The
fine print in guarantees can be treacherous.
Auckland accountant Richard Johnston was held liable to pay FAI Money
$137,000 on a guarantee when his lawyer brother gave false financial
information in the loan application.
West Auckland lawyer Edward Johnston was
bankrupted after failing to repay FAI Money some $836,000 in 2011. Funds had been borrowed two years previously
to take full ownership of an East Tamaki building he then part-owned. Included in the security required by FAI was
guarantees from the two trustees of family trusts holding title to Edward
Johnston’s family home in Swanson. The
trustees were his brother Richard Johnston and his father-in-law Gavin Crawley.
The High Court was told Richard Johnston
signed. Mr Crawley did not sign in
person. He denied ever seeing the
documents or being aware of the transaction.
Edward Johnston signed on his behalf, under a power of attorney. After Edward Johnston was bankrupted, FAI
turned to sue the two trustees under their guarantee. The plain wording of both the loan agreement
and the guarantee stated FAI could recover from the trustees only the amount
available from selling trust assets. But
the plain wording was then qualified: the trustees were personally liable to
the extent that the value of trust assets was reduced by their negligence.
Justice Keane ruled the loan documents
together with the guarantee had the effect of having the trustee/guarantors
vouching for the accuracy of the financial information provided by Edward Johnston
to FAI. His statement in the loan
application claiming a net worth of $11.147 million was untrue. His statement that the Swanson family home
was mortgage free and worth at least $1.5 million was wrong. There was then $1.1 million owing on a Westpac
mortgage over the home.
Justice Keane ruled Richard Johnston was
negligent. As Edward’s accountant,
Richard knew of his brother’s circumstances and could have seen at a glance
that the financial information provided contained highly material inaccuracies.
Justice Keane ruled Mr Crawley was not negligent, knowing nothing of the
initial FAI loan and guarantee or of later manoeuvres to keep the Swanson home safe
from creditors.
The proved negligence of Richard Johnston
meant he was personally liable to FAI for any loss in the value of the family
trust asset: the Swanson family home. As
trustee, Richard Johnston had been party to an arrangement having the effect of
preventing FAI getting hold of the property. The loss of $137,000 was
calculated on a notional sale of the Swanson home: sale at a forced sale price
of $1.035 million less the mortgage owed to Westpac. In fact, the home had been sold to a new
family trust in 2012 at a price sufficient to clear the then outstanding
Westpac mortgage. Edward Johnston’s wife appears to be the primary beneficiary
of the new trust. The price paid by the
new trust was less than the notional forced sale price of $1.035 million.
FAI
Money v. Johnston – High Court (28.08.15)
15.098