IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-404-005820

BETWEEN	MATRIX CUSTODIAN LIMITED Plaintiff

AND	RICHARD SCOTT PHILLIPS First Defendant

AND	LESLIE DAVID VISKOVICH Second Defendant

AND	CHRISTOPHER RUSSELL HOOK Third Defendant

AND	BRENDON JAMES GIBSON AND GRANT ROBERT GRAHAM Intended Third Parties

Hearing:	23 March 2010

Counsel:	GM Sandelin and A Shariat for plaintiff
BM Cunningham for first and second defendants
No appearance by third defendant

Judgment:	30 March 2010 at 4:00pm

RESERVED JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application for summary judgment]

This judgment was delivered by me on 30 March 2010 at 4:00pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:	MinterEllisonRuddWatts, PO Box 3798, Auckland for plaintiff Phillips, PO Box 28 649, Auckland for first and second defendants Meredith Connell, PO Box 2213, Auckland for third defendant

MATRIX CUSTODIAN LTD  V PHILLIPS HC AK CIV-2009-404-005820  30 March 2010

The application

[1]       The plaintiff seeks summary judgment against all defendants for $2,420,191, plus interest at the contract rate of 17 per cent per annum from 13 August 2009 until judgment, plus costs on a solicitor/client basis.

Background

[2]       The claim arises out of a loan contract.  The plaintiff advanced funds to Dew Drop Properties Ltd.  The defendants, at all material times, were directors of Dew Drop Properties Ltd and Zane Grey Restaurant & Bar Ltd.

[3]       Dew Drop Properties Ltd’s and Zane Grey Restaurant & Bar Ltd’s primary business was the operation of a resort.   It is situated on a four hectare block on Urupukapuka Island, Bay of Islands.   Dew Drop Properties Ltd owned the lease interest in the land.   Zane Grey Restaurant & Bar Ltd operated a restaurant and accommodation business on the land.

[4]       The  defendants  executed  guarantees  in  respect  of  the  loan.    The  loan agreement and the  guarantees were  executed on 12 June 2007.   The guarantees provided  as  between  the  plaintiff  and  the  guarantors  that  the  liability  of  each guarantor is deemed to be the liability of a principal debtor.

[5]       On 9 July 2008 Dew Drop Properties Ltd defaulted under the loan agreement. It failed to pay the principal sum together with the outstanding interest.

[6]       On 17 July 2008 the plaintiff issued notices pursuant to the Property Law Act

2007, ss 119 and 121 on Dew Drop Properties Ltd and on the defendants.   Those notices relied on the security which Dew Drop Properties Ltd was required to give the plaintiff in terms of the loan agreement.

[7]       The  Property  Law  Act  notices  expired  on  29 August  2008.    The  loan remained unsatisfied.

[8]       On 14 July 2008 Zane Grey Restaurant & Bar Ltd was put into liquidation by resolution of its shareholders.  On 29 July 2008 Dew Drop Properties Ltd was put into liquidation by resolution of its shareholders.

[9]       On 4 September 2008 the plaintiff appointed receivers to both Dew Drop Properties Ltd and Zane Grey Restaurant & Bar Ltd.  The appointments were made pursuant to the security agreements that were part of the loan agreement.

[10]     The property and the business had previously been placed on the market for sale by the defendants in March 2008.  The plaintiff effected a sale of the property and business on 3 April 2009 in its capacity as mortgagee.  The property was sold for
$600,000.00.   The business was sold for $1,600,000.00.    The sale, together with default interest due up until 12 August 2009, left a shortfall of $2,420,191.00, which is the amount which the plaintiff now seeks to recover.

The opposition

[11]     The first and second defendants’ opposition was refined by Mr Cunningham in his submissions.   The grounds he advanced were that the plaintiff had not established that the first and second defendants had no defence;

a)        Based on the defendants’ claim that the plaintiff was in breach of the obligations imposed on it by the Property Law Act 2007, s 176 in that the plaintiff had failed to obtain the best price reasonably obtainable in respect of the securities that were sold; and

b)        That, in any event, the court should exercise a discretion not to enter judgment so that the defendants could pursue either a third party claim or a new proceeding against the receivers pursuant to the Receivership Act 1993, s 18.

[12]     The factual inquiry which is required to be undertaken having regard to the matters put forward in opposition is whether or not the sale of the securities was in breach either of the statutory obligation imposed by the Property Law Act 2007,

s 176 or the equitable duty in relation to sales of securities which the lender owes the borrower.

[13]     Mr Hook, who was not present, had raised in his notice of opposition a further ground.   He pleaded that the first defendant was solely responsible for satisfying  any  obligation  to  the  plaintiff  pursuant  to  the  loan  agreement.    No evidential foundation for that position was advanced.  In particular, no evidence was adduced  to  suggest  that  the  plaintiff  was  a  party  to  any  arrangement  between Mr Hook and Mr Phillips and that the plaintiff had waived its rights to rely on the guarantee which Mr Hook gave.   Accordingly, to the extent that he has raised an additional ground I answer it accordingly.  The other grounds that he advanced in his notice of opposition do not extend to matters not already covered in the paragraphs set out above.

The court’s approach to a plaintiff’s summary judgment application.

[14]     Both counsel adopted the summary of principle contained in the Court of

Appeal judgment in Krukziener v Hanover Finance Ltd.

The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA).  The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11
PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence  or  assess  the  credibility  of  deponents.  But  it  need  not  accept
uncritically evidence that is inherently lacking in credibility, as for example
where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng
Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court’s
assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).

[15]     On the issue of affirmative defences, it is appropriate to note the following observations:

a)        In Pemberton v Chappell the Court of Appeal said:

If a defence is not evident on the plaintiff’s pleading I am of opinion that if the defendant wishes to resist summary judgment he must file an affidavit raising an issue of fact or law and give reasonable particulars of the matters which he claims ought to be put in issue. In this way a fair and just balance will be struck between a plaintiff’s right to have his case proceed to judgment without tendentious delay and a defendant’s right to put forward a real defence.

b)	That   position   was   further   reinforced   in   Australian   Guarantee

Corporation (New Zealand) Ltd v McBeth where the Court said:

Although the onus is upon the plaintiff there is upon the defendant a need to provide some evidential foundation for the defences which are raised. If not, the plaintiff’s verification stands unchallenged and ought to be accepted unless it is patently wrong

The mortgagee’s obligations under the Property Law Act 2007, s 176

[16]	The Property Law Act 2007, s 176 provides:

176	Duty of mortgagee exercising power of sale

(1)        A mortgagee who exercises a power to sell mortgaged property, including exercise of the power through the Registrar under section
187, or through a court under section 200, owes a duty of reasonable care to the following persons to obtain the best price reasonably
obtainable as at the time of sale:

(a)        the current mortgagor: (b)        any former mortgagor: (c)        any covenantor:
(d)        any mortgagee under a subsequent mortgage:

(e)        any holder of any other subsequent encumbrance.

(2)        A mortgagee who exercises a power to sell mortgaged property may not become the purchaser of the mortgaged property except in accordance with section 196 or an order of a court made under section 200.

[17]     It is not contended that the sale of the security property was in breach of s 176(2).  Accordingly, that needs no further comment.

[18]     What is required in this case is an assessment of the duty owed by the plaintiff to the defendant as the guarantor of the loan pursuant to the Property Law Act 2007, s 176 to see if there is a proper foundation for a defence that that duty has been breached.

The mortgagee’s duty of care – the law

[19]     In Crown Money Corporation Ltd v Pink-Martin  I extracted a series of general propositions from authorities in relation to the mortgagee’s duty of care which I now set out:

a)        The Property Law Act 2007, s 176 and its predecessor, the Property Law Act 1952, s 103A, codify the duty which, under the general law, a mortgagee exercising a power of sale would be taken to owe to the persons mentioned in the Property Law Act 2007, s 176:  Apple Fields
Ltd v Damesh Holdings Ltd.   I have already mentioned that this now

has been extended to cover guarantors.

b)        The duty of care is concerned with obtaining the best price reasonably obtainable as at the time of sale: Agio Trustees Co Ltd v Harts Contributory Mortgages Nominee Co Ltd.     It is a duty to take reasonable care.   It does not necessarily follow that the best price reasonably obtainable will be achieved.

c)        The duty has to be measured at the time of the sale.   The duty arises at the time the decision to sell is made: Tse Kwong Lam v Wong Chit

Sen.   There is thus a need to analyse the steps taken once the decision to sell is made, up to the time of sale.

d)        The duty of care does not qualify the mortgagee’s right to decide if and when to sell: Agio Trustees Co Ltd v Harts Contributory Mortgages Nominee Co Ltd; Downsview Nominees Ltd v First City Corporation Ltd.

e)        When deciding for the purposes of s 176 whether reasonable steps have been taken by a mortgagee to obtain the best price, the steps taken by the mortgagee and those acting with it must be looked at in the round.  The issue is a commercial one to be viewed in practical commercial terms: Apple Fields v Damesh Holdings Ltd.

f)         Assistance in determining the issue mentioned in (e) above can be found by considering the steps endorsed in Harts Contributory Mortgages Nominee Co Ltd v Bryers  where the following matters were mentioned:

[c]        Where the security is substantial, or specialised property is involved, it will usually be necessary for the mortgagee to obtain and act upon specialised advice as to the method of sale: Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54 (PC).   Appointing a competent agent to sell does not discharge the mortgagee’s duties, but since its duty is ultimately only one of reasonable care, putting the matter in the hands of a competent agent will usually go a long way towards discharging the mortgagee’s duties.

[d]        In  the  normal  course  the  proposed  sale  will  need  to  be advertised with  an adequate  description  of the property’s attributes and, within reason, widely enough to attract all possible purchasers.  In some cases this will need to extend to both general and specialist publications: See Kwong supra at p 61; Ansell v NZI Finance Ltd (unreported, Wellington Registry, A434/83, Quilliam J, 14 May 1984).

[e]        There is no obligation to postpone the sale in the hope of a better price later, or to break up the assets and sell in a piecemeal  manner if this can  only be  carried  out  over  a substantial period or at a risk of loss: Kwong supra at p 59.

[f]        When  assets  are  sold  by  tender  or  auction,  a  reasonable period must usually be allowed for purchasers to inspect the property and arrange finance before submitting bids: see Fairer   Fishing   Co   Ltd   v   Broadlands   Finance   Ltd (unreported,  Timaru  Registry,  A35/77,  17 August 1984); discussed by Ross, supra, along with Ansell v NZI Finance Ltd.

g)	For the breach of duty to be actionable there must be proof of damage:

Apple Fields Ltd v Damesh Holdings Ltd.

The law in relation to receivers

[20]	The Receivership Act 1993, s 19 provides:

19	Duty of receiver selling property

A receiver who exercises a power of sale of property in receivership owes a duty to—

(a)	The grantor; and

(b)        Persons  claiming,  through  the  grantor,  interests  in  the property in receivership; and

(c)	Unsecured creditors of the grantor; and

(d)        Sureties who may be called upon to fulfil obligations of the grantor—

to obtain the best price reasonably obtainable as at the time of sale.

The equitable duty of good faith

[21]	Out of an abundance of caution, I briefly refer to the equitable duty imposed on a mortgagee.   That co-exists with the duty imposed by the Property Law Act
2007, s 176.  In most cases the statutory duty of care will be more onerous than the equitable duty: Apple Fields Ltd v Damesh Holdings Ltd as upheld in Apple Fields

Ltd  v  Damesh  Holdings  Ltd.      In  Commercial  and  General  Acceptance  Ltd  v Nixon  (1981) 38 ALR 225 and accepted in Apple Fields Ltd v Damesh Holdings Ltd  the duty to act in good faith requires a mortgagee to act without fraud and without wilful or recklessly sacrificing the interests of the mortgagor but stops short
of exposing the mortgagee for liability for negligence.

[22]     The facts reveal no evidence of bad faith.  Nothing has been disclosed to me which would indicate that there is a basis for a defence based on breach of the equitable duty of good faith.  I have mentioned this out of an abundance of caution because it was not separately addressed by Mr Cunningham.

[23]     A receiver is under a similar duty of care to that owed by a mortgagee when exercising a power of sale.  Somers J said in RA Price Securities Ltd v Henderson that a receiver:

is required to carry out his duties with the interests of the company, its creditors and shareholders in mind. So in the exercise of powers of sale he must act as a mortgagee with due care, skill and judgment in obtaining the best results reasonably possible in the circumstances.

The sale of the security property

[24]     In March 2008 the two debtor companies instructed Jim Mays, of Precision

Real Estate, to market the property and business for sale.

[25]    On 9 July 2008 the first defendant received an offer from Mr William Goodfellow to purchase the property and business for $3,315,000.00.  The offer was made by letter.  It had conditions attached which were recorded as follows:

1)         Clear title, free from all debts and obligations

2)	Finance.   With the intent of negotiating a sensible continuation in some form with Matrix

3)	The Landing Rights Agreement being terminated with appropriate guarantees

4)         Satisfaction   as   to   the   Department   of   Conservations   position regarding the future prospects for the property and re-negotiation of the lease fee

5)         Satisfactory position from the Far North District Council regarding the future prospects f the property and re-negotiation of the rates

6)	General Due Diligence on all aspects of the property and business

[26]     The letter recorded that time is of the essence and that it was expected that the matters would be completed within six weeks with possession to be given at
1 October 2008 for the new season.

[27]     One of the conditions referred to by Mr Goodfellow concerned a landing rights agreement between one of the local transport ferry operators in the Bay of Islands, Fullers, and Dew Drop Properties Ltd.  Otehei Bay has a wharf and landing facilities for ferries.  Fullers runs ferry services in the Bay of Islands.  The agreement required Dew Drop Properties Ltd to provide certain services for the Fullers’ passengers.   It also granted exclusive landing rights at the wharf to Fullers.   Zane Grey Restaurant & Bar Ltd had contracted with Dew Drop Properties Ltd to provide the  services.    Mr Goodfellow  made  it  plain  in  his  offer  that  he  required  this agreement to be terminated.

[28]     Mr JN   Gilbert,   an   insolvency  practitioner,   was   the   person   appointed liquidator of both debtor companies.   He has sworn an affidavit in which he has confirmed that he also retained Mr Jim Mays to market the resort and, in particular, to  negotiate  with  Mr Goodfellow  and  other  prospective  purchasers.    Mr Gilbert confirms that he instructed Mr Mays to go back to Mr Goodfellow and advise him that his offer of $3,315,000.00 was not high enough if it involved a termination of the landing rights agreement.  A number of emails passed.  A meeting was arranged on 19 August 2008.   At that meeting the first defendant provided Mr Mays and Mr Gilbert with a draft agreement for sale and purchase of the resort and associated business.     Mr Gilbert  instructed  Mr Mays  to  forward  the  draft  agreement  to Mr Goodfellow.   Mr Gilbert then met with Mr Goodfellow.   He brought a signed offer with him.   Mr Gilbert says that as a result of the meeting Mr Goodfellow revised  the  offer  to  $3,600,000.00.     The  purchase  price  was  payable  as  to
$1,125,000.00 at settlement on 1 October 2008 and the balance, $2,475,000.00 on

1 October 2009.  There was a further revised offer.  Mr Gilbert says he forwarded the offer and the revised offer to the plaintiff’s solicitors on 21 August 2008.

[29]     What is apparent is that as at 21 August 2008 the authority to execute any sale  and  purchase  agreement  was  with  the  liquidator  of  the  two  companies. Mr Cunningham confirmed to me and there is reference to this in the evidence that the liquidator in any event could not sign the contract because there was no ability to provide a release of a second mortgage.

[30]     The liquidator says he effectively stepped back from the whole process when the plaintiff appointed receivers of the two debtor companies on 4 September 2009.

[31]     The   sale   and   purchase   agreement   form,   which   was   the   offer   of Mr Goodfellow  of  19 August  2008,  contained  a  due  diligence  condition  in  the following form:

This contract is entirely conditional upon the Purchaser being satisfied that the property is satisfactory in all respects.  This condition is to be satisfied within               working days from the date of the agreement  30th September
08.   The purchaser is to notify the Vendor or the Vendor’s Solicitor in writing by 4.00 PM on the 30/09/08 working  day that this clause has been satisfied or this contract shall terminate.  This condition is inserted for the sole benefit of the Purchaser.

The conditions being,

1.         Clear title free from all debts and obligations

2.         Although it is our intent to negotiate continuation with Fullers, the
Landing Rights Agreement being terminated with appropriate guarantee

3.         Due diligence on the property and business including satisfactory discussions with the Department of Conservation and Far North District Council.

[32]     There  was  considerable  correspondence  and  to-ing  and  fro-ing  between Mr Goodfellow and his solicitor, the real estate agent instructed, the liquidator and the legal advisers to the plaintiff.   The outcome of it, however, was  that as at
28 October  2008  Mr  Goodfellow,  through  his  solicitors,  advised  that  the  due diligence condition had not been satisfied and therefore he cancelled the two agreements that had been signed in respect of, firstly, the land and, secondly, the business.

[33]     When the terms of the due diligence commissioned are analysed, it is difficult to see how any challenge to Mr Goodfellow’s cancellation could be maintained. That being the case, it is difficult to see how any criticism could be levelled at the plaintiff or the receivers in respect of the negotiations that were undertaken with Mr Goodfellow and all steps taken right up until Mr Goodfellow’s letter cancelling the agreements.

[34]     It is appropriate that I next review the steps that were taken to effect the sale of the security property.   It is common knowledge that at the relevant time the economic conditions and, in particular, the lack of finance in the property development and tourist property area had a considerable impact on the amount of interest from purchasers in the subject properties.  The position is well illustrated by a valuation that was given by McNally Valuation 2000 Ltd.  The importance of the valuation, which is dated 5 November 2008, is that it commented upon an earlier valuation which the same company had given on the instruction of the debtor company in 2007.  In the course of the November 2008 valuation, the valuer records:

In the current climate the proposed development will be difficult, if not impossible, to fund.   The global downturn combined with the credit crisis suggests demand for this type of property will be severely diminished and I believe my previous valuation needs to be discounted to between 30% and
50% of previous assessment to achieve a sale and therefore be in a range of
$1,745,000.00 to $2,900,000.00 inclusive of the fixtures, fittings and plant in the resort.

[35]     The position just outlined was reinforced in a letter to the receivers from Bayleys Real Estate Ltd of 26 September 2008 where the real estate agent expressed the  view  that  the  market  price  was  somewhere  between  $1,000,000.00  and
$1,500,000.00.  He recommended that any price in excess of the indications that had been given be seriously considered.

[36]     Mr Jim Mays, of Precision Real Estate Ltd, who had been retained by the defendants, then the liquidators and the receivers, undertook a specialised and targeted marketing plan and $9,700.00 was set aside for that.  The evidence discloses that there was website advertising, advertising in the New Zealand Herald on three occasions and direct marketing to interested parties.  Mr Mays was able to identify no additional potential buyers.   Mr Goodfellow appeared to be the only potential

buyer.  The due diligence process undertaken by Mr Goodfellow raised a number of issues.

[37]     The sale that was ultimately transacted with Mr Goodfellow was within the valuation parameters that had been set.   No specific areas were identified in the material placed before me, or in counsel’s submissions, to suggest that at the time of the actual sale any potential buyer had been overlooked or that, in some way, the marketing of the property was deficient.  I can find nothing in the evidence placed before me to show a ground of defence which might properly be available when I consider the summary I have set out in [19].

A review of the principle matters advanced on the defendants’ behalf

[38]     Mr Cunningham submitted that there was no reason for the due diligence conditions not to have been met.   However, the evidence is that Mr Goodfellow relied on the due diligence condition to cancel the contract.  I was provided with no sound legal basis that could support a case for challenging the position adopted by Mr Goodfellow.    Accordingly,  the  only  conclusion  that  can  be  reached  on  the evidence before me is that the original negotiations, including the contract that was entered into with Mr Goodfellow, were never likely to produce an unconditional contract on the terms that had been negotiated.  There are two consequences of this. The first is I am not satisfied that there can be any criticism of the steps taken by the plaintiff in relation to obtaining the sale of the security properties.  Second, I have not been provided with any sound basis for criticising anything that the receivers did in relation to the negotiations with Mr Goodfellow.   It is not necessary for me to make a final finding on the position regarding the receivers because they are not, strictly speaking, a party to this summary judgment application.  Having said that, however, it is important that I record that any potential claim against the receivers does not satisfy me that this is an appropriate case to exercise the discretion against entering summary judgment against the defendants.

[39]     Mr Cunningham initially submitted that the facts justified a defence that the plaintiff had failed to mitigate its loss.   He expressly abandoned that submission. For that reason, I examine it no further other than to say that my preliminary view is

that the submission was misconceived.  This is, after all, a simple case of a creditor pursuing repayment of its debt.

[40]     Mr Cunningham submitted that insufficient notice was taken of the effect of the cancellation of the landing rights agreement by Fullers in November 2008.   It will be recalled that this was one of the requirements that Mr Goodfellow laid down for  proceeding  with  his  contract.     Mr Cunningham  submitted  that,  with  the cancellation of the landing rights agreement there opened up the possibility of the complex being developed as a private resort.   The implication here is that there would be a different category of likely purchasers for the development.  Mr Sandelin submitted that that was not possible having regard to the lease which Dew Drop Properties Ltd obtained from the Crown.   I do not need to make any final determination on that issue.

[41]     What is apparent from the material that has been placed before me is that there is simply no factual foundation to support the proposition that there was a category of likely purchasers who had not been approached to see if they might be interest in purchasing the complex.  If there was anything in this submission at all, it is at best, hypothetical and which, as I have said, has no foundation in the evidence before me.

[42]     In [19] of this judgment I extracted a series of general propositions from the authorities.   Both counsel made reference to my judgment in Crown Money Corporation Ltd v Pink-Martin.    When those general propositions are considered against the facts in this particular case, I am driven to the conclusion that there is, in fact, no sound basis for criticism of the actions of the plaintiff in effecting a sale of the securities it held in this case.   Further, I have not been provided with a basis which suggests to me that there is a serious foundation for a claim against the receivers.

[43]     Accordingly,  I  am  satisfied  that  the  plaintiff  has  established  that  the defendants have no defence and that this is an appropriate case to enter summary judgment.

[44]	For the reasons already recorded in this judgment, the position of interest and costs is reserved for the filing of memoranda.

Judgment

[45]     Judgment is entered against the defendants for $2,420,191.00.

Interest and costs

[46]     If counsel cannot agree on these matters, memoranda in support, opposition and reply shall be filed and served at seven-day intervals.  On receipt of the reply memorandum the file shall be referred to me to consider the entry of judgment on
interest and costs.

JA Faire
Associate Judge