IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-106

BETWEEN	SUNNYVALE PROPERTY TRUST LIMITED
First Plaintiff

AND	HACIENDA HOLDINGS LIMITED Second Plaintiff

AND	DAVE RAJ FERMAH Third Plaintiff

AND	FERMAH FARMS LIMITED Fourth Plaintiff

AND	PROPERTY FINANCE SECURITIES LIMITED
First Defendant

AND	WROXTON FINANCE LIMITED Second Defendant

AND	CANTERBURY TRUSTEES (2007) LIMITED
Third Defendant

Hearing:	5 March 2010

Counsel:	PJ Dale for the Plaintiffs
G Riach for the Defendants

Judgment:	31 March 2010 at 3.30 p.m.

JUDGMENT OF RODNEY HANSEN J

This judgment was delivered by me on 31 March 2010 at 3.30 p.m., pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date: ………………………….
Solicitors:	Ellis Law, P O Box 4516, Auckland for Plaintiffs
Harmans Lawyers, P O Box 13151, Christchurch 8141

SUNNYVALE PROPERTY TRUST LIMITED AND ORS V PROPERTY FINANCE SECURITIES LIMITED AND ORS HC AK CIV-2010-404-106  31 March 2010

Introduction

[1]       The defendants are finance companies.  They jointly made an advance to the first and second plaintiff (Sunnyvale and Hacienda) for the purpose of a subdivision at Henderson, Auckland.   The third and fourth plaintiffs (Mr Fermah and Fermah Farms) guaranteed the borrowers’ obligations.  The security provided by Sunnyvale and Hacienda included the sections in the subdivision and a farm at Whakatane owned by Fermah Farms.

[2]     In October 2009 the first defendant (PFS) commenced mortgagee sale proceedings.   Some of the sections in the subdivision have already been sold at mortgagee sale.  The plaintiffs want to prevent the threatened sale of the farm.  On
14 January 2010, Lang J made interim orders restraining the defendants from taking any further steps to sell the farm pending a full hearing of the application for an interim injunction.  I am required to decide whether the orders should be continued until the substantive proceeding is determined.

[3]       The statement of claim pleads five causes of action.  Those relied on for the purpose of establishing that there is a serious question to be tried are:

a)	The defendants are in breach of the loan agreement;

b)	The  defendants  have  or  have  threatened  to  act  in  an  oppressive manner;

c)	There has been  a breach of duty of care to obtain the best price reasonably realisable.

Further background

[4]       The dealings between the parties go back to May 2007 when PFS made a loan to Sunnyvale to fund the subdivision.   In August 2007 PFS was placed in receivership.  This led to a revision, in November 2007, of the terms of the original loan agreement.  Then, in February 2009, PFS obtained the consent of Sunnyvale to the second and third defendants (Wroxton and Canterbury) assuming liability in respect of the first $750,000 of the advance.  PFS and Wroxton became the joint first mortgagees.   In June 2009, after PFS had served notices of demand, the parties entered into two new loan agreements dated 19 June 2009.  The term of the loans is in dispute.  The plaintiffs say the loans were until 31 October 2009.  The defendants assert that they were entitled to call up the loans and make demand at any time.

[5]       On  6  October  2009,  without  any  act  of  default,  PFS  made  demand  for repayment of the loan.   Property Law Act notices were issued several weeks later and, on 2 December, seven of the nine sections in the subdivision were sold at mortgagee sale.  The plaintiffs claim that they were sold at prices well below those that could have been achieved and would have been achieved had conditional agreements, earlier entered into by Sunnyvale, been allowed to proceed.

First serious question – breach of loan agreement

[6]       PFS is the lender in one of the two loan agreements entered into on 19 June

2009.   Wroxton and Canterbury are the lenders in the other agreement.   In both agreements Sunnyvale and Hacienda are the borrowers and Mr Fermah, his brother and Fermah Farms are the guarantors.

[7]       The  provisions  of  the  agreements  dealing  with  the  term  of  the  loan  are identical.  In each case cl 5, providing for repayment, reads as follows:

Repayment

(a)        The  Borrower  shall  repay  the  principal  amount  of  the  Loan outstanding together with all interest and costs on the Expiry Date, so far as not otherwise repaid or prepaid under the terms of this Agreement.

(b)        The Borrower shall have the right to repay the Loan at any time prior to the Expiry Date PROVIDED THAT on or before the date of such repayment,  the  Borrower  shall  pay  to  the  lender,  in  addition  to interest to the date of repayment, the amount equal to three week’s interest  calculated  at  the  Lower  Interest  Rate  on  the  amount  so repaid.   Otherwise interest on the amount so repaid shall cease as from the date of repayment.

(c)        Moneys repaid pursuant to clause 5(b) may not be redrawn.

[8]       Clause 1 provides that, unless the context otherwise requires:

“Expiry Date” means the date on which written demand is made by the Lender but failing demand means 31 October 2009, or such other date as may be agreed in writing by the Lender and the Borrower subject to the Lender’s right to require repayment at an earlier date pursuant to the terms of this Agreement.

[9]       The affidavit evidence dwelt at length on the dealings between the parties leading up to the signing of the agreement.   Mr Fermah’s evidence is that he specifically negotiated the term of the loan as 31 October 2009.  The plaintiffs rely on an exchange of emails he had with Mr John Edilson, acting on behalf of the defendants.  In response to an email from Mr Fermah, dated 12 June 2009 which set out  the  proposed  terms  of  the  loan,  including  the  term  as  “31  October  2009”, Mr Edilson replied “term will be 31/10/09”.

[10]     Mr Edilson acknowledges that the term of the advance was agreed to be

31 October 2009 but said that was simply the last date upon which the borrower must  make repayment.    He maintains  that  it  was  always  contemplated  that  the defendants could call up the loan at any time and the definition of “expiry date” reflects that intention.

[11]     The legal implications of the pre-contractual communications between the parties was a matter of some debate.  The plaintiffs plead that the defendants agreed to the term of the loan being until 31 October 2009 in response to an oral request from Sunnyvale.   Alternatively, it is pleaded that the plaintiffs entered into the revised loan agreement in reliance upon express oral representations by the defendants that the loan would not be called up until 31 October 2009.  However, in his evidence, Mr Fermah does not go that far.   He denies having been given an assurance that demand would not be made for repayment before 31 October 2009

because, he says, he did not know this would be an issue.  He simply asserts that, as far as he was concerned, all parties had agreed that the loan would not have to be repaid until 31 October 2009 unless the plaintiffs were in default.

[12]     At the hearing, there was discussion of whether any oral representation could support an estoppel.   Mr Riach argued that there could be no estoppel given that there was no pleaded conduct in reliance on the representation.   There may, nevertheless, be room for the plaintiffs to invoke the doctrine of estoppel by convention which would permit precontractual negotiations to establish a common assumption which a party could not retreat from if it would be unjust to allow him to do so – see the discussion of McGrath J in Vector Gas Limited v Bay of Plenty
Energy Limited  at [67] – [69] and [74].   However, I put the issue to one side as

estoppel has not been pleaded or argued at this stage.

[13]     Instead  I  proceed  to  consider  the  first  cause  of  action  by  reference  to orthodox principles of contractual interpretation.  The starting point is to examine the contract itself in order to ascertain its meaning.  That requires, in the first instance, an examination of the words themselves in the context in which they appear in the contracts.

[14]     By cl 5(a) of the loan agreements, the expiry date is the date on which the borrower “shall repay” the principal amount of the loan.   The definition of expiry date appears to contemplate the expiry date being fixed in one of three ways:

a)	The date on which written demand is made. b)	If no demand is made, 31 October 2009.
c)	The date agreed in writing by the parties.

[15]     On this interpretation of the definition, the expiry date will be 31 October

2009  unless  either  demand  has  been  made  earlier  or  the  parties  have  agreed otherwise.  The alternative interpretation favoured by the plaintiffs requires that the

written demand provided for in the definition is limited to a demand consequent upon an act of default by the borrower.

[16]     Events of default are set out in cl 10.1 of the loan agreements.  Clause 10.2(a) provides for demand to be made when there has been an event of default.  It reads as follows:

Remedies on Default:  Upon or at any time after the occurrence of an Event of Default and if any Lender may at its discretion and without prejudice to its other rights and remedies by notice in writing to the Borrower take all or any of the following actions:

(a)        demand  immediate  repayment  of  all  moneys  owing  or  payable pursuant to this Agreement and the Security Documents or any of them and if so demanded the Borrower shall immediately repay such moneys to the Lender and for all purposes of this Agreement or the Security Documents upon such demand being made the Expiry Date shall be deemed to have arrived.

[17]     If written demand is interpreted in the unqualified way argued for on behalf of  the  defendants,  the  default  provisions  in  the  contract  become  practically redundant.  Demand can be made at any time; no event of default is required.

[18]     Clause 5(b) of the loan agreements (set out in [7] above) also provides some support for a restrictive interpretation of the definition.   It gives the borrower the right to repay the loan at any time before the expiry date on the terms set out in the proviso.   That right to repay will be effectively negated if the lender had the unconditional right to make demand before 31 October.

[19]     In my view, the definition of expiry date, when read in context, is ambiguous. While the plain words indicate that demand can be made at any time, the interpretation for which the plaintiffs contend sits more comfortably with the scheme of the agreement and, arguably, its commercial purpose.  This was a short term loan. The term was important to the borrowers who needed time to market the sections. They paid substantial up-front fees - $40,000 to Wroxton and $8,500 to PFS.  An agreement which conferred a substantial and immediate benefit on the lenders, while giving them the unqualified right to terminate the loan at any time thereafter, is extraordinarily unfavourable to the borrowers and, arguably, contrary to the commercial purpose of the transaction.

[20]     In my view, there are good grounds for the plaintiffs to argue at trial that the loan agreements did not give the defendants the unconditional right to call up the loan at any time.  I conclude that there is a serious question that the defendants were in breach of the loan agreements in making demand before 31 October 2009.

Breach of Credit Contracts and Consumer Finance Act 2003

[21]     The second cause of action is that, in demanding repayment before the agreed expiry date without notice and proceeding to advertise the sections to the general public  before  the  expiration  of  the  Property  Law  Act  notices,  the  defendants exercised the rights or powers conferred on them by the loan agreements in an oppressive manner.  If established, the Court could reopen the loan agreements under s 120 of the Credit Contracts and Consumer Finance Act 2003 (the Act).  For this purpose, oppressive is defined in s 118 of the Act as meaning:

... oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice.

[22]     Mr Dale submitted that the plaintiffs were entitled to act in the belief that they had  until  31  October  2009  to  put  their  affairs  in  order  and  to  meet  their repayment obligations under the loan agreement.  In exercising the power to call up the  loans  and  to  advertise  an  auction  when  they  knew  there  were  conditional contracts for sale in place, the defendants acted oppressively.  The cumulative effect of these circumstances are relied on.

[23]     In light of my finding that there is a serious question on the first cause of action, it is unnecessary for me to review the evidence relied on and to finally determine whether there is a serious question to be tried on this issue.   It is appropriate, nevertheless, to note some of the obstacles to a finding of oppression highlighted in the submissions of Mr Riach.

[24]     First, Mr Riach made the point that the exercise of a contractual right can never, of itself, be oppressive.  Nor is it oppressive to advertise the properties for sale before the expiry of the Property Law Act notices – Woods v DFC New Zealand

Limited.  Mr Dale sought to distinguish Woods on the basis that the properties were subject to conditional agreements but, as Mr Riach pointed out, the fact that the mortgagee sale had been advertised did not prevent the purchaser from completing due diligence and making a decision to purchase the sections.  Had they wished to do so, they could have bought at auction.

[25]     Mr Riach also pointed out that, apart from calling up the loan prior to 31

October 2009 and issuing a Property Law Act notice, Wroxton and Canterbury did not participate in the later acts relied on as constituting oppression.  The plaintiffs would be hard-pressed to succeed against them at trial unless they are able to establish, as Mr Dale believes they could with the assistance of discovery, that PFS acted with the approval and acquiescence of Wroxton and Canterbury.

Breach of duty to obtain best price

[26]     The third cause of action is that the defendants were in breach of the duty, now to be found in s 176 of the Property Law Act 2007, to take reasonable care to obtain the best price reasonably obtainable for the properties sold at mortgagee sale. The plaintiffs say the prices obtained at auction were significantly less than the true value of the sections.  They rely on the conditional sale agreements which, had they been completed, would have yielded $1.93m, three sections selling for $215,000 each and the remaining six for $212,500 each.  The seven sections sold at auction yielded a total of $1,169,000 or an average price per section of $167,000.   The plaintiffs say that, had the defendants withheld calling up the loan early and advertising the properties in the face of the conditional agreements, the sections would have sold for a great deal more.

[27]     The question of whether there has been a breach of duty to obtain the best price is very much a fact-specific enquiry.   Again, having decided that there is a serious question to be tried on the first cause of action, no useful purpose will be served by reviewing the voluminous evidence (running to many hundreds of pages) for the purpose of deciding whether there is an arguable case.

[28]     However, once again, it seems to me that the plaintiffs face considerable hurdles at trial.   There is reason to doubt whether the unconditional agreements provide reliable evidence of value.  Unconditional offers made in relation to three of the sections were for $179,000 each, not materially more than the price they obtained at auction.  An experienced real estate agent retained by the defendants to market the sections assessed their value at $170,000.   The sections sold for an average of
$167,000 after what appears to have been an orthodox advertising campaign.  Then, there is the difficulty noted in relation to the second cause of action that only PFS engaged in the later acts relied on as constituting a breach of the duty to obtain the best price.

Balance of convenience

[29]     I am satisfied that the balance of convenience favours the continuation of the interim injunction.  The defendants are claiming a total of approximately $1.15m, of which some $150,000 is in dispute.  There is ample security in the form of the two sections still to be sold and the farm owned by Fermah Farms.   It has a value of
$2.9m.  It is subject to a first mortgage securing up to $1m.  There is no suggestion that the defendants risk irrecoverable losses if interim restraint remains in place until the substantive issues are determined.

[30]     On the other hand, there is evidence that the plaintiffs could suffer significant losses if a mortgagee’s sale proceeds.  The plaintiffs are engaged in discussions to refinance their indebtedness to the defendants.  Mr Fermah believes that the proposal could not proceed if the defendants take steps to sell the farm.  He also fears that the first mortgagee of the farm would take steps to call up its loans.   Among other things, that would put at risk the employment of some one hundred staff employed by the plaintiffs.

Result

[31]     The interim orders made by Lang J are to continue pending the determination of the proceeding or earlier order of the Court.

[32]     Counsel are agreed that the proceeding is suitable for transfer to the Fast Track List.  As a first step, a memorandum should be filed in accordance with the Fast Track Practice Note.