The Court of Appeal judgment in favour of Blue Chip victims, the Bartles, carries a caution for lenders in the finding that the loan contract entered between the Bartles and GE Custodians Ltd (GE) is oppressive within the meaning of the Credit Contracts and Consumer Finance Act (CCCF Act) and can be re-opened.
Key to GE’s defence was that the loans were arranged by other companies and that, had it been aware of the Bartles’ financial circumstances, it would not have advanced the money. However the three Appeal Court Judges rejected this, ruling that the responsibility to comply with the CCCF Act remained with GE.
The issue has been remitted to the High Court to decide the appropriate remedy. As it is seen as a test case for other Blue Chip investors, it is likely that GE will seek to appeal it to the Supreme Court.
The Bartles, a retired couple in their 60s with a combined pension income of $21,736 a year, borrowed $630,000 against their freehold home in Whangarei to buy an apartment in Auckland as part of a Blue Chip deal. Describing the “investment opportunity” promoted by Blue Chip, Hammond J said it had “the character of a Trojan horse to access the equity of investors in their homes”.
The idea was that after four years the unit would be sold and the Bartles would receive 10.10% of any capital gain with the balance flowing to Blue Chip. In the meantime, they would get $451 a fortnight before tax on the rental.
Hammond J again: “Even assuming the scheme went according to plan, and there were plenty of opportunities for it not to, the principal beneficiary would be Blue Chip”.
GE loaned the money to the Bartles in three instalments; the first two (of $137,484 and $125,791) for 25 year terms and the third (of $366,291) for a 30 year term. The loans were at fixed interest for five years but reverted to variable rate principal and interest payments after that time.
They were lent under a “Fast doc” or “asset lending” arrangement. These are typically provided to self-employed investors who may be unable to provide proof of income and rely on the borrower having sufficient equity to support the loan and signing a declaration of ability to pay.
The CCCF Act
The matter before the Court was whether the contract could be reopened under the CCCF Act on the grounds that the terms were “oppressive, harsh, unjustly burdensome, unconscionable or in breach of reasonable standards of commercial practice”.
Hammond J described Parliament’s intention in passing the Act as “to see that those who borrow money understand what is going on in the transaction and what they are getting into...If this is paternalistic, and undoubtedly it is, it is because Parliament has seen that to be necessary in the interests of the citizens of this country”.
The relationship between GE and Tasman Mortgages Ltd
A lot of the argument in the Court centred on the relationship between GE and Tasman Mortgages Ltd (TML), a company in the Blue Chip group. GE knew nothing of the Blue Chip connection or of Blue Chip but had contracted with TML to originate, implement, service and enforce loans in the New Zealand market.
Accordingly, GE argued that it was simply a funding source and had nothing to do with the “making” of the transactions so should not have to bear the cross of its security being avoided.
GE had inserted a number of protections for itself in its formal arrangements with TML. The Correspondent Deed between them specified among other things that:
TML was an independent contractor and not an agent, partner or employee of GE
TML was to relay to GE any information which might be material to accepting or rejecting a loan application, and
TML was obliged to comply with the law in performing its obligations under the Deed, including the law “relating to or regulating the engaging in of misleading, deceptive and unconscionable conduct” and “the Credit Contracts Act”.
But the Court found that, despite these provisions, responsibility remained with GE. Arnold J said:
“A lender is, of course, entitled to organise its business by subcontracting out, or relying on others to perform, functions associated with its lending activities. But in my view, it would undermine the scheme and purpose of the CCCF Act if lenders could avoid its application, in whole or in part, by adopting lending processes and requirements that meant they could disclaim all personal knowledge of factors that, objectively, indicate the existence of oppression. To permit that would be to allow lenders to insulate themselves from the operation of the CCCF Act”.
Arnold J further suggested that the New Zealand courts should adopt a similar approach to the Australian courts in relation to asset lending, this being to work from the presumption that the loan is unconscionable if the borrower could honour it only by selling the family home.
He said of the Bartles:
“They had no income sufficient to meet their obligations, even taking account of any returns from the apartment, and their most significant asset by far, their home, was fully exposed. The loan transactions were in this sense one-sided. From GE’s perspective they were based essentially on the value of the security offered, without genuine regard to the ability of the Bartles to service them”.
The Court accepted that, had GE been fully apprised of the Bartles’ financial position, it would not have granted the loan. However, rather than accept this as a mitigating factor, Hammond J found that it was “powerful evidence of a departure from reasonable standards of commercial practice” and “a clear indicator that the loan itself was oppressive”.