Construction Contracts: re Lighthouse Property Development

Voluntary administration disrupts contractors who do not get Construction Contract Act charging orders registered in time.  They remain unsecured creditors with rights frozen.

Contractor Amstar New Zealand Ltd claims it is owed at least two million dollars by Lighthouse Property Development No.1 Ltd for work at an apartment complex on Auckland’s Karangahape Road.  A 2020 Construction Contracts adjudication against Lighthouse went unpaid.  The Act allows unpaid adjudications to be filed in court and a charging order registered over title to the project.  This gives unpaid contractors security over the project they worked on.

Within two hours of Amstar filing documents in the District Court, Lighthouse appointed voluntary administrators.

Copied from Australia, voluntary administration sees control of distressed companies taken over by insolvency specialists.  The intention is to have an independent specialist see if the business is worth salvaging.  Legal action by unsecured creditors is suspended during administration; secured creditors still have freedom of action.

After its court filing, Amstar obtained a court judgment and registered a charging order against Karangahape Road.  Amstar used this charging order as a bargaining chip; ongoing apartment sales could not be finalised without its approval.

The High Court ruled Amstar’s charging order was unenforceable.  At the time Lighthouse directors handed over control to administrators, Amstar was an unsecured creditor.  Rights as an unsecured creditor were frozen.  Later steps to get a charging order were invalid.

re Lighthouse Property Development No.1 Ltd – High Court (23.12.20)

21.022

Wages: Kidd Partnership v. Cowan

Wages must be paid in cash or credit to a bank account, unless otherwise agreed.  Help for a mate came unstuck when courts ruled a transfer of land assessed at $80,000 could not be counted as payment in lieu of wages.

Friends for over fifty years, Charles Kidd offered to help George Cowan, left with no place to live after a relationship property split. For a period of more than seven years, Mr Cowan lived rent free in an apartment and then a cottage both owned by Mr Kidd.  Through a partnership with his son, Mr Kidd owned farms, properties and a rest home all in and around Winton.  Shortly after Mr Cowan shifted into the rent-free apartment, Mr Kidd transferred to him land as a site for a new home.  This site had a rating valuation of $58,000.  It was valued at $80,000 for purposes of the gift to Mr Cowan.   

Over a seven year period, Mr Cowan worked for Mr Kidd on an informal basis, driving trucks and assisting both on farms and with building projects.  There was no agreed employment contract.  No wages were paid.  The two subsequently fell out.  Mr Cowan sued for unpaid wages.  The Employment Court awarded wages calculated at the minimum wage per hour: $104,600.  Mr Kidd countered that the $80,000 value of the land should be counted.

The Wages Protection Act requires wages be paid in money only, the Court of Appeal said.  The value of the land could not be taken into account.  Forerunners of the Act were designed to stop the practice of ‘trucking,’ or barter, where employees were paid with chits or tokens that could be exchanged only for goods at the employer’s store.

Kidd Partnership v. Cowan – Employment Court (28.07.20) & Court of Appeal (21.12.20)

21.021

Class Action: Claims Resolution v. Smith

Christchurch earthquake litigation specialist Claims Resolution Service together with lawyers Grant Shand are facing a class action from disgruntled clients alleging failure to properly disclose hidden fees.

Some 170 former clients of Claims Resolution Service Ltd are disgruntled with the service provided.  It promised to co-ordinate earthquake insurance claims in return for an eight per cent commission on earthquake payouts.  Fewer than two per cent of claims went to litigation it said; nearly all were settled out of court.  Debt collection action by Claims Resolution for fees allegedly unpaid led to a backlash; clients banded together attacking its business model.

Customers looking to use Claims Resolution services had signed standard-form contracts requiring an upfront payment of $2500 with an obligation to pay ongoing expenses like engineers’ reports and any court filing fees.  Lawyers’ fees and Claims Resolution’s payoff were deferred until claims were settled. Disgruntled clients complain interests associated with both Claims Resolution and Grant Shand picked up hidden fees along the way doing work for Claims Resolution clients as supposedly independent entities.  The supposedly independent property damage assessments and costings used as part of negotiations with insurers were far from independent, clients complain. Compensation is demanded.

The Court of Appeal confirmed legal action can continue as a class action.  Claims Resolution was ordered to post on its Facebook page notice of the intended litigation together with an advertisement for former clients to ‘opt-in’ to class action litigation.  Evidence was given that Claims Resolution had been using Facebook posts to campaign against the threatened class action, stating ‘class actions may not be all they are promised to be’ and warning class action litigants risked ‘incurring enormous costs.’

Claims Resolution Service Ltd & Grant Shand v. Smith – Court of Appeal (18.12.20)

21.020

Sports Agent: Taylor v. Miles

Raised by a solo dad in tight financial circumstances, Elijah Taylor made it in the tough professional arena of rugby league playing for the Kiwis and NRL teams: Warriors, Penrith and West Tigers. Former bankrupt Ian Miles preyed on his financial naivety to rip him off misappropriating some $440,000.  When sued, Miles bankrupted himself again in a doomed attempt to escape the financial consequences.   

It was only through determined detective work by Elijah’s wife Poko that the fraud was discovered.  Professional firms came to his aid: Accounting firm Deloitte tracked down the extent of the fraud at no cost; lawyers worked for a reduced fee.

The High Court was told Elijah made his first grade debut with the Warriors in 2011.  Whilst on a base salary of $70,000, a new contract offer was made at some $200,000 a season.  His then agent recommended he accept.  Miles was in the background.  He had been offering mental skills coaching to members of the wider Warriors’ squad. On Miles recommendation, Elijah turned down the offer, later appointing Miles as his agent because he thought he would ‘do a great job’ in getting a better offer.  By late 2011, Miles was acting as his sports agent.

The NRL requires all player/sports agent contracts to include standard terms, a requirement intended to curb exploitation of players.  Elijah signed a standard contract.  It allowed Mills to receive seven per cent of his cash salary (the norm in the NRL), but Miles suggested he be given signing authority on Elijah’s bank accounts (which is not the norm).  Within three months, Miles was making unauthorised withdrawals.  Two years later, Miles had Elijah sign a second athlete/manager contract having five per cent of cash salary going to a company controlled by Miles.  While Elijah though he was now paying only five per cent, Miles took commissions stated in the combined contracts: twelve per cent of salary.  The High Court was to later rule this 2013 contract unenforceable as an unconscionable bargain arising from Miles undue influence over his client.  Elijah never read the 2013 contract nor got independent advice; he signed when told.

This 2013 contract was signed at a time when Elijah joined the Panthers on a A$360,000 annual salary.  As had happened in New Zealand, Miles ensured he had access to Elijah’s Australian bank accounts including a credit card operating off Elijah’s account.

The High Court was told that over a three year period Miles actioned over one thousand unauthorised transactions on Elijah’s bank accounts both in New Zealand and Australia.  He supressed these misappropriations by having bank and credit card statements sent to his home address in Christchurch.  Any liquidity difficulties were explained to Elijah as excessive credit card spending by his wife Poko.  Annoyed and frustrated by these insinuations, Poko unearthed details of Miles’ internet banking authorisation, changing the delivery address for their bank and credit card statements to have them delivered to their Sydney home. The fraud was quickly exposed.

With the benefit of Deloitte’s forensic accounting work, Elijah sued in the High Court.  Miles immediately filed for bankruptcy.  After an undefended hearing, Justice Doogue ruled the 2013 contract void and ordered Miles pay $A340,000 plus NZ$42,900.

The general bankruptcy rule is that court judgments are unsecured debts, forming part of any bankruptcy.  Debts arising from fraud are an exception.  These debts survive bankruptcy and can be enforced after a bankrupt’s discharge.  Justice Doogue highlighted that her High Court order against Miles was based on a claim for fraud.

Taylor v. Miles – High Court (17.12.20)

21.018

Fraud: Kloogh v. Serious Fraud Office

While upholding eight years ten months imprisonment for Barry Edward Kloogh’s $15.7 million Ponzi fraud, the High Court overturned a five million dollar reparations order; Kloogh had no prospect of making any reparations and to order reparations only raised false hope for his victims, the court said.

Dunedin-based Kloogh was an authorised financial adviser. His local profile was heightened by involvement with local theatre. Victims were recruited by holding ‘free’ dinner seminars, followed up with one-on-one meetings offering tailored investment plans. It was all a con.  The High Court was told Koogh never invested clients’ money as promised. Their money was stolen in a long-running Ponzi fraud. Money advanced by newer clients was used to pay fictitious investment returns to existing clients.  Forged bank statements were shown to clients; keeping up the pretence of investments made on their behalf.  When investigated by Serious Fraud Office, Kloogh admitted to stealing client money as far back as 1995.  Money stolen was used to prop up businesses owned by Kloogh, pay lease payments on cars, make loans to family members and on holidays for himself and his wife.

At trial, Kloogh admitted to defrauding 81 victims of some $15.7 million.  Many were elderly, losing their retirement savings. One terminally-ill client lost $630,000, money received from an early pay out on a life assurance policy.

After being charged, Kloogh met with many of his victims at restorative justice conferences.  The vast majority of these victims considered Kloogh insincere and lacking insight into his offending, the High Court said. 

Kloogh v. Serious Fraud Office – High Court (17.12.20)

21.017

Health & Safety: WorkSafe v. Dong SH Auckland Ltd

Just supervising another contractors’ work is sufficient to incur workplace Health & Safety liability.  WorkSafe took a test case to the High Court after a bungled demolition trapped the wheelchair-bound occupant of a neighbouring property.

The 2017 demolition of a residential house on Moa Road in Auckland suburb Pt Chevalier went catastrophically wrong when a wall collapsed, severing a gas line and having debris fall onto a neighbouring property.  Fire Service was called to rescue the trapped neighbour.

The High Court was told owner J & Ling Properties Ltd had Moa Road demolished as the first step in redevelopment plans.  Dong SH Auckland Ltd was project manager. Demolition company Quick Earth Moving Ltd accepted liability for the botched demolition, pleading guilty in a Health & Safety prosecution.  Dong SH was also prosecuted.  The trial judge dismissed this prosecution; Dong SH did not hire Quick Earth to do the job, it recommended Quick Earth to J & Ling Properties and it was J & Ling who had the contract with Quick Earth.

Worksafe appealed.  The High Court ruled no contractual relationship was needed for Health & Safety liability.  Proof is needed that the person prosecuted was managing or supervising work when Health & Safety breaches occurred.  Retrial of the Dong SH prosecution was ordered.

Mr Huo of Dong SH said his company had limited involvement with the demolition.  It arranged for utilities to be cut off and security fencing placed around the site. It only became actively involved on site after the wall collapsed, he said.

WorkSafe New Zealand v. Dong SH Auckland Ltd – High Court (17.12.20)

21.019

Confidential Information: Donovan Group v. Reid

After getting a wide-ranging court order to seize business records from a rival construction business set up by former general manager Haemish Reid, Whangarei-based Donovan Group has been told it cannot use heavy-handed judicial processes just to stop a more nimble rival competing in the market.

Mr Reid left Donovan group in 2018, setting up Smartsteel Buildings Ltd in competition.  He was taken by surprise when Donovan later turned up with a court order authorising seizure of computer data and business records.  Donovan alleges Mr Reid was using confidential information taken from Donovan in breach of his earlier employment contract.  Mr Reid disputes Donovan’s definition of confidential.  He claims Donovan is deliberately stalling in arguments over what is truly confidential, disrupting his new business.

In the High Court, Associate judge Bell ruled Donovan had to limit its confidentiality claim to projects Donovan had underway at the time Mr Reid left and that Mr Reid subsequently tendered for; seven contracts, the court was told.  Mr Reid’s business submitted the winning tender on some, but not all, of these contracts.  Donovan is allowed to look at documents relating to those contracts.

Donovan cannot use confidentiality claims to prevent Mr Reid using trade skills and expertise developed whilst employed, Judge Bell ruled.  Complaints that Mr Reid used project management and pricing skills learnt whilst at Donovan must be specified in detail, if confidential, he said.  These are not processes unique to Donovan.  They are general business processes applied by all businesses. Donovan could not claim its building designs and steel-framing methods were confidential, Judge Bell said. Building designs become public knowledge when filed for resource consent.  Donovan’s steel framing was protected by patent.  Consent applications and patents are on the public record.  Anyone can read them.  Filing destroys confidentiality.

General or over-broad allegations of breach of confidence cannot be used to stifle competition, Judge Bell ruled.

Donovan Group NZ Ltd v. Reid – High Court (16.12.20)

21.016

Estate: Chen v. Wu

Informal nature of Chinese adoption law proved critical in a dispute between two families over inheritance of a house in south Auckland. 

Qinping Ling died in 2018.  She owned a house in Ballater Place, south Auckland. Named in her 2005 will as executor and sole beneficiary was Li Hui Ling, described as her father. He died in 2010.  In legal jargon, Qinping died intestate.  Since her named sole beneficiary pre-deceased her, Qinping left no valid will.  The Administration Act provides a backstop solution, allowing blood relatives to inherit with the nearest blood relative appointed to administer the estate.  There was a challenge as to who were Qinping’s blood relatives.

The High Court was told Qinping was born in northern Vietnam into the Wu family in the late 1960s, but was raised by the Ling family. Six months after birth, Qinping’s birth parents passed their daughter on to the Ling family, living in a neighbouring village.  In the 1960s, cultural practice in Vietnam was to gift children to childless couples.  Renaming this child was assumed to bring good luck for the childless couple, improving their chances of having children of their own.  Both the Wu and Ling families subsequently fled Vietnam in the face of hostility from ethnic Vietnamese.  They settled in different parts of China.  Qinping was acknowledged as a member of the Ling family in a hukou, the local residence permit issued by Chinese authorities.  Evidence was given that Qinping did have occasional social contact with her Wu siblings. In 1989, Qinping came to New Zealand on a tourist visa, later gaining New Zealand residence and having her Ling parents join her on the government’s then family-reunification policy.  In her early days in New Zealand, Qinping lived with members of the extended Wu family who had separately emigrated to New Zealand.

After her death, Qinping’s Wu family siblings said they were her closest blood relatives, entitled under New Zealand law to her assets on death.  Justice Wylie said this depended on whether Qinping had been adopted by the Lings. New Zealand adoption law treats an adopted child as the biological child of the adoptive parents.

The High Court was told Peoples Republic of China had no formal rules for adoption at the time the Ling family fled to China. Informal oral adoptions were valid. The fact Qinping had lived with the Ling family since age six months and had been raised by the Ling family meant she had been ‘adopted’ according to Chinese law, Justice Wylie ruled. Administration of Qinping’s estate was awarded to Qinping’s adoptive mother.

Chen v. Wu – High Court (14.12.20)

21.015 

Colour Trademark: Energy Beverages v. Frucor

Frucor’s V energy drink and Energy Beverages’ Monster Energy both feature colour green as distinctive markings on their product.  Legal arguments over improper competitive use were compounded by a stuff up at IPONZ over Frucor’s trademark colour registration.

Intellectual Property Office of New Zealand is a government body, part of Business, Innovation and Employment. It acts as a trade marks registry.  IPONZ accepted for registration a colour trade mark by Frucor Suntory, colour green Pantone 376C for use on cans and promotional material advertising its V energy drink.  Frucor has held this colour mark since 2008.  IPONZ mistakenly recorded on the register a colour swatch of the incorrect shade green as representing Pantone 376C.  Competitor Energy Beverages swooped.  It argued Frucor had no legal protection to colour green for its energy drinks and that its 2008 trade mark rights be removed from the register. Trade mark law requires a registered mark to be precise and to lack ambiguity.

The High Court ruled Frucor’s 2008 colour trade mark valid. Its application was not ambiguous.  The colour swatch presented with its application was that of Pantone 367C. The error lay with IPONZ which copied and uploaded a darker shade of green than that being trademarked.  The court was told Frucor has applied to have the register corrected.

Ironically, Frucor’s claim to a Pantone 367C colour trade mark across the Tasman was dismissed in the Australian courts.  Its registration in Australia was ambiguous. It filed for registration a copy of the mismatched registration sitting on the New Zealand register; carrying across the Tasman and submitting in its own name the error made by IPONZ.

Energy Beverages LLC v. Frucor Suntory New Zealand Ltd – High Court (14.12.20)

21.014

Honey Wars: Nirvana Farm Ltd v. Makakaho Land Co Ltd

Manuka honey is the new gold. Whanganui neighbours are at war with allegations of ‘boundary stacking;’ placing hives on boundaries to harvest nectar from neighbouring properties.

Nirvana Farm Ltd, together with other beekeepers, alleges neighbour Makakaho Land Company Ltd is poaching manuka nectar with strategically placed hives on their common boundary.  More narrowly, the dispute is between Gerald Pearce and Rodger Pearce.  They share more than a common surname; the ability to gather commercially valuable manuka honey from manuka scrub around Waitotara.

Nirvana and Gerald claim to have suffered losses in excess of $612,000 because Makakaho and Rodger overstocked their common boundary. Nirvana is suing; alleging trespass and nuisance.  Whether bees entering from a neighbour’s property can amount to either trespass or nuisance has lawyers scratching their heads.  It is a novel legal problem.  The High Court has been asked to rule.

Meanwhile, strict rules were set down by Justice Cull pending a full court hearing.  Makakaho is prohibited from placing hives within 300 metres of their common boundary and is allowed no more than one hive per hectare of manuka on its property. Previously, Makakaho had some 600 hives on the common boundary.   Nirvana is allowed to fly drones over Makakaho to check placement of hives. Inspectors appointed by Nirvana are entitled to be present at harvest to record the volume of honey extracted by Makakaho.

Nirvana Farm Ltd v. Makakaho Land Company Ltd – High Court (10.12.20)

21.013

Leaky Home: White v. Zadeh

For the Zadeh family it was the tenant from hell when property agents installed a member of the Nomad gang as tenant in their Richmond investment property.  The Zadehs were subsequently ordered to pay $420,000 damages to a purchaser after evicting the tenant and onselling, inaccurately promising the buyer it was not a leaky home.

Initially from Iran, the Zadehs moved to New Zealand from the United States after completing a large-scale property subdivision in Colorado.  They purchased investment properties in the Marlborough-Nelson area.  Their 2012 purchase of a residential investment property on Blair Terrace in Richmond proved a nightmare.

The High Court was told their tenant failed to pay rent, used the premises to manufacture methamphetamine, flooded the house after blocking drains to prevent police getting forensic evidence by testing wastewater leaving the property and threatened the Zadehs when they sought access. Police assisted in the issue of an eviction notice.  During the last three months of occupation, the tenant prominently displayed a banner stating: ‘Leaky Home For Sale Available August.’

Selling the property proved difficult.  Eventually, Mr Zadeh advertised Blair Terrace as a private sale on TradeMe.  Negotiations leading to a December 2016 sale underwent close examination in the High Court.  Existence of the ‘leaky home’ banner was widely known in the neighbourhood.  Evidence was given that Mr Zadeh was keen to tell intending purchasers the banner’s message was untrue.  The banner was a malicious act by a former tenant, he said.  At the same time, he was keen to downplay weathertightness issues which had been subject of a claim to the Weathertightness Resolution Service by a former owner.  There was evidence that during their ownership, the Zadehs twice repaired the living room ceiling because of leaks and also had repairs made in the master bedroom and en suite.  Justice Dobson ruled Mr Zadeh did make emphatic statements during negotiations that Blair Terrace was not a leaky home.  This was untrue.  The purchaser was entitled to damages.  The High Court was told remediation would require replacement of all exterior cladding and installation of a new roof.  This cost would exceed the $520,000 purchase price paid.

The Zadehs were ordered to pay damages totalling $420,00: the estimated cost of remediation less a deduction of some $18,000 for deferred maintenance and a further $100,000 for ‘betterment.’ After remediation, the purchaser would have a better property than that purchased.

White v. Zadeh – High Court (8.12 20)

21.012

Car Insurance: IAG v. Forde

In an insurance test case, the High Court ruled a licensed driver supervising a learner driver is not ‘in charge’ of the vehicle if asleep in the passenger seat.

Motorists holding a learner licence must be supervised by a fully-licensed driver when driving.  IAG refused to pay out on a motor vehicle policy after a serious crash near Milton in 2018.  Charlene Day fell asleep at the wheel, crossing to the wrong side of the road and colliding with a campervan.  Occupants of both vehicles were seriously injured.  Ms Day was charged with careless use of a motor vehicle.

The High Court was told Ms Day was driving a vehicle owned by her fiancée, Bryan Forde.  She held a learner licence; Mr Forde was fully-licensed.  At the time of the crash, he was in the passenger seat. The IAG policy denied liability if the driver was ‘not driving according to the conditions of his or her licence.’ IAG alleged Mr Forde was asleep in the passenger seat at the time of the accident.  There was no-one ‘in charge’ it said.

Mr Forde complained to the Insurance and Financial Services Ombudsman about AIG’s refusal to pay for damage to both vehicles. She recommended IAG pay.  IAG made an ex gratia payment, then took a test case to the High Court.  It paid Mr Forde’s legal expenses.  The Insurance and Financial Services Ombudsman Scheme requires providers to meet complainant’s legal expenses of they wish to challenge an Ombudsman’s decision in court.  For the purposes of the test case, it was presumed Mr Forde also had fallen asleep.

Justice Dunningham ruled the Land Transport Act requirement for a fully-licensed driver to be ‘in charge’ when a driver on a learner licence is driving means the fully-licensed driver must be actually in charge, in the sense of supervising the driver and being able to give instructions and to take corrective action when required.

IAG New Zealand Ltd v. Forde – High Court (8.12.20)

21.011

Fraud: Hunter v. R.

Described as a generous sentence, the High Court confirmed a community detention sentence for recidivist fraudster Brian Damian Hunter after conviction for deception, misrepresenting himself as a Ministry of Education supplier to fraudulently obtain computer hardware from UK supplier ApplianSys.

Hunter has over 150 convictions for dishonesty.  The High Court was told he contacted ApplianSys in 2007, claiming to be a consultant with Education and offering to act as ApplianSys’ New Zealand agent.  He was sent eight cache boxes and two servers, valued at $30,000, to be trialled in schools.  Hunter followed up with advice that he expected to obtain a multi-million dollar Education contract.  When advised by ApplianSys that it had scheduled a meeting with an Education representative, Hunter intervened stating he knew the representative personally. He advised ApplianSys to cancel the meeting.  No multi-million dollar contract was forthcoming.  Some eighteen months later, ApplianSys received an anonymous email warning Hunter was a convicted fraudster.

A police search of Hunter’s home located five ApplianSys cache boxes; the remaining three and the two servers were never located. Hunter pleaded guilty when charged with fraud.  The High Court dismissed his appeal against conviction and sentence of six months’ community detention with a daily curfew and 100 hours community service.  Having pleaded guilty, it was difficult to appeal conviction. The sentence imposed was generous, the High Court ruled.

Hunter v. R – High Court (7.12.20)

21.010

Business Purchase: Coffey v. Walker

Six years after private investigator Mark Walker left Alligator Security alleging business colleague Paul Coffey had misrepresented Alligator’s financial position, Coffey sued claiming Walker still owed $500,000 for his purchase of a thirty per cent stake.  The Court of Appeal ruled Walker owed nothing; the manner of his departure amounted to cancellation of their agreement. 

The two had known each other since the late 1980s when Mr Walker operated as a private investigator.  In May 2008, Mr Walker left his then job with ASB to buy into Mr Coffey’s existing security and alarm monitoring business: Alligator Security. Mr Walker was not provided with any detailed financials.  He agreed to buy in at $700,000 without getting legal advice.  He paid Mr Coffey $200,000 up front for a thirty per cent stake, promising the balance of $500,000 would be paid in five years.  Mr Walker left a little over a year later after Mr Coffey said the business was not earning enough to pay salaries.

In 2015, Mr Coffey demanded payment of the promised $500,000, plus interest for late payment.  In the interim, Mr Coffey had been convicted of numerous tax offences; sentenced to ten months’ home detention and fined $20,000.

Defending Mr Coffey’s $500,000 claim, Mr Walker said their agreement came to an end because of Mr Coffey’s misrepresentations. Mr Coffey misrepresented Alligator’s financial viability, in particular Mr Coffey failed to disclose the extent of its borrowings and its unpaid tax debts, he said.  Mr Coffey’s use of company cash to fund a lavish lifestyle amounted to personal spending written off as a tax expense, he alleged.

In the Court of Appeal, legal argument centred on whether the contract to pay $500,000 was cancelled.  Lawyers typically ensure cancellation is made by formal written notice. In this case, Mr Walker simply walked away from the business.  There was some email communication with Mr Coffey by Mr Walker seeking a buy-back of his thirty per cent stake together with soothing suggestions that they might be able to work together some time in the future.  Nothing came of these negotiations.  The conduct of both Mr Walker and Mr Coffey made it clear the contract was cancelled, the court ruled.  Mr Walker left and resigned as a director of the business; Mr Coffey made no mention of $500,000 still being due while he personally pumped another $300,000 into the company in an attempt to fend off Inland Revenue.

Mr Coffey took security over company assets in return for his injection of this $300,000.  Evidence was given that Mr Coffey used this security to seize company assets, days before the business was forced into liquidation by Inland Revenue.  It was alleged these business assets were then sold at an undervalue to Mr Coffey’s long-term girlfriend.

Coffey v. Walker – High Court (31.10.19) & Court of Appeal (4.12.20)

21.009

Constructive Trust: Morrison v. Autumnal Investments

Seven years after Maurice O’Reilly agreed to pitch in and financially assist old school friend Stuart Morrison the two were in court bitterly disputing what had been agreed: O’Reilly had agreed to warehouse his Tauranga properties until he got back on his feet, Morrison said; Morrison sold the properties outright, said O’Reilly.

Valued at $4.7 million in July 2018, the properties at Tauriko on Tauranga outskirts encompass two residential properties and a kiwifruit orchard.  Mr Morrison purchased Tauriko in stages through 2004 and 2005, taking title in the name of his family trust.  By 2011, the trust was in default on a bank loan.  A mortgagee sale was threatened.  Mr Morrison put the properties up for auction.  They didn’t sell.  Conditional sales eventually came to nothing.  Family friend Maurice O’Reilly and wife Anne came to the rescue, borrowing to pay off the pressing bank loan and taking title in the name of their family investment company: Autumnal Investments Ltd.  A lease was signed allowing Mr Morrison to stay in occupation of his home, paying rent to Autumnal.  The High Court was told Mr Morrison never paid the agreed rent and Autumnal never pressed for payment.  Kiwifruit operations were contracted out.  Revenue from kiwifruit and rentals from the second residence went to Autumnal.  In what was an unusual commercial arrangement, Mr Morrison was personally liable to Autumnal for all shortfalls in expense beyond revenue received.

Mr Morrison was bankrupted in 2013.  The O’Reillys again came to the rescue, setting up a company which employed Mr Morrison as a painter and decorator.  In August 2014, Mr Morrison presented the O’Reilly’s with plans to subdivide and sell part of the Tauriko property.  Evidence was given that the O’Reilly’s were furious, stating the property was owned by Autumnal and Mr Morrison had no rights over it. Pushing Mr Morrison to one side, they did subsequently proceed with the subdivision, selling off the subdivided portion at a net profit for Autumnal of some $450,000.  Litigation followed, after Mr Morrison’s discharge from bankruptcy.

Mr Morrison claimed the O’Reillys had agreed to a no-cost ‘buy and hold’ arrangement with Autumnal holding title in trust for Mr Morrison’s family trust.  He was to cover any financial shortfall, Mr Morrison said, with the right to get the properties back once he was back on his feet.  The O’Reillys denied any such deal.

Justice Wylie ruled that on balance a ‘buy and hold’ deal was agreed.  The arrangement did not mirror a typical ‘arms-length’ transaction.  Mr Morrison as vendor paid the legal costs of Autumnal as purchaser; he received no reimbursement for work done around the property; a contract requiring him as vendor to accept all responsibility and financial risk for ongoing operations was not a typical commercial arrangement, and; the O’Reilly’s setting up a painting company during his bankruptcy was consistent with the need to have him earning income to meet Autumnal’s expenses.

Autumnal held title to Tauriko as constructive trustee for Mr Morrison’s trust, Justice Wylie ruled.  Trust law does not allow trustees to profit from their position, unless expressly agreed.  The O’Reillys were ordered to transfer title for Tauriko back to Mr Morrison’s trust and to account for the net profits of the subdivision and sale together with all revenue profits received.  Autumnal made a taxable profit in four of the six years it held title to Tauriko. Transfer of title back to Mr Morrison’s trust is subject to him repaying Autumnal’s mortgage and reimbursing the O’Reillys for their $55,500 cash contribution towards Autumnal’s purchase. 

Morrison v. Autumnal Investments Ltd – High Court (3.12.20)

21.008

Legal Highs: Eversons International v. Stewart

Frustrated by Evan Stewart’s failure to provide detailed financial information about Eversons International, his insolvent legal-high business, liquidators from KPMG sued for $2.07 million allegedly personal drawings taken by Stewart from his company.  Mr Stewart stalled in the High Court, forcing KPMG to dig deeper without his co-operation.

Eversons’ liquidators are trying to trace millions of dollars transferred to Australia by Mr Stewart in early May 2014.  Two million dollars was withdrawn from Eversons’ bank account days before a government law change prohibiting sales of synthetic highs destroyed Eversons’ business model.  Evidence before the High Court indicates Eversons incurred losses totalling five million dollars in lost raw materials destroyed under police supervision together with wasted processing and packaging costs.  Eversons’ tax filing for the year ended March 2017 values its overseas investments at over $6.5 million.  KPMG can find no evidence of these investments; it suspects Mr Stewart personally controls funds sent overseas.  In New Zealand, Inland Revenue claims Eversons owes $3.7 million for unpaid taxes, including penalties.

Liquidator KPMG told the High Court Mr Stewart was not co-operative, failing as director of Eversons to provide information as requested. In particular, he failed to provide details of Eversons’ overseas investments or any relevant accounting records. Trawling through Eversons’ bank statements, KPMG tallied up payments made directly to Mr Stewart: $2.07 million. None of these payments were recorded as salary.  Using the High Court fast-track summary judgment procedure, KPMG sued demanding repayment; the payments were on demand loans made by Eversons to Mr Stewart, it said. Associate judge Paulsen refused summary judgment.  A forensic examination of Eversons’ financial affairs was needed.  Mr Stewart claims two million dollars of the amount claimed was money he invested in Australia on behalf of Eversons.  Mr Stewart was under no obligation to disclose in summary judgment proceedings where the money went.  For summary judgment, KPMG needs to determine the correct position, said Judge Paulsen.

Eversons International Ltd v. Stewart – High Court (3.12.20)

21.007

Ademption of Gift: Taylor v. Platt

Status of a redeemed $250,000 life assurance policy raised legal arguments about ademption on death of Faye Leslie Taylor in 2018.  Did the money go to residuary beneficiaries of her estate, or to two named charities? 

Ms Taylor and Jeanette Platt commenced a relationship in 2006.  They jointly purchased a Motueka property in 2013.  Ms Taylor contributed $227,500; a bank loan signed by both completed the purchase.  At the time of the Motueka purchase, Ms Taylor held a $250,000 AMP life assurance policy taken out nearly thirty years previously.  The High Court was told Ms Taylor was diagnosed in 2016 with terminal ovarian cancer.  A will signed some months later stated proceeds of her life policy were to be used to pay off her share of the Motueka bank mortgage, with any surplus going to two named charities.

AMP paid out on the policy in full three months prior to Ms Taylor’s death, at her request.  Life insurers make early payment at their discretion on proof of imminent death to thwart exploitative third parties.  Sectors of the money-lending industry developed a tactic of offering to buy life policies from terminally-ill policyholders at a steep discount just prior to death.  A policy holder got to enjoy the money whilst still alive, they said.  Months later, the money lender would collect, at a handsome profit.  In response, life insurers decided to cut out the middle man; redeeming policies in full prior to imminent death.

The early redemption of Ms Taylor’s AMP life policy raised legal questions for her estate.  On her death, the life policy no longer existed; it had been paid out.  The High Court was asked if the gifts funded from her life policy had adeemed.  If the asset named in a will as the source of a gift no longer exists on death, the gift fails.  Ademption would see residuary beneficiaries of Ms Taylor’s estate inheriting.

Justice Cull ruled ademption did not apply in this case. Ms Taylor’s will stated ’the proceeds of [her] life insurance policy’ were to be used first to pay off her share of the Motueka mortgage and secondly be paid to two charities.  The ‘proceeds’ still existed Justice Cull ruled; they had been paid into a NZCU Baywide account.  The funds had remained untouched in the bank account up to her death, bar deductions for monthly bank charges.

The two charities sharing part of the $250,000 life policy were named as: Nelson Society for the Prevention of Cruelty to Animals Incorporated and Second Chance Group.  Ms Taylor’s half share of the 2013 bank loan was $125,000.

Taylor v. Platt – High Court (3.12.20)

21.006

Fraud: Chen v. R

After promising to pay SPCA $50,000 as a mark of remorse and pleading guilty to consumer fraud when re-packaging over three million eggs laid by caged chickens and marketing them as free range, Xue Chen said he should be sentenced to community detention only. The High Court confirmed his sentence of twelve months’ home detention.

Community detention imposes a night-time curfew, allowing freedom of movement in normal working hours.  Home detention allows movement outside home only as agreed with Probation Service.

Over a twenty-five month period, Chen perpetrated the fraud through his west Auckland company: Gold Chick.  His company leased a property in Henderson which did have chickens running free range.  The High Court was told Chen augmented his usual supply of free range eggs with caged eggs.  To hide the fraud, he used unmarked rental vans to uplift caged eggs from a supplier and had invoices delivered to a third party.  Commerce Commission investigators assessed increased profit from selling caged eggs as free range to be in excess of $320,000.

Justice Gordon ruled the sentence of home detention was not ‘manifestly excessive.’  The court was told Chen spent 45 days in prison during the investigation following conviction for obstructing the course of justice.  This conviction was overturned on appeal.

Chen v. R. – High Court (2.12.20)

21.005