Credit costs: Commerce Commission v. Sportzone

Retailers looking to create artificially low credit sale prices will be warned off after a Commerce Commission probe: lowering the list sale price and then recouping general business overheads as specific fees in the credit contract is in breach of the Credit Contract and Consumer Finance Act.

The Commerce Commission challenged use of allegedly inflated fees with legal action taken against Sportzone Motorcycles, a Christchurch motorcycle dealer now in liqudation, motor industry financier Motor Trade Finances Ltd and MTF Securities Ltd which securitises Motor Trade’s loan book and onsells these as debt securities.

The Commission alleged they were all in breach of credit law by inflating fees charged when buyers purchased on credit.  Credit law does not limit interest rates charged but it does require clear disclosure in credit contracts of a number of specific items: establishment fees as the cost of setting up the credit contract; maintenance fees for ongoing supervision of the account; prepossession fees for notices on default; and repossession charges.

Credit law limits these specific fees to the dealer’s actual and reasonable costs.

Credit customers buying through Sportzone were charged establishment fees of $390  (Sportzone itself charged $200 and financier Motor Trade charged a further $190); monthly account maintenance fees were eight dollars (Sportzone at five dollars and Motor Trade a further three dollars); with itemised one-off payments for default notices and repossessions (since early 2007, $80 has been charged for both default notices and repossessions).

The Commission said actual and reasonable costs do not extend to general business overheads such as rent, insurance, phone and power, rates, staff training and operation of IT systems.

The High Court ruled that general business overheads are not to be included.   There has to be a close and relevant connection between the cost claimed and the specific fee being charged.  Justice Toogood said an analysis of employee time spent setting up and reviewing credit contracts could justify an apportionment of employee remuneration to establishment fees and maintenance fees for individual credit contracts.

For retailers, general overheads not recoverable by these fees are to be recovered in list prices.  For financiers, overheads are recovered through interest charged on the loan.

The High Court made no ruling as to what would be actual and reasonable costs in this case.  It was left for discussions between the finance industry and the Commerce Commission.  Failing agreement, they could return to court.

Commerce Commission v. Sportzone Motorcycles – High Court (27.09.13)

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Litigation funding: Waterhouse v. Contractors Bonding

With increased use of litigation funding agreements the Supreme Court has set out rules governing third party provision of financial and legal support for other people’s damages claims.

As the adage has it: the courts like the doors of the Ritz Hotel are open to all comers.  But not all can afford to enter.  Impecunious litigants with valuable claims can be blocked by a deep-pocketed defendant who uses pre-trial manoeuvres to exhaust a claimant both financially and emotionally.

Litigation funding agreements are common in the United States.  Investors put up cash to fund litigation and share in any award of damages.  These arrangements have been frowned on in countries like New Zealand who follow the English tradition: it is against public policy to allow outsiders to meddle in litigation in which they have no personal interest.  At its worst, individuals with an ulterior motive would be taking control of someone else’s legal rights for the sole purpose of embarrassing or bankrupting the unfortunate defendant.  The United States courts have taken a more pragmatic view: the right to sue is a valuable economic commodity by itself and if others are willing to pay a price to share in this potential economic benefit then well and good.  The economic argument is buttressed by policy arguments that litigation funding agreements allow financially disadvantaged litigants to pursue their legal rights.

Use of litigation funding agreements in New Zealand reached the Supreme Court when the former owners of Phoenix Brokers Inc., registered in the US state of Georgia, sued New Zealand company Contractors Bonding Ltd.  In 2000, Contractors Bonding had agreed to underwrite Phoenix policies.  When the broking business collapsed, the former owners sued for negligence, deceit and breach of fiduciary duty, alleging they had suffered personal loss because of Contractors Bonding’s actions.  On learning that the litigation was being funded by a third party financier, Contractors Bonding demanded the right to see terms of the funding agreement.

The Supreme Court ruled that disclosure of the full agreement was not required: all that was required was disclosure of the identity and location of the funder and its agreement to abide by the decisions of a New Zealand court.

The court said it was not its job to vet any funding agreement; its job is to rule on the dispute put before the court.

Further inquiry is appropriate should the litigation funder be taking an assignment of the legal action; effectively “taking ownership”.  Outright purchase of another’s legal rights is not permitted.  In deciding whether ownership is being assumed, the court takes into account the level of legal control assumed by the funder and the share of damages to be received.

Waterhouse v. Contractors Bonding Ltd – Supreme Court (20.09.13)

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Freezing assets: Commissioner of Police v. Keen & ors

Jack Chen and May Wang, who hit the headlines with attempts to buy into the New Zealand dairy industry are facing criminal charges in Hong Kong of conspiracy to defraud.  New Zealand assets they are believed to have an interest in have been frozen by court order.

It is alleged Chen Keen (also known as Jack Chen) and May Hao (also known as May Wang) conspired to defraud the Hong Kong Stock exchange and China Jin Hui Mining Corporation/Natural Dairy (NZ) Holdings when attempting to sell 22 dairy farms owned by the Crafar group at an inflated price and without disclosing their interest. 

The two are alleged to have created false accounting statements overstating farm profits by some fifty million dollars.  Jack Chen is alleged to have received $23.5 million and May Wang $201.6 million.  Funds allegedly received dishonestly from Natural Dairy (NZ) are said to have been used to buy four farms along with residential property in Auckland.

In October 2011, Hong Kong authorities placed a restraining order on their property worldwide.  To be effective, such an order needs to be registered in each country where assets are situated.  In New Zealand, the Mutual Assistance in Criminal Matters Act and the Criminal Proceeds (Recovery) Act set out a mechanism for registration of foreign restraining and forfeiture orders.

In the High Court, Justice Courtney approved registration of the Hong Kong order.  The biggest asset frozen is a 142 hectare farm on the Napier - Te Matai roads valued at just over four million dollars.  The Official Assignee takes control of the property.  The court-ordered freeze does not affect the rights of secured creditors to seize mortgaged assets.

Commissioner of Police v. Keen & ors – High Court (2.09.13)

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Rates: Mangawhai Ratepayers v. Kaipara District

Kaipara District Council has failed to block legal action by Mangawhai ratepayers incensed by a cost blowout for the construction of a sewage treatment plant.  The High Court ruled that ratepayers are entitled to their day in court.

Ratepayers in the seaside resort of Mangawhai are challenging the validity of a special levy set by Kaipara District for sewage reticulation.  Initial borrowings of $35.6 million for the project ballooned out to $57.9 million after modifications to the initial contract.  Ratepayers allege the special levy is illegal and invalid.  They say Council did not follow the correct statutory procedure for setting a special levy.  Some have gone on a rate strike, refusing to pay.  With just over one thousand members, the Mangawhai Ratepayers’ and Residents’ Association funded High Court action seeking a judicial ruling that the levy is illegal.    

In 2005, Council committed to sewage reticulation for Mangawhai after it became apparent waste from septic tanks was polluting the harbour and estuary.  Twelve months later, Council agreed to project amendments which were to have the effect of increasing financing costs by $22 million above its previously authorised limit.  Funding has been provided by ABN Amro.

Kaipara District asked the High Court to strike out key parts of the ratepayers’ claim, saying the financing transaction with ABN Amro is a “protected transaction” under the Local Government Act: lenders can enforce their loans against councils even if there are procedural mistakes by a Council in setting up the loan contract.

Justice Heath ruled ratepayers could still proceed with legal arguments over the legality of the Council’s special levy even though ABN Amro’s right to enforce its $57.9 million loan could not be challenged.  These legal arguments have yet to be heard.

Meanwhile, the Auditor-General is investigating the Council’s activities in relation to the Mangawhai contract, and draft legislation is currently before parliament which will retrospectively validate any irregularities in setting the levy.

Mangawhai Ratepayers v. Kaipara District – High Court (29.08.13)

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Jury Service: McAllister v. Solicitor-General

Jury service is described as a civic duty but for some it has parallels with press gangs in Elizabethan England: snatched off the streets and pressed unwillingly into service with the Royal Navy.  An Auckland engineer sentenced to jail for contempt of court when he refused jury service had the jail term replaced on appeal by a $750 fine.

David James McAllister attended Auckland District Court in July 2013 on a jury summons.  On this first day he was not called to be on a jury and was free to leave by lunchtime.  He was required to turn up the following day.  On the second day he was selected for jury service on what was scheduled to be a three week trial.  He asked to be excused, saying he had work commitments as a self-employed engineer maintaining Kordia’s telecommunication network.  The trial judge said he was excused, but was required to return on day three for any jury to be selected for a shorter trial.  Again he had lost a morning’s work.

Attending on the third day, Mr McAllister was selected.  After the judge presiding at this trial refused to excuse him, Mr McAllister refused to be sworn in as a juror.  He told the judge that work pressures meant that he could not properly fulfil his role as an impartial juror.  While the trial judge was not given the detail, it was to come out in High Court evidence that Mr McAllister was then currently committed to a major repair on a Kordia transmission tower in the Manawatu requiring the co-ordination of 15-20 specialist contractors.

The High Court heard evidence of rapidly rising tensions in discussions between the trial judge and Mr McAllister.  Mr McAllister’s refusal to be empanelled meant there were insufficient numbers left in the jury pool to make up the twelve needed for a jury.  It was to come out in the High Court that the trial judge had already excused some ten potential jurors from sitting on the jury before Mr McAllister sought also to be excused.

The trial was abandoned and all jurors told to report again the next day. 

When Mr McAllister attended the following morning with the remainder of the jury pool he was singled out by the trial judge, told he was in contempt of court for failing to be sworn in as a juror and then again in contempt when he had changed his mind saying that he would sit on a jury.  Mr McAllister spent the day in the courtroom cells before being called back before the trial judge at the end of the day.  He was then sentenced to ten days in jail for contempt.

On appeal to the High Court, Justice Lang cautioned trial judges in their summary use of contempt proceedings.  Judges fining or jailing jurors for contempt simultaneously fill the role of complainant, witness, prosecutor and judge.  There is no formal charge read and no formal plea taken.

Justice Lang said there was no urgency requiring the trial judge to deal with any alleged contempt by Mr McAllister that day.  The matter could be adjourned to a later date. There was a risk the trial judge would reach a decision without hearing the full story.

Justice Lang ruled that refusing to be sworn in as a juror without lawful excuse was a contempt of court.  At the time, Mr McAllister did not provide an adequate excuse.  To the trial judge he simply appeared to be avoiding jury service and that amounted to contempt of court.  Justice Lang ruled that a prison term was excessive.  The day spent in the cells and a $750 fine was sufficient punishment.  The High Court took into account that Mr McAllister had turned up to court each day as required by his jury summons and had attempted to atone for his contempt by belatedly offering to serve on a jury.

Justice Lang said the later offer to serve was not a separate act of contempt.  It was an offer to rectify the unfortunate situation he had created by refusing to take the oath.

McAllister v. Solicitor-General – High Court (29.08.13)

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Christchurch Earthquake: Fowler Developments v. CERA

Challenges to government offers to buy out earthquake damaged properties in Christchurch were successful in the High Court, but no decision was made on the merits of the offer.  The court simply ruled that government did not follow the correct procedure before making offers.

Following devastating earthquakes in Christchurch during 2010 and 2011, government declared whole suburbs as no longer habitable because of severe infrastructure damage.  Eventually over 7400 properties were “red zoned”.  A government-funded buy out scheme enabled residential property owners to cash up and move.  A two-tier compensation scheme saw those with property insurance offered the 2007 rating value for their property; those without insurance and those owning bare land were offered 50% of rateable value.  Government budgeted some $12.5 million for compensation to those offered the 50% deal.

Property owners aggrieved by the 50% offer banded together in a lobby group called Quake Outcasts.  Together with a property developer owning vacant land in the red zone, they sued government challenging the manner in which the offer was formulated and alleging a 50% offer is discriminatory, oppressive, disproportionate and in breach of their human rights.

Of red-zoned insured property owners receiving the full 2007 rating offer, 98.9% have accepted.  These full offers were perceived as a better option than the market could possibly provide, Justice Pankhurst said.

As regards the 50% offers, the court was told acceptances were received from 62.6% of uninsured residential property owners and 72.8% of those owning vacant land.  Evidence was given that government made the 50% offers after being told by the Valuer General that vacant land in the red zone may be worth no more than ten per cent of its pre-earthquake value.

Examples were given of some anomalies which had been dealt with administratively: six insured red-zoned residential leaseholders leasing from their local authority were made full 100% offers on the condition that they then freeholded their property and surrendered it to government; 22 insured red-zoned commercial/industrial property owners were offered 100% of the value of their buildings but 50% of the value of the underlying land.    

Justice Pankhurst did not address the merits of offers made by government.  He reviewed the process by which government had red-zoned properties, ruling that it had not followed the statutory process required by the Canterbury Earthquake Recovery Act 2011.  Before red-zoning entire suburbs, government should first have revoked or suspended the existing resource management zoning, he said.  To that extent, government declaration of the red zones was unlawful.

Fowler Developments v. CERA and Quake Outcasts v. CERA – High Court (26.08.13)

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