Lender FAI Money is chasing a past due property loan owed by bankrupt, disbarred lawyer Edward Errol Johnston.
Hanover co-founders Eric Watson and Mark Hotchin are also directors of FAI, which originally lent $300,000 to Mr Johnston for a Waitakere property in December 2009.
Mr Johnston has been adjudicated bankrupt since the Waitakere loan. He was also struck off by the New Zealand Lawyers and Conveyancers Disciplinary Tribunal after admitting charges of misconduct and breaches of law governing practitioners.
He had further trouble last year when he was referred to the Serious Fraud Office following the collapse of his property investment company.
This week, the unsecured loan for the 9000sq m Waitakere property was at the centre of a High Court squabble.
Although the loan was made to Mr Johnston, the property was the sole asset held in a trust. Mr Johnston’s wife and two children were the beneficiaries, according to court documents.
Since 2012, the lender has been trying to pin its two trustees Gavin Crawley and Mr Johnston’s brother, Rick Johnston, as also personally liable for the past due debt.
The trustees applied to the Auckland High Court to set aside default judgments entered against them in 2012 by FAI. That hearing was heard by Associate Judge Tony Christiansen this week, who ordered the judgments be set aside.
Those judgments formed the basis of FAI’s further requests filed in June 2013 for the issue of bankruptcy notices to the trustees. Judge Christiansen also ordered the bankruptcy notices be set aside.
The lawyer representing the trustees, Simativa Perese, told Judge Christiansen it must be determined they acted dishonestly or fraudulently in order to find the trustees personally liable. That hasn’t been determined, so their liability is limited to the assets in the trust, he argued.
Judge Christiansen agreed, saying there was insufficient evidence before the court to show dishonesty.
“If they have a defence, they need to be heard by the court; now is not the appropriate time,” Judge Christiansen said during his oral decision to set aside the judgments.
Among FAI claims, the lender says the mortgaging of the property was “fraudulent/dishonest or (alternatively) negligent,” according to court documents, because it was already mortgaged to Westpac and Dorchester Finance.
Further, FAI claims the property was sold to related parties for $960,000, which was well below the $1.5 million value Edward Errol Johnston presented in his statement of assets before the loan. When the property sold for $960,000, proceeds were used to pay down secured debt.
The rateable value of the property was $1.1 million in July 2011, according to Auckland Council property records.
Terranet records show the mortgage to Dorchester was discharged the same day in February 2012 the property was sold. In court, Mr Perese told Judge Christiansen Westpac has also been paid.
The current owners of the Waitakere property are Johnston Associates Trustees and Seabreeze Trustees, according to Terranet, with an ASB mortgage.
The lone director and shareholder for Seabreeze is Logan Granger, who is a co-director at Johnston Associates Chartered Accountants, where trustee Rick Johnston works.
The loan and details
The loan went into arrears in June 2011 and within two months the parties agreed to a repayment plan. The new agreement called for an increase in debt from $300,000 to $386,267.96 plus interest as well as full payment by June 5, 2012.
The new agreement also called for the defendants to execute an admission of claim, which they did in August 2011, according to the court judgment.
However, FAI submitted a judgment by default for sealing in May 2012 and an amended statement of claim and a fresh judgment for sealing a couple of months later in July.
Another judge determined it was not clear the plaintiff was entitled to seal a judgment for the unpaid principal before the June repayment date. He recommended serving the amended documents to the trustees.
The amended statements of claim were never served to the trustees, so they claim the default judgment against them was irregularly obtained.
The trustees further argue they have a good defence because any obligations they assumed under the guarantee were limited to the assets of the trust.
FAI claims, among other things, the trustees breached their guarantee obligations because the trust’s security property was mortgaged to Westpac and Dorchester Finance, contrary to information given during the application.
Further, the sale of the property was to related parties.
The onus is on the trustees to show the property sales were not fraudulent, barrister Bret Gustafson argued in court, which they have not done. Mr Gustafson represented FAI in the High Court proceedings this week.
The trustees claim a title search would have shown the priority to lenders already in place.
Mr Gustafson told the judge his clients might seek to have assets frozen, which will only add time and cost to the legal bills.
FAI claims it has incurred costs of $30,000, the court judgment says, “and it would be prejudiced by having to discharge the charging orders it has registered over three properties” related to the trustees.
Judge Christiansen has reserved his decision on costs.