Fair Trading: Red Eagle Corporation v. Ellis

Having a reputation for good business judgment and integrity means liability follows for honest but misleading statements made without qualification or reservation. Two Auckland businessmen fell out when a loan went sour.

The Supreme Court was told that Auckland businessman, Mr Tony Falkenstein, was approached by a longtime business acquaintance, Mr Rick Ellis, for short-term development finance. Mr Ellis was assisting a Sydney woman in setting up a paua farm in Singapore. She had asked him to source a three month $250,000 loan to fund the closing stages of the project.

When approaching Mr Falkenstein for assistance, Mr Ellis told him the woman owned substantial Sydney real estate having a net worth of some two million dollars.

At Mr Falkenstein’s request, Mr Ellis obtained details of her assets and liabilities which appeared to confirm the substance of her claimed net worth. Mr Ellis did not personally check the accuracy of the information provided from Australia and did not tell Mr Falkenstein that the information was unverified.

Loan documents were signed by the woman and an unsecured advance for $250,000 handed over. The loan was not repaid, the Australian woman was bankrupted and Mr Falkenstein found out that she did not own the properties she claimed to own.

He sued Mr Ellis, alleging a breach of section 9 of the Fair Trading Act 1986: misleading or deceptive behaviour.

The court said Mr Falkenstein advanced the loan because past experience showed that he could trust Mr Ellis’ integrity. Mr Ellis had initiated discussions about the loan. Mr Falkenstein relied primarily on the information provided by Mr Ellis about the value of the Sydney properties. The woman provided a schedule of her (supposed) assets and liabilities which appeared to confirm the accuracy of what Mr Ellis was saying. This schedule alone was not the reason for making the loan.

The Supreme Court ruled that statements made by Mr Ellis about the borrower’s financial position were misleading. He was liable to make good Mr Falkenstein’s losses.

However, the amount to be recovered was reduced by 50 per cent. The court said Mr Falkenstein could have better protected his position by taking steps to find out who did own the properties.

Red Eagle Corporation v. Ellis – Supreme Court (12.03.10)

12.10.002