second issue is whether the Court ought to defer the effect of the bankruptcy notice that was served on Mr Johnson, pending the hearing of the appeal against the orders made by Asher J. This will only need to be considered if the Court declines the application for adjudication based upon a breach of s 20.

Departure from New Zealand with intent to defeat or delay creditors

[13] There is no doubt that, as at the date when Mr Johnson left New Zealand, (27

September 2016), he knew of the existence of the judgment. He owed the amount of the judgment referred to above to Ms Ellis, was a debtor of Ms Ellis and therefore a debtor within the meaning of s 20 of the Act.

[14] The arguments which counsel for Mr Johnson, Mr Murray, raised in his commendably succinct submissions were that Mr Johnson has always been an American citizen and he only came to New Zealand in 2010 from the United States

12 years after he married Ms Ellis. The reason he left New Zealand was to return home. That was his purpose in departing New Zealand and not the intent to defeat or delay his creditors, Mr Murray said.

[15] In support of that submission, Mr Murray pointed out that, on 23 August

2016, Mr Johnson emailed Ms Ellis from the United States informing her that he would be back in New Zealand between 2 - 27 September. He noted that he had not seen his children for three months and that they were his only tie to New Zealand. This communication, Mr Murray contended, showed that Mr Johnson never intended staying here. It was a temporary return.

[16] Mr Murray said that Mr Johnson’s departure from New Zealand was to enable him to return to his residence in the United States, where he had been living for more than six months working and seeking work.

[17] I accept that, because Mr Johnson resides in the United States and appears to have only come here for a limited period, it is open on the evidence to say that Mr Johnson returned to the United States at the date which he had anticipated when he made his travel bookings.

[18] The issue that arises therefore is the following. Even if the actions of Mr Johnson may have had the effect of delaying or defeating a creditor, should the application be dismissed on the ground that Mr Johnson’s intent was not to bring about that cause of action, but to return to his home in the United States? It apparently is not disputed that his departure would in fact have the effect of delaying or defeating a creditor. Mr Johnson’s counsel’s submissions do not say otherwise.

[19] Mr Knight, counsel for Ms Ellis, pointed to the early history of Mr Johnson as evidencing an intention to defeat or delay creditors. As well as being uncooperative, he took steps to obtain her share of the relationship property and also sent funds out of the jurisdiction without disclosing where they were. He further referred to the circumstance of an attempt to evade service of the bankruptcy notice which the service agent reported.

[20] When considering the effect of the evidence that the parties have put forward and the inferences to be drawn from it, I consider that I am able to take into account any evidence legitimately before the Court which provides information about Mr Johnson’s state of mind with regard to the claims which his former wife has brought against him. In the case which Ms Ellis has brought, there is reference to the findings that Asher J made, which are to the effect that Mr Johnson obstructed the claims which his former wife brought. There is reference in that evidence to findings that the Judge made that the money which was taken out of the country had been placed beyond her reach. While it may not have been expressed in those terms, that is the effect of the evidence. However, Mr Murray said that it is a matter for the Court to make its own judgments on questions of fact and the findings of fact which Asher J made are not necessarily binding on this Court.

[21] However, given that the entire case for the applicant and the evidence which she provides in effect duplicates the allegations that Asher J considered in his decisions, these allegations were being made afresh in this proceeding. Ms Ellis was not just saying Asher J came to certain views on the evidence which may or may not be correct. The thrust of her case was that the findings in the judgments, which Asher J made, were based upon facts that actually occurred. But it must be noted that Mr Johnson does not state that the findings of fact are wrong. He simply says

that the underlying judgment is being appealed to the Court of Appeal. While I am not aware of the details of the appeal, I accept it may be that Mr Johnson considers that Asher J’s findings of fact were erroneous. He does not say anything in his evidence in this application about the conclusions that Asher J came to that he had given wrong information to the Court in Oregon, which meant that that judgment had been obtained fraudulently. He did not say, either, that he did not place assets beyond the reach of his wife in Oregon.

[22] The fact that sealed copies of the Court orders which Asher J had made directing a payment were served on the lawyers for Mr Johnson on 25 August 2016 and the service on him of a bankruptcy notice on 21 September 2016,⁶ must have been clear to him that by the time he was preparing to leave New Zealand that further legal processes were going to be initiated to enforce the judgments against him.

[23] Mr Johnson does not contend that he took any steps to ensure that he complied with the lawyers’ demand before he left New Zealand. He does not claim that he intended to deal with the matter when he got back to the United States. He did not leave instructions for his lawyers in New Zealand to arrange satisfaction of the claim. When he left the country after being served with the bankruptcy notice, in my view the inference must be that he understood that if he did nothing about that notice bankruptcy proceedings would need to be commenced and, from his history of litigation involving him and Ms Ellis, he would have expected that at some point there would be a need to serve additional legal documents on him. To that extent, his departure would have the effect of defeating and certainly delaying his creditor.

[24] The fact that Mr Johnson had existing travel arrangements did not compel him to leave the country. The fact that he took advantage of existing travel arrangements does not really differentiate the position from a case where a debtor has made travel arrangements for the first time after receiving a demand. There is no reason that I am aware of that compelled him to leave the country, rather than staying here in order to make arrangements to satisfy his obligations to

_{Ms Ellis.}

⁶ This is not disputed by Mr Johnson in evidence or submissions.

[25] I consider that, having regard to the lengthy history of this matter, a commonsense and robust approach needs to be taken in viewing the facts. In my judgment, Mr Johnson would have understood the consequences of leaving the country.

[26] In the light of the conclusions I have reached on the foregoing factual matters, the question arises whether Mr Johnson left New Zealand with the intent described in s 20. This is a matter of ascertaining the meaning of s 20.

[27] The issues that arise for determination are these:

a) What is the intent that s 20 speaks of?

b) Is the section inapplicable where a debtor has more than one reason for departing from New Zealand, one of which does not involve any intention to defeat or delay creditors?

c) Did Mr Johnson have the necessary intent?

[28] To do an act “with intent” is commonly viewed as meaning that the action is intentional, as opposed to being accidental or inadvertent or due to circumstances beyond the control of the actor. But to do something with a particular “intent” can also describe doing something in order to bring about a particular result.⁷ A further possibility is that a person may have more than one objective when they act in a particular way.

[29] The first authority that I propose to refer to is the decision of Re Wills (ex parte Worldwide Sports International Ltd).⁸ In that case, Master Kennedy-Grant had before him an application to adjudicate two persons who had come into New Zealand from Australia to sell apparel. They were about to depart New Zealand on a flight to Europe when they were arrested following a creditor’s application for a

_{warrant and were subsequently bailed. The creditor had commenced proceedings}

7. Oxford English dictionary where the uses described as rare or obsolete other than in particular phrases, an example of which where the expression is used in the phrase “to that intent”.

⁸ Re Wills (ex parte Worldwide Sports International Ltd) HC Auckland B80/93, 24 February 1993.

under the now repealed Insolvency Act 1967. Section 19(1)(c) of that Act mirrors s

20 of the current Act, as it states that a debtor commits an act of bankruptcy in cases where, with an intent to defeat or delay their creditors, they depart New Zealand.

[30] The creditor met with the debtors and spoke to one of them, while at the same time delivering a demand letter and making a further request for the money that they owed to that creditor. The female debtor allegedly said “we’re off to England and you won’t be able to get us”, following which she handed the letter back to the agent and declined to discuss matters further.

[31] The Judge concluded that the debtors were undoubtedly intending to leave New Zealand and had possessed that intention for some time before the events just described occurred. The facts of that case have similarity to the present one. That is the debtors in that case had apparently made travel arrangements in November 1992, whereas the interview with the creditor’s agent took place in January 1993.

[32] The Judge made the following remarks concerning those circumstances:⁹

That [the intention established at an earlier date to leave New Zealand] does not mean that, when the time to leave approached, they did not have the added intention of leaving to defeat or delay their creditor. On the findings I have made they knew that their contract was with the (creditor) and failed to make any attempt to pay the debt due under it ... I find that, at the time of the service of the letter on 18 January 1993 and from then on until their arrest, Mr and Mrs Wills were intending to take advantage of their existing arrangements to leave the country to defeat or delay their creditors.

[33] A second authority where the nature of “intent” was considered was the decision of the Supreme Court in Regal Castings Ltd v Lightbody.¹⁰ The creditor in that case sought to reverse the effect of the alienation of the property by the debtor under s 60 of the Property Law Act 1952, which provides that a transaction can be set aside if it was entered into with intent to defraud creditors. Plainly, the case dealt with a different statutory provision than the one under consideration in this case. However, the analysis of the statutory intent required to be proved in that case,

_{throws some light on the meanings attributable to the expression “intent”.}

⁹ _{At 16-17.}

¹⁰ Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433 at [54].

[34] In Regal, the Court was concerned with a debtor transferring his home into the ownership of a family trust. The property was his only significant asset. That step resulted in the creditor being unable to satisfy its debt by execution over the property.

[35] The Court concluded that the debtor had the requisite intent and that he took his actions “with intent to defraud”. The Court stated:

[54] Whenever the circumstances are such that the debtor must have known that in alienating property, and thereby hindering, delaying or defeating creditors’ recourse to that property, he or she was exposing them to a significantly enhanced risk of not recovering the amounts owing to them, then the debtor must be taken to have intended this consequence, even if it was not actually the debtor’s wish to cause them loss.

[36] The Court spoke of an example where an insolvent debtor gifted a substantial asset to a relative or friend, thereby removing an asset from an already insufficient quantum of assets. They commented that:¹¹

There may be room for argument over whether in that circumstance there is or is not a presumption, perhaps irrebuttable, of an intention to defraud. It would be a rare case in which a difference of view on that question would affect the outcome. The consequence for the creditors is so obvious that it is really beyond argument that the debtor must be taken to have intended it.

[37] Mr Johnson was aware that he was a debtor from the point where the judgment of the High Court was sealed. Up until the point where he knew that he had been constituted a debtor as a result of the judgment, he may well have been free to come and go from New Zealand. However, from that point, for him to leave the country without making arrangements to deal with what were going to inevitably be further steps to enforce the judgment, he knew that his actions were likely to cause

defeat or delay enforcement of that judgment.¹² Mr Johnson may well have had

other objectives in mind when he left New Zealand, but that does not assist his position, as the Wills case establishes. He must have known that the result of his going home to the United States would hinder Ms Ellis in executing the judgment. That, in my judgment, was sufficient to bring him within the limits of s 20. It is not

_{necessary to show that he had actively welcomed that consequence. It is enough that}

¹¹ _{At [55].}

12. He did not, for example, make an arrangement under HCR 6.7 for service of the documents by agreement.

he must have known that defeat or delay to his creditors would be the consequence of his departure and therefore he must be taken to have intended that consequence. He therefore had the necessary “intent” that s 20 speaks of.

[38] For all of these reasons, I consider that the creditor has made out the grounds for making an order under s 20 of the Insolvency Act 2006.

Relevance of the appeal again Asher J’s judgment

[39] The next issue concerns the impending appeal and whether that should affect the outcome of Ms Ellis’s application. The judgment creditor should have applied for a stay of execution, as Mr Knight submitted, if it wished that further steps in relation to the judgment be deferred until the judgment of the Court of Appeal on the underlying debt coming to hand. He has not sought such an order. Notwithstanding that Mr Knight’s submissions correctly reflect the orthodox position, in relation to execution generally, there is power under s 38 of the IA in the case of bankruptcy proceedings to halt the creditor’s application for adjudication.

[40] The ground for bankruptcy under s 20 is only available where the respondent is a “debtor”. It would follow that, if the judgment in the Court of Appeal had the effect of reversing the orders made in the High Court, Mr Johnson, while formerly a debtor, would no longer have that status. In those circumstances, it would be reasonable for the Court to dismiss the application for adjudication under s 20 of the IA.

[41] There would not seem to be any great prejudice to Ms Ellis if a “halt” order

were made in this case. The appeal, as I have noted, is to be heard on 23 March

2017 and it is to be expected that a judgment would be to hand before half way through this year. While I appreciate that the proceedings between the parties have taken a long time already, I consider that the interests of justice will best be served by viewing the rights of Mr Johnson not to be adjudicated, in the event that the appeal reverses the debt, as outweighing any inconvenience to Ms Ellis resulting from the further delay.

[42] The result will be that, if Mr Johnson’s appeal is unsuccessful and the debt stands, then the stay will be lifted and the bankruptcy proceedings will be able to proceed.

[43] Leave is reserved to either party to apply for further directions in this proceeding which will enable either of them to bring the matter back before the Court once the outcome of the appeal is known. Because of the impending appeal, I also consider that no purpose would be served by giving detailed consideration to the application to set aside the bankruptcy notice. That application is adjourned and is to be considered anew when the case comes back before the Court for review of the stay orders.

[44] The issue of costs is also adjourned until the point is reached where a review of the stay order arises.

[45] The stay order pursuant to s 38 is to take effect on the date and time of the issue of this judgment.

J.P. Doogue

Associate Judge