Blue Chip loan agreements entered into by Mr & Mrs Bartles, a retired Whangarei couple, have been ruled oppressive by the Court of Appeal. The case goes back to the High Court for a decision on the extent to which the agreements should be amended. The Bartles could still lose their Whangarei home after a disastrous investment in the Blue Chip scheme.
To get working capital for its property developments, Blue Chip offered “joint venture” arrangements to investors; a deal typically offered to cash-poor retired couples whose homes were often mortgage free.
In return for funds advanced, investors were offered the chance to share in any capital gain from the development and sale of apartments while being paid an income stream from rent received from the property. To get cash for investment, investors were encouraged to mortgage their debt-free homes. Income from rents was touted as being sufficient to pay interest on the mortgage prior to the sale of the apartment and cashing up of the “joint venture”.
The reality did not turn out as well as expected: the apartments being sold to investors were inflated in value; a falling market reduced realisations; and there was no strong rental demand for the apartments. Blue Chip companies were described as clipping the ticket at every stage of the transaction.
In September 2006, the Bartles agreed to pay $552,000 to purchase an apartment in a building being refurbished in
The Bartles solicitor, Mr Jonathan Mathias, was ordered by the High Court to pay damages for negligence. He is bankrupt.
Faced with a mortgagee sale of their Whangarei home, the Bartles argued that the mortgage transaction should be reopened under the Credit Contracts and Consumer Finance Act 2003 as being oppressive. GE Finance argued the Blue Chip companies were not acting as its agent when they set up the transactions. The financier argued it was an innocent bystander, entitled to enforce a legitimate mortgage transaction. It should not be prejudiced by any alleged oppressive conduct by the Blue Chip companies. GE was described as having “out-sourced” its loan originating operation – Blue Chip companies set up the transactions and presented GE with completed paper work from investors seeking a loan. It was alleged a Blue Chip representative slyly amended the Bartles application to change their status from “retired” to “self-employed investor” in order to facilitate the loan approval.
The High Court ruled that the GE mortgage could be enforced.
The Court of Appeal ruled the mortgage should be reconsidered. The 2003 Act allows a court to reopen credit transactions where there has been oppressive behaviour: behaviour which falls outside current commercial practice.
The loan was held to be oppressive because: GE took no risk (the claimed asset values comfortably exceeded the loan advance and GE holds insurance for any shortfall); the loan was spread over a term of 25-30 years (being a $630,000 loan to a couple in their mid-60s having an annual pension income of about $22,000); and while the Bartles had access to supposedly independent advice, Mr Mathias was described as a “tame” solicitor recommended by Blue Chip to intending investors.
While GE out-sourced the loan origination to Blue Chip companies, the Court of Appeal said it could not avoid potential liability under the 2003 Act by delegating this work.
Bartle v. GE Custodians – Court of Appeal (6.5.10)
05.10.001