Ge Custodians v Bruce Leonard Bartle and Dorothy Judith Bartle

JurisdictionNew Zealand
JudgeBlanchard J
Judgment Date03 December 2010
Neutral Citation[2010] NZSC 146
Docket NumberSC 52/2010
CourtSupreme Court
Date03 December 2010
BETWEEN
GE Custodians
Appellant
and
Bruce Leonard Bartle and Dorothy Judith Bartle
First Respondents

And

Bartle Properties Limited
Second Respondent

And

Jonathan Mathias
Third Respondent

[2010] NZSC 146

Elias CJ, Blanchard, Tipping, McGrath and Anderson JJ

SC 52/2010

IN THE SUPREME COURT OF NEW ZEALAND

Appeal against a Court of Appeal decision which held that loan contracts entered into by respondents were oppressive under s120 Credit Contracts and Consumer Finance Act 2003 (reopening of credit contracts, consumer leases, and buy-back transactions) — respondents entered a loan agreement to purchase an apartment through Blue Chip — respondents were of retirement age and had limited income — the respondents had supplied the appellant with a declaration they could meet payments and were not relying on the appellant to verify or review their financial position — whether the appellant had any knowledge of matters which would have made the loan contracts oppressive — whether the appellant had any knowledge which should have put it on inquiry.

Counsel:

J A Farmer QC, B J Upton and M V Robinson for Appellant

J G Miles QC, P J Dale and D W Grove for First and Second Respondents

No appearance for Third Respondent

  • A The appeal is allowed and the orders made by the Court of Appeal are set aside.

  • B The case is remitted to the High Court for determination of issues reserved by that Court for further consideration.

  • C The appellant is awarded costs in this Court against the first and second respondents of $25,000 together with its reasonable disbursements to be fixed by the Registrar.

  • D The costs order made by the Court of Appeal is reversed.

JUDGMENT OF THE COURT
REASONS

(Given by Blanchard J)

Introduction
1

Section 120 of the Credit Contracts and Consumer Finance Act 2003 (the CCCF Act) permits, but does not require, a court to reopen a credit contract 1 if, in any proceedings, it considers that the contract is oppressive. Section 118 defines “oppressive” as “oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice”.

2

The central issue on this appeal is whether three loan contracts, and associated mortgages forming part of those contracts, between the first respondents, Mr and Mrs Bartle, as borrowers and the appellant, GE Custodians (GE), an unlimited company in the General Electric Corporation group, as lender, were oppressive and should be reopened in circumstances where GE says that it had no knowledge of any matter which would make any of the loan contracts oppressive or which should have put it on inquiry.

3

In the High Court, Randerson J dismissed the Bartles' claim against GE, saying that he was not persuaded that there was any basis to conclude that the loan contracts were oppressive under the CCCF Act. 2 The Court of Appeal unanimously reversed that decision. 3 It declared the loan contracts oppressive and remitted the case to the High Court for consideration of the appropriate remedy.

Facts
4

Mr and Mrs Bartle were born in 1939 and 1940 respectively. In 2006 they owned a relatively modest unencumbered home near Whangarei. They had previously had an investment in real estate on the Gold Coast in Queensland but had not found that a happy experience and had sold out. They seem to have invested the proceeds of $65,000 with a bank on term deposit. Apart from the interest on that deposit, their only income was New Zealand Superannuation totalling $21,736 per annum.

5

Unfortunately for the Bartles, they were enticed into what has become known as the Blue Chip investment scheme promoted by the Blue Chip Group, all the New Zealand companies in which are now insolvent. But it is important to be aware that in 2006 the Blue Chip Group appeared to a large and successful operation with numerous property interests and a stock exchange listing. The central figure in the group was Mr Mark Bryers. The board of directors of the parent company included several prominent independent directors.

6

The Bartles, whom the High Court Judge described as a couple of normal intelligence but lacking sophistication in business matters, 4 were keen to utilise the equity in their home in order to obtain a higher level of income in their retirement. They considered raising a reverse equity mortgage but ultimately rejected that in favour of a proposal put to them by a Blue Chip salesman that they should buy a residential apartment in a large building then under construction in Symonds Street, Auckland, borrowing against their home and the apartment itself in order to do so. Blue Chip suggested that they would hold the apartment for about four years and it could then be sold into the rising Auckland property market, with profits being shared with Blue Chip. Blue Chip sales material made much of the fact that the Auckland property market had risen continuously for many years and projected a continuance of that phenomenon. Until the apartment was resold Blue Chip guaranteed to meet the shortfall on rental income (that is, it would subsidise the

mortgage outgoings) and would in addition pay the Bartles an income of $451 per fortnight. It was this additional income, plus their trust in Blue Chip's predictions about the rising property market, which seems to have motivated the Bartles to enter into the scheme, although in fact when the apartment was sold and the mortgages repaid they were to receive only a 10.1% share of the capital profits, with Blue Chip getting the rest
7

Before moving to explain how GE became the financier to the Bartles it is convenient to further describe how the proposal devised by Blue Chip was implemented. The Bartles were to purchase the apartment (from a vendor developer apparently independent of Blue Chip) for $552,000 but to borrow in that connection an aggregate amount of $629,566. So, unusually, they were to borrow $77,566 more than the price of the apartment. In the result there were three loan advances. The first, on 8 November 2006, when the Bartles had already unconditionally committed themselves to purchase the apartment but the apartment building was still in the course of construction, was for $137,484, secured only against the Whangarei home, which had a value for rating purposes of $235,000. 5 Blue Chip allocated $55,200 of the borrowing for the deposit on the apartment and another $55,200 for “working capital” of the joint venture between Bartles and Blue Chip”. That sum was to be paid to Blue Chip. There was also a brokerage fee of $16,284 payable to Blue Chip. The rest was a provision for valuation and legal fees and disbursements to be incurred in connection with the scheme. The Bartles began to receive their fortnightly payments effectively from funds they themselves had provided as the “working capital”.

8

The second and third loans totalling $492,082 were drawn down together nearly 11 months later on 28 September 2007 when the purchase of the apartment was settled. $125,791 was secured under the original Whangarei mortgage and the balance of $366,291 was secured by a mortgage over the apartment. The borrower of the third loan was a company formed by the Bartles to buy the apartment, Bartle Properties Ltd, which is the second respondent to this appeal. But the Bartles gave GE a guarantee of their company's liability and that guarantee obligation was in turn

secured under the Whangarei mortgage. So effectively GE could have recourse to the Whangarei property, if necessary, for the whole amount of the aggregate borrowing
9

The later borrowing was split into two parts in order to keep the borrowings against each property (ignoring the guarantee liability) below 70% of the valuation of the security in each case. The reason for this will shortly emerge.

10

The apartment was sold to Bartle Properties Ltd subject to a lease already in place to a Blue Chip subsidiary, ART Apartments Ltd. The lease was guaranteed by Blue Chip New Zealand Ltd. The term was for four years at a rent of $33,280 per annum. 6

11

The joint venture between the Bartles and another Blue Chip subsidiary, Blue Chip Joint Ventures Ltd, had a number of very unsatisfactory elements. It is unnecessary to mention more than three. First, although the Bartles were to receive only 10.1% of any capital gain over and above the amount necessary to discharge the mortgages, any capital loss was not to be borne by Blue Chip. Secondly, Blue Chip's guarantee was limited to indemnifying the Bartles against the interest (but not the capital) of their borrowings (including any increase in the interest rates) plus the payments of $451 per fortnight. These payments were effectively being funded by the Bartles themselves from the working capital. And Blue Chip Joint Ventures Ltd had a share capital of only $100. Thirdly, unbeknown to the Bartles, Blue Chip had an arrangement with the vendor of the apartment that it would pay Blue Chip a commission of 15% of the purchase price. There thus appears to have been a secret commission, which would presumably also have been unknown to the valuer who wrote a valuation report for the Bartles and the lender which valued the apartment at $527,545. This suggests that the true market value of the apartment may have been much less than the price the Bartles were paying of $552,000, which already included furniture said to have a value of $24,000. The High Court Judge found that the Bartles did not understand the joint venture arrangements. 7

12

The funding of the Bartles was arranged in this way. On the Bartles' behalf, Blue Chip approached a mortgage broker, Tasman Mortgages Ltd (TML) 8 with which Mr Bryers had an association 9 although it does not appear to have been part of the Blue Chip Group until March 2007 and then only briefly, for a majority shareholding (70%) was conditionally sold to the Lombard Group less than three months later and that transaction was settled...

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