New Zealand Credit Law Bulletin - Vol 7, No 1, January 2007
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: nz-bulletin-join@mailman.hattaways.com
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- A radio station tries advertising to find the person behind a debtor company
Justice appears to be done in this privacy case - Car finance provider to refund $12,000 - a press release from the Commerce Commission
A press release from the Commerce Commission on CCCFA enforcement carried out - f you tell your lender there is no vendor finance when in fact there is, you risk jail
Bad news for the buyer and the lawyers involved - A performance bond case - would minor errors stop the indemnities?
Our first ever case (in 7 years of Bulletins) on these bonds, an important concept
1. A radio station tries advertising to find the person behind a debtor company
Lehmann v CanWest Radioworks Limited [2006] NZHRRT 35 (21 September 2006)
In 2001 Lehmann was associated with a company called Chemical Enterprises Limited (CEL) which was trying to set up "branch agencies" around New Zealand. The agencies required an "investment" of $130,000 from the people persuaded to be agents.
When CEL wanted to advertise with CanWest Radioworks, Lehman filled out Radioworks’ standard credit application on behalf of CEL. His evidence was that, at that time, he was engaged by CEL to assist with its public relations.
The cheque for the initial advertising bounced. Ms Faulding, the General Manager, Network Sales, for Radioworks, spoke to Lehmann and the invoices were paid. Faulding received post-dated cheques from CEL, signed by Lehmann, for $5,625 and $7,875 before a second lot of advertising ran. The advertising said, among other things:
‘Owing to popular demand, business guru, John Lehmann, returns to Radio Pacific ...
Tune in from 2 to 2.30 Wednesday afternoon when John Lehmann explains how you can invest in your future and work for yourself with his unique product RB-80 ...
It’s the fantastic roofing and siding product that colourises, waterproofs AND insulates ... and it could be the key to your future ...
So listen Wednesday from 2 pm for John Lehmann ... You supply the will, and they’ll supply the skill ...For more information call 0800 RB-80 4 US.’
The post-dated cheques also bounced. Talking to Lehmann had resulted in the first cheques clearing, so Faulding tried to contact him. He didn’t answer his mobile phones so she then asked a collection agency to try to find him. The agency was unsuccessful, so she decided to have the following message broadcast over the various radio stations operated by the defendant around New Zealand:
"If you know the whereabouts of John Lehmann associated with the companies Thurco Ltd, Waco Coatings, or RB- 80, and believed to be in the Auckland area, please contact RadioWorks’ reception during business hours on (09) 375 7171".
Messages were broadcast 73 times on 4 days of November 2001. Lehmann claimed that by doing this, Radioworks breached the Privacy Act. He took the company to the Human Rights Review Tribunal, claiming damages to compensate him for humiliation, loss of dignity and injury to feelings.
There were two responses to the advertising. One piece of information received was that an elderly couple for whom a lawyer in Wellington had acted in the past had lost money in their business dealings with Lehmann.
Radioworks argued that this was unsolicited. The adverts asked for contact information. The fact that someone told them that an elderly couple had lost money in their business dealings with Lehmann was not information "collected" within the meaning of the Privacy Act. The Tribunal agreed.
A second outcome was that Lehmann’s solicitor rang and asked Radioworks to stop the ads. He gave Lehmann’s cell phone number to Faulding. The Tribunal concluded that this was done with Lehmann’s authority. The decision pointed out that "there cannot possibly have been any harm to the plaintiff arising out of the fact that his own solicitor gave the defendant his cell phone number, when that is obviously what the plaintiff had asked his solictor to do."
The key issue was whether Radioworks breached Principle 4 "Personal information shall not be collected by an agency
(a) By unlawful means; or
(b) By means that, in the circumstances of the case,
(i) Are unfair; or
(ii) Intrude to an unreasonable extent upon the personal affairs of the individual concerned."
The Tribunal felt that it must have been obvious to Faulding that Lehmann was not personally liable for the debt. (While an insolvent trading action against Lehmann might in theory have made him personally liable, in practice it was not a feasible option considering the amount of money involved.)
The Tribunal said, "we struggle to accept that her decision to go about contacting him in this unusual and extraordinarily public way was altogether divorced from a hope that he might feel pressure not only to make contact ... but also to resolve the matter by arranging payment of the debt, perhaps even paying it himself." The Tribunal said that "in the end we are left with no doubt that what the defendant did to collect personal information about the plaintiff was unfair."
However, under s.66(1) of the Privacy Act, the plaintiff has to show that he has suffered some harm. Here, Lehmann claimed "significant humiliation, significant loss of dignity and/or significant injury to his feelings as a result of the unfair way in which the defendant collected personal information about him (see s.66(1)(iii))."
However, Lehmann’s claims of depression and embarrassment, and distress caused to his late father as a result of the advertising were not believed.
The Tribunal said, "if all other things had been equal, it would not have been difficult to persuade us that the plaintiff’s evidence about his reaction to the broadcasts had established the requisite level of humiliation, loss of dignity and/or injury to feelings to cross the s.66 threshold ... But all things are not equal... We regard some of his answers as having been deliberately evasive. We found him to be an altogether unreliable witness."
The evidence eventually established that Lehmann owned 99% of the shares of a company which owned CEL. CEL’s business problems were dealt with in part in two High Court cases in 1998 and 2001. In one of them, the Tribunal noted that Lehmann "had apparently given sworn evidence to the High Court that ... CEL had not traded since 1997" despite the fact that it had just carried out its first lot of advertising with Radioworks!
"The content of the plaintiff’s evidence... and his elusive demeanour as a witness generally, served to dissolve our confidence in his credibility to a point at which we are not willing to accept any of the evidence he gave... It follows that the claim must be dismissed in its entirety."
POSTSCRIPT
The plaintiff had already taken his complaints to the Broadcasting Standards Authority. In a decision dated 13 June 2002 the Authority found that the defendant had failed in its obligations as a broadcaster under the Broadcasting Act 1989 because it had improperly used its position as a broadcaster for its private purposes. The Authority found the defendant's conduct to have contravened Principles 3 and 5 of the Radio Code of Broadcasting Practice (Principle 3 obliges broadcasters to maintain standards that are consistent with the privacy of individuals, and Principle 5 requires broadcasters to deal justly and fairly with persons who take part in or are referred to in broadcasts). However the Authority declined to make any orders for a broadcast to summarise its decision, or for compensation to the plaintiff. It noted that the issues that had been raised were novel, and considered that the remedial orders sought by the plaintiff were neither necessary nor appropriate.
CEL was subsequently wound up by Radioworks.
Back to top
Information on our current seminars
2. Car finance provider to refund $12,000 - a press release from the Commerce Commission
An Auckland company that provides finance to car buyers, Falcon Advances Limited, will refund over $12,000 to 143 customers who bought vehicles from Auckland car yards between April 2005 and February 2006.
In a settlement with the Commerce Commission, the company admits it breached the Credit Contracts and Consumer Finance Act (CCCFA) by not giving key information to 951 borrowers, not calculating interest properly, and over-charging those who wished to repay their loans early.
Falcon Advances also admits breaching the Fair Trading Act by telling customers it could enforce the contracts, and taking collection action against 93 people, including repossessing 26 vehicles. In fact, the contracts were unenforceable, because they did not meet the requirements of the CCCFA.
In the settlement, Falcon Advances agrees to refund all default and collection fees to affected debtors. It has also agreed not to pursue debtors who still owed money after their cars were repossessed and sold. Normally, debtors would have to pay the difference between the amount of their loan, and what the repossessed car was sold for.
"The Credit Contracts and Consumer Finance Act and the Fair Trading Act require credit providers to meet high standards of behaviour, and the Commission will actively pursue any breaches of these standards," says Graham Gill, Commerce Commission Acting Director of Fair Trading.
"Credit providers need to know that if they don’t give debtors the right information, their contracts can’t be enforced."
"Where contracts don’t meet the legal requirements, credit providers can’t repossess property or call in debt collectors - so there are very strong incentives for credit providers to get it right."
The CCCF Act requires credit providers to disclose key information to all customers entering into consumer credit contracts. This includes telling customers how interest is calculated and charged, what the fees are, and advising customers of their right to cancel the contract. Falcon Advances’ disclosure did not contain some of this key information.
Mr Gill said that an out-of-court settlement was appropriate in this case as Falcon Advances had moved to correct the breaches and make refunds to all affected customers. The company has undertaken to provide the correct disclosure to all customers in the future.
Background
The Credit Contracts and Consumer Finance Act 2003 took effect from 1 April 2005. The Commerce Commission is charged with enforcing the CCCF Act. CCCF Act, section 17, requires creditors to provide initial disclosure of key information under a consumer credit contract. (CCCF Act, Schedule 1 sets out the key information to be disclosed). CCCF Act, section 99, prohibits creditors from enforcing a consumer credit contract, or enforcing the security interest of a consumer credit contract unless initial disclosure is provided to debtors. Credit providers found in breach of the CCCF Act may be liable for statutory damages, criminal conviction to a fine of up to $30,000, and may be banned by the court from providing consumer credit.
Calculation method. Falcon Advances had used "the rule of 78" to calculate the interest owing by debtors upon the full prepayment. This method of calculation, which is no longer allowed under the CCCF Act, unfairly disadvantages debtors and results in a greater repayment figure. Falcon Advances refunded some of the affected debtors earlier in the year however, under the settlement, has agreed to recalculate the refunds already made and to ensure all affected debtors receive a refund.
Falcon Advances Ltd provides consumer finance for motor vehicle purchases through a number of Auckland-region car yards.
Previous case. Senate Finance Limited, which provides finance to the customers of car dealers, was fined $59,000 in November 2006 for giving customers terms and conditions they could not read, as the small print had been faxed and photocopied, rendering it illegible. Seventeen affected customers were also awarded a total of $13,700 in statutory damages. The company pleaded guilty to 17 breaches of the CCCF Act, for not adequately disclosing the terms and conditions of its loans.
Back to top
Information on our current seminars
3. f you tell your lender there is no vendor finance when in fact there is, you risk jail
The Queen v Harris and anor [2006] NZCA 273 (27 September 2006)
Osmond and Harris were solicitors who practised in partnership in Cambridge. Osmond was convicted of theft from his firm’s trust account and struck off. (Osmond v R [1996] 1 NZLR 581). He continued to operate out of his former firm’s building, assisting the firm’s clients with "para-legal" matters.
Mr Skinner owned a Waikato quarry called East Point Sand. He decided to sell it in 1997. Osmond became involved in helping Skinner to sell the quarry (in return for a substantial fee if it sold).
Sands & Stones Ltd, a company controlled by Mr Smitheram, (who was, it turned out, an Australian bankrupt) contracted to buy the quarry for $2.8 million. Of this, $1 million was to be left owing to Skinner’s trust, the Cobra Trust, secured by a second mortgage. When the seller allows the buyer to owe some of the purchase price, this is known as "vendor finance".
Dorchester Finance agreed to lend Sands & Stones $1.8 million to buy the quarry. In the lead-up to settlement, Dorchester became suspicious that the price might have been "hydrauliced". This is where a buyer and a seller decide on a price but tell the buyer’s lender that the price is higher, so that the buyer appears to be putting in some cash of his/her own as a deposit. This is bad news for the lender for many reasons. One of the main reasons is it means that the lender is being misled about the value of the asset which is their security.
However, in this case, the deal wasn’t hydrauliced, but there was a vendor finance arrangement which Dorchester was not told about, presumably because they would have been likely to turn down the loan application. The buyer who has put no "hurt money" of his own into the business has less to lose by walking away and therefore has less incentive to fight to continue to pay off the lender’s loan, and more money to pay back from cashflow. Dorchester was led to believe that Smitheram was putting in $1 million of his own money.
Harris was the lawyer acting for both vendor and purchaser, and for Osmond and Smitheram personally. Dorchester tried to pin Harris down to an undertaking that there was no vendor finance. Instead, Harris gave an undertaking to Dorchester that a cheque for $1 million from Smitheram’s trust would be added to Dorchester’s loan to buy the business.
Of course, Smitheram (the buyer) and his trust didn’t have $1 million. So Osmond (the struck-off lawyer) arranged for the BNZ to lend Skinner (the vendor) $1 million for "one hour or so". Harris (the lawyer) gave the BNZ an undertaking that the money would be repaid that day. They then created a commercially meaningless circular exchange of the $1 million in order to mislead Dorchester.
By a series of transfers and journal entries the money was transferred from the BNZ to Skinner, from Skinner to the law firm, then on to Skinner’s trust, then to Smitheran’s trust, then back to the law firm, then to Sands & Stones, then to Skinner’s Trust, (as part-payment for the quarry) then to Skinner’s account in the law firm’s trust account, then to Skinner and then back the BNZ. This convoluted process ensured that Harris’s undertaking to Dorchester was correct - $1 million from Smitheram’s trust was added to Dorchester’s loan to buy the business - albeit that the money was loaned by Skinner and immediately paid back to Skinner.
The upshot was that it appeared that Smitheran and his company, Sands & Stones, had paid $2.8 million but in fact there was $1 million in vendor finance left in and owed by to Skinner’s Cobra Trust.
Sands & Stones Ltd soon defaulted on its loans to Dorchester and the Cobra Trust. The quarry was sold by mortgagee sale. Dorchester was effectively fully repaid but the Cobra Trust received nothing.
Smitheram, Osmond, and Harris were convicted of conspiring to defraud Dorchester. The jury in the subsequent trial accepted that "the objective was to have Dorchester believe settlement of the transaction was going to involve a substantial and lasting injection of cash by the purchaser rather than an arrangement amounting to a funding of the shortfall - between the purchase price and the Dorchester loan - by the vendor." Harris was sentenced 2 years 3 months’ imprisonment, Osmond to 2 years 9 months, and Smitheram 15 months with leave to apply for home detention.
Harris and Osmond appealed against conviction and sentence.
The most interesting issue on appeal related to the jury doing research on the internet. At the end of sitting, on 14 February 2006, Court staff found a print-out from www.answers.com on "burden of proof" and "beyond a reasonable doubt". It contained advice which may have applied to a US case. However, for New Zealand, it was wrong. This was at a stage between the conclusion of defence evidence and final addresses. It was shown to the Judge the next morning. He gave the jury a stern warning to ignore the internet, and the trial continued.
The Court of Appeal did not believe it likely that the jurors applied the wrong legal tests for burden of proof and reasonable doubt. The appeals failed on all counts.
Back to top
Information on our current seminars
4. A performance bond case - would minor errors stop the indemnities?
BEALE AND BEALE V BANK OF NEW ZEALAND AND ORS HC AK CIV 2005-404-6308 [2006] NZHC 449 (3 May 2006)
Lockheed Limited was a contractor. It was to construct "Quattro Apartments" in Grey Lynn for B R Properties No. 8 Limited ("BRP"). BRP required a contractor's performance bond - a bond which would be forfeited if the contract wasn’t completed.
Michael Beale was involved in the affairs of Lockheed. He approached the BNZ and arranged a $300,000 bond early in 2004. If the contract wasn’t completed, the BNZ would pay BRP $300,000 and he and Tracey Beale would repay the bank. A commercial property the Beales owned in Palmerston North provided security.
After the bond was signed, it was changed to meet the form required in the construction contract. This meant that new indemnity documents were signed by the Beales. In the middle of 2004, the Beale’s sold the commercial property and a term deposit of $300,000 with the BNZ replaced the property as security for the bond.
Problems arose with the construction and Lockheed defaulted on the contract. In June 2005, BRP made demand on the bank for payment of $300,000 under the bond. (Its actual losses were apparently $1.7 million.) The bank paid out and took the $300,000 term deposit. The Beales claimed that although they would have had the right to do this under the first indemnity, they weren’t able to do it under the second one. They claimed the first indemnity ceased to have effect when replaced by the second one. The bank sought summary judgment on the basis that none of the Beale’s arguments could succeed. Summary judgment is a short process which avoids going through a full hearing. The judge looks at the documentary evidence and makes a final decision only if he/she believes that one side can’t win. (Otherwise the matter goes to a full hearing.)
The indemnity referred to a form of bond "attached and initialled" but the document wasn’t attached and initialled. However, the judge concluded that this didn’t affect the clear meaning and intent of the indemnity and the intent of the parties, that the second indemnity was to operate in respect of the substitute Bond. The bank’s application for summary judgment was therefore granted.
