Murren v Schaeffer [2018] NZHC 1517 (22 June 2018)

Last Updated: 6 July 2018

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE

CIV 2015-442-0028 [2018] NZHC 1517

BETWEEN	JAMES JOSEPH MURREN as trustee of the JAMES J MURREN SPENDTHRIFT TRUST First Plaintiff DANIEL LEE Second Plaintiff
AND	GLENN WILLIAM SCHAEFFER Defendant

Hearing:	5 March 2018
Appearances:	A J Horne and A E Simkiss for Plaintiffs B M Nathan and T B Elkington for Defendant
Judgment:	22 June 2018

JUDGMENT OF PETERS J

This judgment was delivered by Justice Peters on 22 June 2018 at 4.30 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date: ...................................

Solicitors: Minter Ellison Rudd Watts, Auckland

Duncan Cotterill, Nelson

MURREN v SCHAEFFER [2018] NZHC 1517 [22 June 2018]

[1] This judgment determines an application by the plaintiffs, Mr James Murren and Mr Daniel Lee, for a freezing order (“application”).¹ Simon France J made orders on an interim basis on 13 February 2018 and the question is whether those orders ought to be extended.

[2] The plaintiffs have given an undertaking in damages. Accordingly, the Court may make a freezing order if the plaintiffs establish:

(a) a good arguable case, that is the allegations in the proposed claim are capable of tenable argument and supported by sufficient evidence, bearing in mind the stage of the proceedings at which the application is brought;

(b) assets, usually of the respondent’s, to which the order can apply;

(c) a real risk of dissipation of those assets.²

Orders sought

[3] Mr Murren and Mr Lee’s proceedings, commenced in June 2015, are to go to trial in late October 2018. The proceedings concern the defendant, Mr Glenn Schaeffer, and a limited partnership registered in Nevada in the United States, the purpose of which is to invest in an entity or entities owning a vineyard in New Zealand. The entities concerned are Woollaston Estates Holdings Limited and Mahana Estates Limited (“WEHL” and “MEL”), and are generally referred to as “Mahana Estates”.

[4] The application, brought against Mr Schaeffer, WEHL and MEL, is in respect of the following assets (“assets”):³

(a) Mr Schaeffer:

1. High Court Rules 2016, r 32.2; and Interlocutory Application for Freezing Orders dated 12 February 2018.

² McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR32.2.03].

3. On its face, the application is also brought against Mr Paul Le Gros but does not set out grounds for any order to be made against him. For that reason, I shall not mention Mr Le Gros again.
   • (i) his shareholdings in WEHL and MEL;

(ii) his artworks; and

(iii) all the land described in CT387917, of which Mr Schaeffer is the registered proprietor.

(b) WEHL and MEL:

(i) all assets including those utilised in and produced by the business known as “Mahana Estates”; and

(ii) all the land described in certificates of title 387916 and NL12C/1028, of which WEHL is the registered proprietor.

[5] The plaintiffs seek orders prohibiting the disposal of the assets unless at arm’s length for market value, with the proceeds of sale to be held on interest bearing deposit in the trust account of Mr Schaeffer’s solicitors, Duncan Cotterill.

[6] The maximum sought to be restrained is $4,430,683.64, being the amount claimed in the proceedings, including interest to 31 December 2019 and the plaintiffs’ estimate of costs on a “2B” basis.

Background

[7] Mr Schaeffer is a citizen of the United States with permanent residency in New Zealand. In recent years, Mr Schaeffer has divided his time between the two countries.

[8] In or about 1999, Mr Schaeffer met Mr Philip Woollaston who owned, or wished to establish, vineyard. Mr Woollaston and his wife, Mrs Carol Wollaston, incorporated WEHL in November 2000.
[9] Mr Schaeffer was an acquaintance or friend of Mr Murren and Mr Lee, when all were senior executives of large companies in the United States. Mr Murren and Mr Lee are still senior executives of large entertainment companies.⁴

[10] In or about 2000, Mr Schaeffer proposed to Mr Murren and Mr Lee that they, with others, invest in a vineyard and winery in New Zealand, that is Mahana Estates.

[11] In 2002, Mr Schaeffer circulated a proposed agreement to Mr Murren and Mr Lee, providing for the formation of a limited partnership to undertake the investment, and to be known as “Kiwi” (“2002 agreement”). Mr Murren executed the 2002 agreement, and Mr Lee did likewise subject to amendments.

[12] As it turned out, Mr Murren and Mr Lee were the only investors who did sign, and in early 2006 Mr Schaeffer circulated another proposed agreement (“2006 agreement”). Each of Mr Murren and Mr Lee signed the 2006 agreement, as did several other investors.

[13] The 2006 agreement also provides for the formation of a limited partnership, again to be known as Kiwi. Constellation Partners, LLC (“Constellation”) is the General Partner and is to manage the partnership. Mr Schaeffer and his former wife, Mrs Renee Schaeffer, incorporated Constellation in 2003.

[14] The 2006 agreement also provides that the partnership capital is to be US$14,008,000, with Constellation to contribute 70 per cent, Mr Murren’s trust 10 per cent, Mr Lee five per cent and several other partners contributing 20 per cent between them. On the evidence before me, all of the partners, Constellation included, have contributed the capital due from them.

[15] Mr Schaeffer is not a party to the 2006 agreement in his own right, although he executed the agreement on behalf of Constellation.

[16] Clause 1.3 of the 2006 agreement provides:⁵

⁴ Affidavit of D Lee in reply sworn 26 February 2018 at [8].

⁵ Affidavit of J J Lin affirmed 12 February 2018 at exhibit O.

1.3 Purposes

The purpose of the Partnership is to invest in, own, develop, and commercially exploit interests in a New Zealand entity which, in turn, owns 80% of the Philip Woollaston Estates vineyards and winery in or near Nelson, New Zealand, and to conduct such other activities as may be incidental to or desirable in connection with the ownership, development, and exploitation of such interests.

[17] Both the 2002 and 2006 agreements are governed by Nevada law.

[18] Kiwi was registered as a limited partnership in Nevada in early 2006. Mr Murren’s total investment, made between 2002 and 2008, is $1,600,813.92, of which $1,400,724.66 was paid prior to the 2006 agreement. Mr Lee’s total investment, made during the same period, is $700,406.96, of which $102,000 was paid prior to the 2006 agreement.

WEHL and MEL

[19] WEHL holds various assets, including the land on which the Mahana Estates vineyard is situated. MEL was incorporated in early 2006 and is the winemaking and trading entity.

[20] At all material times until late 2015, Mr Schaeffer held 80 per cent of the shares in WEHL and MEL in his own name. There is no evidence before me as to the present directors but I infer from Mr Schaeffer’s evidence that at present he is the sole director of both companies.⁶

Arguable case

[21] The plaintiffs’ fundamental allegation is that Mr Schaeffer represented to them that they, and not Mr Schaeffer personally, would hold and in fact did hold the partnership’s 80 per cent interest in the vineyard and winery. Other representations alleged are that the investment would be an inflation and currency hedge, that partners would receive audited annual financial statements and that any differences between the 2002 and 2006 agreements were of no consequence.⁷

⁶ Affidavit of G W Schaeffer sworn 19 February 2018.

⁷ First Amended Statement of Claim dated 22 January 2018 at [15], [23] and [40].

[22] The plaintiffs have pleaded causes of action under s 9 Fair Trading Act 1986 (“FTA”) and in negligent misstatement, deceit, and fraudulent misrepresentation in respect of pre-contractual misrepresentations. They also allege a breach of s 41.600 Nevada Deceptive Trade Practices Act.

[23] Mr Schaeffer does not deny representing that Kiwi, the partnership, would hold an 80 per cent shareholding in the entity or entities owning the vineyard and winemaking business. This is consistent with clause 1.3 of the 2006 agreement quoted above. However, Mr Schaeffer’s case is that nothing turns on this because he has always held a proportion of the shares in his name on trust for Kiwi. Moreover, Mr Schaeffer contends that from at least 2006 it has been evident to partners, including Mr Murren and Mr Lee, that he held the shares in WEHL and MEL in his own name. This has been evident from information supplied to partners, including from Kiwi’s accountant, Ms Kelly Bulgatz.

[24] Regardless, in late 2015, Mr Schaeffer transferred 30 per cent of his shareholding in each of WEHL and MEL to Kiwi. The effect of this is that Mr Schaeffer and Kiwi now hold, respectively, 56 and 24 per cent of the shares in WEHL, and 52 and 24 per cent of the shares of MEL. Plainly, this transfer does not meet the terms of the 2006 agreement which provides for the entire 80 per cent shareholding to be in one parcel. Whether that is of any consequence is a matter for trial.

Discussion of arguable case

[25] I am satisfied that Mr Murren and Mr Lee have an arguable case as to liability on one or more of their causes of action. At present, however, I have reservations as to whether they will be able to establish that any misrepresentation made to them has caused them loss, let alone loss of the sums claimed, being the sums invested in Kiwi. No particulars of causation have been pleaded in the statement of claim, none appear from the affidavit evidence and causation is denied in the statement of defence. Nor is causation self-evident.

[26] Aside from this significant issue, Mr Schaeffer has pleaded limitation defences under the FTA, as to which see s 43A, and under the Limitation Act(s). Limitation
defences may not be a complete answer to the plaintiffs’ claim but may well affect their claim under the FTA in particular.

Assets to which the orders can apply

[27] There is no dispute that there are assets to which the orders can apply.

Risk of dissipation Mr Schaeffer

[28] In support of their case that there is a risk of dissipation, Mr Murren and Mr Lee rely on evidence that Mr Schaeffer sold a large number of artworks at an auction in the last quarter of 2017.

[29] The plaintiffs also rely on Mr Schaeffer’s purchase in August 2016 of a residential property in Omaha, Nebraska and an affidavit from Mr David Milne, a private investigator in the Nelson region. Mr Milne’s evidence is to the effect that, when visiting Mahana Estates in December 2017, he observed that no one was living in the dwelling known as “Mahana Villa”, said to be Mr Schaeffer’s residence. Moreover, an internet listing stated that the villa is available to rent, describing it as Mr Schaeffer’s “former” residence.

[30] In response, Mr Schaeffer’s evidence is that he received $1,211,591.80 from his disposal of the artwork and that he applied this sum to WEHL, and to acquire wine from MEL for distribution in the United States. This evidence is confirmed by evidence from Mr Ross Strawbridge, a chartered accountant in Nelson, whose firm has recently been engaged as accountants for Mr Schaeffer, WEHL and MEL.⁸

[31] Mr Schaeffer also states that there has been no recent change in his living arrangements, and that he has previously stayed at the villa if it has not been not rented at the time. Mr Schaeffer’s evidence is that in recent years the villa has been utilised as a hospitality asset and been widely publicised as such.

⁸ Affidavit of R H Strawbridge sworn 20 February 2018.

[32] Mr Schaeffer acknowledges that he spends a significant amount of time in the United States, particularly because he is seeking to promote Mahana Estates’ wine in that market. Mr Schaeffer does not deny the purchase of the residential property in Omaha.

WEHL and MEL

[33] There is evidence that WEHL and/or MEL is likely to dispose of assets. Rabobank, the companies’ lender, wishes to be repaid its advances. In addition, on the scant evidence before me, WEHL has debts due to Mrs Schaeffer and to Mr Schaeffer. WEHL’s debt to Mr Schaeffer is very substantial and it may be that much of this is due to Kiwi and its investors. There is no reliable evidence of the value of the assets and how much is owed to Rabobank.

Discussion of dissipation

[34] The evidence as to the companies’ financial position is unsatisfactory and I take the view that it was for Mr Schaffer to disclose the same. Despite that, the evidence to which I have referred is insufficient to substantiate the real risk of dissipation required before making a freezing order. Much more is required before it is proper to make a freezing order.

Result

[35] I decline to continue orders made by Simon France J on 13 February 2018 and discharge the same.

Costs

[36] The plaintiffs are to pay the defendant’s costs on a 2B basis, together with reasonable disbursements.







Peters J