IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA CA294/2019 [2020] NZCA 285 BETWEEN FM CUSTODIANS LIMITED Appellant AND THE QUEEN First Respondent AND LINDSAY BECKETT SMITH Second Respondent Hearing: 13 May 2020 Court: Kós P, Venning and Mallon JJ Counsel: G P Blanchard QC, B K McLay and E B Moran for Appellant K South and J Mara for First Respondent No appearance for Second Respondent Judgment: 14 July 2020 at 9.30 am JUDGMENT OF THE COURT The appeal is dismissed. ____________________________________________________________________ REASONS OF THE COURT (Given by Venning J) Introduction [1] Lindsay Beckett Smith pleaded guilty to a representative charge of using forged documents to obtain a pecuniary advantage and one charge of failing, without reasonable excuse, to comply with s 149 of the Insolvency Act 2006. He was sentenced in the District Court at Greymouth to two years and two months’ FM CUSTODIANS LIMITED v R [2020] NZCA 285 [14 July 2020] imprisonment on the forgery charge, with a reparations order of $764,000, and convicted and discharged on the insolvency charge.1 [2] The offending involved two loans totalling $784,000 which FM Custodians Ltd (FMC) had advanced to entities associated with Mr Smith. The loans were secured against several properties. As part of the sentencing process, the Crown sought forfeiture of the proceeds of sale of the properties. FMC applied for relief against forfeiture. [3] Judge Neave found that FMC did not have a valid interest in the property as its mortgage was created by fraud. The Judge went on to reason that if he was wrong in that conclusion, FMC was in any event involved in the qualifying instrument forfeiture offence. It could not, therefore, meet the test for relief from forfeiture under s 142L of the Sentencing Act 2002. The Judge made an instrument forfeiture order in relation to the proceeds of sale totalling $647,870.36.2 [4] FMC appealed. Nation J dismissed the appeal.3 He held: (a) the properties in issue were an instrument of crime;4 (b) the Judge was correct to find FMC did not have a valid interest in the properties as its mortgages were created by fraud;5 (c) the Judge was also correct to find that FMC, through Mr Smith as its agent, had been involved in the relevant instrument forfeiture offence;6 and 1 2 3 4 5 6 R v Smith [2017] NZDC 27345 [Sentencing notes]. R v Smith [2017] NZDC 19891 [District Court judgment]; and R v Smith DC Greymouth CRI-2014-018-39, 26 September 2017 [District Court recall judgment]. FM Custodians Ltd v R [2019] NZHC 1128 [High Court judgment]. At [55]. At [151]. At [178]. (d) the Judge had properly concluded FMC was not entitled to relief from the forfeiture order and consequently the proceeds of sale should be forfeited to the Crown.7 [5] FMC applied for leave to bring a second appeal. This Court granted leave to FMC to appeal the High Court decision that FMC was not entitled to relief from the instrument forfeiture order.8 [6] The appeal raises the following issues: (a) Were the properties instruments of crime as defined in s 5 of the Criminal Proceeds (Recovery) Act 2009 (CPRA) and s 4 of the Sentencing Act? (b) If so, did FMC have an interest in the properties as required by s 77(1) of the CPRA and s 142L(1)(b)(i) of the Sentencing Act? (c) [7] Was FMC involved in the qualifying instrument forfeiture offence? FMC does not seek relief from forfeiture on the grounds of undue hardship under s 77(1)(b) CPRA and s 142M of the Sentencing Act. Background [8] Mr Smith was a well-known accountant on the West Coast. He became involved in a number of other business ventures, including property development, a mining operation, and a heliport project in Franz Josef. One of the property developments involved a subdivision and residential development at Blue Spur near Hokitika. Mr Smith went into that venture with a Mr and Mrs Ross. A company, Ballarat Terrace Limited (Ballarat), was incorporated for the purpose. In the course of the development project Ballarat created over a dozen sections. 7 8 At [180]. FM Custodians Ltd v R [2019] NZCA 598. [9] Mr and Mrs Ross lived in Picton. They held 50 per cent of the shares in Ballarat through a family trust. Mr Smith lived in Hokitika. He held the remaining 50 per cent of the shares in Ballarat through his family trust, the Prospect Family Trust (the Prospect Trust). Mr Ross and Mr Smith were also both directors of Ballarat. [10] Both the District Court and High Court found Mr and Mrs Ross had paid $115,000 for their shares in Ballarat, made further cash advances of $410,000 and paid an additional $260,000 into a Bartercard account in the name of Ballarat to which Mr Smith had access. In total, their contribution to Ballarat was $785,000. Over the course of the development, Ballarat had returned $114,760 to the Rosses, leaving a balance due to them of current account and shareholder advances of $670,240. [11] Mr Smith required funding for his various business ventures. He approached FMC through its Dunedin based agent Fund Managers Otago Limited (FMO). FMO managed a group investment fund, the New Zealand Mortgage Income Trust No 2 Fund (NZMIT Fund) for the trustee, Trustees Executors Limited (TEL). Members of the public invested in the fund by purchasing units in it. FMC is a custodial company for TEL and was the lender (as nominee of TEL) on the relevant documentation. [12] Judge Neave concluded that, although they were separate corporate entities, TEL, FMC and FMO were so interrelated and interdependent that each was acting as the agent of the other during various parts of the relevant transaction.9 That finding is not challenged. [13] Mr Smith applied to FMO for loans of $520,000 for the Prospect Trust and $264,000 for Ballarat. FMO’s Chief Executive Officer, Mr Peter Hutchison, met and dealt with Mr Smith directly. Mr Smith offered mortgages over his family home owned by the Prospect Trust (the Prospect property) and over the eight (as then yet unsold) sections belonging to Ballarat as security for the loans. [14] Mr and Mrs Ross were unaware of Mr Smith’s approach to FMO or of any proposal for borrowing using the Ballarat sections as security. 9 District Court judgment, above n 2, at [23]. [15] In May 2011, FMC agreed to lend: (a) $264,000 to Ballarat to be secured by a mortgage over the eight sections of the subdivision (and also to be supported by guarantees from the directors); and (b) $520,000 to the Prospect Trust to be secured by a mortgage over Mr and Mrs Smith’s family home owned by the Prospect Trust (and also to be supported by a guarantee from Ballarat). [16] Mr Hutchison instructed Mr Stephen Woulfe, of the Hokitika law firm Murdoch James & Roper, to act on the loan advances. Mr Woulfe also acted for Mr Smith and Ballarat. He had prepared Ballarat’s incorporation and constitution documents. Mr Woulfe was aware Mr Ross lived in Picton. [17] Mr Woulfe allowed Mr Smith to take the relevant documentation away in order to obtain Mr Ross’ signature on behalf of Ballarat where it was required. [18] Rather than provide the documents to Mr Ross (who would not have agreed to the borrowing), Mr Smith forged Mr Ross’ signature as director of Ballarat on the following documents in relation to the $264,000 loan to Ballarat: (a) acceptance of loan offer dated 23 May 2011; (b) loan agreement dated 24 May 2011; (c) deed of guarantee and indemnity dated 27 May 2011; (d) Authority and Instruction (A&I) form for electronic transaction (registration of mortgage) dated 27 May 2011; and (e) waiver of independent legal advice by directors of Ballarat dated 27 May 2011. [19] Mr and Mrs Smith executed the following documents in relation to the $520,000 loan to the Prospect Trust: (a) acceptance of loan offer dated 23 May 2011; (b) loan agreement dated 23 May 2011; and (c) as authorised signatories on the A&I form for electronic transaction (registration of mortgage) dated 27 May 2011. Mr Ross’ signature was not required on these documents. [20] However, Mr Smith also forged Mr Ross’ signature as director of Ballarat on the following documents in relation to Ballarat’s guarantee of the Prospect Trust’s obligations: (a) as guarantor on the loan agreement dated 23 May 2011; and (b) as guarantor on the deed of guarantee and indemnity dated 23 May 2011. [21] Mr Smith returned the documents to Mr Woulfe. Mr Woulfe then falsely certified to FMC that he had witnessed Mr Ross sign the A&I form for the registration of the mortgage over the Ballarat properties and that he, Mr Woulfe, had sighted Mr Ross’ driver’s licence to confirm his identity as the person signing. Mr Woulfe also falsely certified that every guarantor had either received independent legal advice or he had recommended to the guarantor that they should obtain legal advice. Mr Woulfe had not spoken to Mr Ross about the borrowing. Both the District Court and High Court found that, although Mr Woulfe had been extremely careless, and indeed dishonest vis-à-vis FMC in doing so, he was not a knowing party to Mr Smith’s dishonesty in forging Mr Ross’ signature.10 10 At [109]; and High Court judgment, above n 3, at [100] and [170]. [22] The mortgages were registered against the titles of the secured properties and the loan funds advanced. Mr Smith misappropriated the loan to Ballarat for his personal use. Eventually, both Ballarat and the Prospect Trust defaulted on their obligations and FMC took steps to realise its securities. [23] By the time Mr Smith was sentenced, FMC had sold the properties. FMC accepts that it holds its claimed interest in the proceeds of sale on trust for investors in the NZMIT Fund. [24] FMC tendered a late affidavit for the appeal. The affidavit is by Alexander Wainwright, Client Manager at TEL. Mr Wainwright confirmed that FMC had received a payment of $800,000 from the settlement of proceedings it had issued against Mr Woulfe but nevertheless calculated that its investors in the mortgages were still out of pocket to the extent of $973,679 taking into account penalty interest, legal fees and the incidental costs of pursuing collection. [25] Although no formal application was made for the affidavit to be considered, Ms South, counsel for the Crown, addressed it in her submissions. Ms South submitted that Mr Woulfe’s settlement for $800,000 meant that FMC had effectively recovered its losses and further, the settlement confirmed Mr Woulfe’s liability to FMC as its agent and its involvement in the offending. As to the additional money claimed, which was principally penalty and ongoing interest and recovery costs, Ms South noted that FMC was on notice since June 2012 of Mr Smith’s fraud but did not take proceedings against Mr Woulfe until April 2017. She submitted that should count against FMC being granted any interest in the proceeds of sale from the secured properties. [26] For the reasons that follow, the appeal can be determined on the issues we have identified above, without the need to consider the further evidence in Mr Wainwright’s affidavit and Ms South’s submissions as to its effect. The appeal grounds [27] FMC submitted: (a) the High Court erred in treating the properties as instruments of crime. It says the properties were not used to commit or facilitate the commission of the qualifying offence; and, in the alternative, (b) the High Court erred in concluding that the Supreme Court’s decision in Nathan v Dollars & Sense Ltd was applicable and erred in relying on that decision to find that Mr Smith was acting as agent for FMC to support its conclusion that FMC did not have an interest in the properties or, alternatively, was involved in Mr Smith’s offending.11 FMC says Dollars & Sense is distinguishable. Statutory framework [28] Sections 142A–142Q of the Sentencing Act provide for instrument forfeiture orders to be made by a sentencing court. The following provisions are particularly relevant for present purposes: 142N Instrument forfeiture orders 11 (1) Following a hearing under section 142K, the court may, if it is satisfied that the property described in the notice given under section 142B is an instrument of crime, order that the instrument of crime or any part of it specified by the court be forfeited to the Crown. (2) In considering whether or not to make an instrument forfeiture order under subsection (1) in respect of particular property, the court may have regard to— (a) any matter raised in an application for relief under section 142J; and (b) the use that is ordinarily made, or was intended to be made, of the instrument of crime; and (c) any undue hardship that is reasonably likely to be caused to any person by the operation of such an order; and (d) the nature and extent of the offender’s interest in the instrument of crime (if any), and the nature and extent of any other person’s interest in it (if any); and Nathan v Dollars & Sense Ltd [2008] NZSC 20, [2008] 2 NZLR 557. (e) in addition to the matters referred to in section 77(1) of the Criminal Proceeds (Recovery) Act 2009, any other matter relating to the nature and circumstances of the qualifying instrument forfeiture offence or the offender, including the gravity of the qualifying instrument forfeiture offence. … [29] In addition to the matters referred to in s 142N(2), in considering whether or not to make an instrument forfeiture order the court is directed to s 77(1) of the CPRA: 77 Applications for relief from instrument forfeiture order (1) A person … may make an application for relief from an instrument forfeiture order under section 142J of the Sentencing Act 2002— (a) [30] if the person claims an interest in property described in a notice issued under section 142B of the Sentencing Act 2002; … Section 142J of the Sentencing Act provides for relief from an instrument forfeiture order and s 142L provides a court may grant such relief if the applicant establishes an interest in the property and was not involved in the qualifying instrument forfeiture offence: 142J Applications for relief from instrument forfeiture order (1) Any person (other than the offender) may make an application for relief from an instrument forfeiture order. (2) An application by any person for relief must be made to the court that convicted the offender— (a) on either of the grounds set out in section 77(1) of the Criminal Proceeds (Recovery) Act 2009; … 142L Court may grant relief from instrument forfeiture order to applicant who establishes interest in property (1) This section applies if— (a) a person applies to the court under section 142J for relief from an instrument forfeiture order in respect of an interest in property on the ground set out in section 77(1)(a) of the Criminal Proceeds (Recovery) Act 2009; and (b) the court is satisfied, following a hearing under section 142K, that the applicant has established on the balance of probabilities that the applicant— (2) (3) (4) (i) has an interest in the property to which the instrument forfeiture order relates; and (ii) was not involved in the qualifying instrument forfeiture offence to which the order relates. If this section applies, the court must make an order— (a) declaring the nature, extent, and value of the applicant’s interest in the property; and (b) either— (i) directing the Crown to transfer the interest to the applicant; or (ii) declaring that there is payable by the Crown to the applicant an amount equal to the value of the interest declared by the court; or (iii) directing that the interest not be included in an instrument forfeiture order made in respect of the proceedings that gave rise to the application; or (iv) determining, in accordance with section 142N, not to make an instrument forfeiture order. Despite subsection (2), the court may, but is not required to, refuse to make an order under subsection (2) if it is satisfied that— (a) the applicant was, in any respect, involved in the commission of the offence in respect of which forfeiture of the property is or was under consideration; or (b) if the applicant acquired the interest at the time of or after the commission of the offence, the applicant did not acquire the interest in the property in good faith and for value. The court must not make an order under subsection (2)(b)(ii) unless it is satisfied that it cannot reasonably make an order under subsection (2)(b)(i) or (iii) (for example, because the interest of the applicant is not severable from the other property in question). Were the properties instruments of crime? [31] In the High Court, FMC had argued for the first time the properties (the Ballarat sections and the Prospect Trust property) were not instruments of crime as they were not used to commit the relevant offence. Nation J found they were.12 FMC challenges that finding. 12 High Court judgment, above n 3, at [50]–[55]. [32] The operative wording of the definition of “instrument of crime” is the same in both s 4 of the Sentencing Act and s 5 of the CPRA: instrument of crime— (a) means property used (wholly or in part) to commit, or to facilitate the commission of, a qualifying instrument forfeiture offence; and … (c) [33] in relation to any property referred to in paragraphs (a) and (b), the proceeds of any disposition of that property or any other property into which that property is converted, after the commission of the qualifying instrument forfeiture offence, except to the extent provided otherwise by any order of a court … excluding any severable interest or granting relief. Mr Blanchard QC, counsel for FMC, repeated the argument advanced in the High Court that the properties had not been “used” to commit or facilitate the commission of Mr Smith’s offence. He noted the ordinary meaning of the verb “use” is:13 [t]o make use of … as a means or instrument; to employ for a certain end or purpose. [34] Mr Blanchard sought to distinguish the present case from what he described as the typical situation in which it could be said property had been used to commit or facilitate the commission of an offence, such as using it to grow, manufacture or store prohibited drugs. Here, the offence was using forged documents to obtain a pecuniary advantage. The property used to commit the offence were the forged documents themselves and the tools required to produce the false documents. The properties, and the equity in them, were best characterised as the target of the offending. In effect, Mr Smith’s offending was designed to steal value from the properties. The forged signatures on documents enabled him to gain access to that value in the form of the secured loans. Mr Blanchard submitted the present situation was analogous to a person using a forged cheque to withdraw funds from another’s bank account. In that case it could not be said the bank account was “used”. Rather, it was the target of the offending. 13 JA Simpson and ESC Weiner (eds) The Oxford English Dictionary (2nd ed, Clarendon Press, Oxford, 1989) vol XIX at 353. [35] We are unable to accept Mr Blanchard’s analysis and argument. The charge Mr Smith was convicted on was a representative charge that: LINDSAY BECKETT SMITH between 23 May 2011 and 17 November 2012 at Hokitika knowing documents to be forged used the documents to obtain a pecuniary advantage or valuable consideration … [36] The pecuniary advantage (or valuable consideration) Mr Smith obtained was the loan advances. While the forged documents were a necessary part of the offending, so were the properties and particularly, the equity in the properties. Without the equity in the properties being available as security, FMC would not have agreed to make the loan advances. The transaction would not have proceeded. The offence would not have been completed. Mr Hutchison accepted as much in his evidence. During cross-examination Mr Hutchison was asked about a discussion he had with Mr Smith regarding the securities: … all I remember about this discussion was that I made it clear that if we were going to entertain a lend it had to be on term and conditions that we could be comfortable with, that we were well protected for our unit holders against those two assets. We actually ended up — we were comfortable with the Prospect loan because it captured the family home and we were very comfortable with the money on Ballarat because it was at 264 over 1.6. [37] And then, after confirming it was an “asset lend” and Ballarat’s borrowing was always going to be serviced from sale of the sections, Mr Hutchison confirmed the importance of the security: [38] Q. This lending wasn’t going anywhere without a mortgage over Ballarat Terrace was it? A. No. Q. It was fundamental to both the Prospect loan and the Ballarat loan that you got Ballarat? A. Correct. The money from the loan drawdowns was the target of Mr Smith’s offending. He needed the money from the loan advances to maintain his business ventures. He had to provide the equity in the properties to obtain the loan advances. As such, the properties were used to facilitate the commission of his fraud. [39] In his submissions, Mr Blanchard criticised an aspect of Nation J’s reasoning concluding that the properties themselves were not targets of the offending. The Judge noted that the extent to which the value of the properties would ultimately diminish was not known at the time of the offending.14 Mr Blanchard submitted the Judge was wrong to look at it that way. He submitted the value of the properties was diminished immediately on registration of the mortgages. Whether it may or may not have been restored was irrelevant. [40] Rather than regarding Mr Smith’s offending as “steal[ing] value” from the properties, we agree with Ms South’s submission that the better analysis is that Mr Smith, by the forgery, enabled the equity in the properties to be provided to FMC in exchange for the loans, thereby allowing FMC to effectively hold or secure the properties until repayment or to sell them (as it did). That was a use of the properties. We agree with the Judge that such an analysis accords with the ordinary meaning of use in a manner that people would understand and accept.15 [41] We also agree with the Judge that just how the loans and securities would ultimately have affected the value of the land (the equity) owned by Ballarat could only be a matter of speculation.16 While Mr Smith may have hoped to pay the advances back and cover up the fraud; that was irrelevant. Mr Smith had to use the properties to obtain the loans in the first place. [42] Nor is the analogy of using a forged cheque to withdraw funds from a bank account particularly apt. The forged cheque may be equivalent to the forged documents in this case, but in the forged cheque example nothing further is needed to be used to commit the offending. In this case, the forged documents would be of no use to Mr Smith unless the properties were provided (used) as security. [43] Mr Blanchard next submitted that, even if the properties could be characterised as a necessary pre-condition of the offending, that did not mean that they were used to commit the offending. He relied on the High Court of Australia case of Milne v R as 14 15 16 High Court judgment, above n 3, at [52]. At [53]. At [52]. authority for the proposition that the word “use” in the definition of “instrument of crime” requires “an instrumental connection between the intended use of the property and the commission or facilitation of the commission of an offence.”17 In Milne, the Court drew a distinction between property with an instrumental connection to the offence and property that was merely a necessary condition of the offending. 18 [44] However, as Ms South pointed out, the facts of Milne were quite different, as was the statutory context. In Milne, a company under Mr Milne’s control disposed of shares in Admerex Ltd by means of a swap for investments in shares in another company. Mr Milne intended the company would not declare the capital gain, which was an offence again s 134.2 of the Criminal Code Act 1995 (Cth). Mr Milne was charged with one count of an offence against s 400.3(1) of the Code which alleged he had dealt with the shares in Admerex Ltd by disposing of them, intending that they would become an instrument of crime in that they would be used to facilitate the commission of an offence under s 134.2. Importantly, an integral part of the offence was the intention to use the property as an instrument of crime. [45] The question on appeal to the High Court was whether the original shares on which the capital gain was made could have been an instrument of crime in that way. The answer was no. There was no use of the property (the shares) to commit the offence of failing to declare the capital gain because the offence, the failure to declare the gain, took place at a later time. The Court noted the definition of “instrument of crime” as used in s 400.3(1)(b)(ii) required an instrumental connection between the intended use of the property and the commission or facilitation of the commission of an offence. The shares were no more than a necessary condition of the commission of the subsequent offence. That did not amount to the use of the shares to facilitate or commission that offence. Nor was the instrumental connection demonstrated merely by an intention to take advantage of circumstances arising after and as a result of the dealing.19 17 18 19 Milne v R [2014] HCA 4, (2014) 252 CLR 149 at [37]. At [37]. At [37]. [46] Here, there was such an instrumental connection between the use of the properties as security for the loans and the loans’ drawdown. Upon the registration of the mortgages (on the basis of the fraudulent documents), the loans were advanced and the offender, Mr Smith, obtained the benefit. The offence was complete at that time. The properties were more than a necessary condition of the commission of the offence. They were an integral element of it. [47] Mr Blanchard next submitted that the Judge had erred in failing to consider the Ballarat and the Prospect Family Trust properties separately. In effect, the Judge’s approach treated them as part of a single transaction, the whole of which was tainted by Mr Smith’s forgery of Mr Ross’ signature on certain limited documents. Mr Blanchard submitted that approach overlooked that the loan and mortgage documents providing security over the Prospect Trust property were validly executed by Mr Smith and his wife as the registered proprietors. The Prospect Trust property could not itself be viewed as an instrument of crime. There was no criminality in the use of that property to obtain the loan from FMC to the Prospect Trust. [48] But that argument overlooks the structure of the loan offer and the basis upon which FMC agreed to the advances. It is quite apparent from Mr Hutchison’s evidence that the Prospect Trust loan would not have proceeded without the security offered by the Ballarat properties. Again, under cross-examination, Mr Hutchison’s evidence was: [49] Q. And therefore the Ballarat security was the thing that made this whole deal work wasn’t it? A. It was certainly a — that’s why we collateralised them, it was important to be able to have access to equity in Ballarat. As Mr Hutchison said, the advances were cross-collateralised. The loan to Prospect Trust would not have been granted unless Mr Smith was able to offer the equity in the Ballarat sections to Mr Hutchison as additional security. That required Mr Smith to forge Mr Ross’ signature on the loan agreement and supporting guarantee provided by Ballarat to support the Prospect Trust borrowing, which in turn tainted the Prospect Trust borrowing with Mr Smith’s fraud. [50] Mr Blanchard also submitted that treating the Ballarat properties as having been used in the offending had the perverse result that the instrument forfeiture order was sought against the victim of the offending, in this case, Ballarat. He submitted the situation was akin to a person stealing an innocent bystander’s car and using that car to commit a bank robbery. It could not be sensibly suggested that an instrument forfeiture order should be made in respect of the car. He noted that the structure of the relevant provisions in the Sentencing Act contemplate that instrument forfeiture orders would generally be made in respect of property in which the offender has an interest. It would be inconsistent to treat property over which the offender has no ownership or lawful control as an instrument of crime. [51] There is a short answer to Mr Blanchard’s point. One of the considerations the court may have regard to under s 142N(2)(d) when considering whether to make an instrument forfeiture order is “the nature and extent of the offender’s interest in the instrument of crime (if any)”. The subsection expressly contemplates there will be situations where the offender does not have an interest in the property which is the instrument of crime. Further, in the example given by Mr Blanchard, the innocent car owner would be entitled to relief given their prior property interests.20 [52] Mr Blanchard also criticised the Judge’s reasoning that treating the properties as instruments of crime accorded with the purposes of the CPRA in that it enabled the value of the property to be available to compensate the victims of Mr Smith’s fraud, namely, Mr and Mr Ross.21 He submitted the direct victim of the fraud in relation to the Ballarat properties was Ballarat. If the High Court judgment was correct, all owners of fraudulently mortgaged land (or chattels over which fraudulent security has been obtained) would be at risk of an instrument forfeiture order being made over their property and would need to apply for relief, albeit they were plainly victims of fraud. That cannot have been intended. [53] We consider that Mr Blanchard’s submission overstates the apparent difficulties. First, Mr and Mrs Ross are properly regarded as victims of Mr Smith’s 20 21 Sentencing Act 2002, s 142L(1)(b); and Criminal Proceeds (Recovery) Act 2009, s 77(1)(a). High Court judgment, above n 3, at [54]. offending. They meet the definition of victims in the Sentencing Act. 22 They have, by means of Mr Smith’s offending, suffered loss of property, namely value in their family trust’s shares in Ballarat. [54] Secondly, each case will turn on its own facts. It will be a rare case where a mortgagor would be required to apply for relief on the basis the mortgage has been fraudulently obtained where they, the mortgagor, will have granted the mortgage. Further, as Nation J observed, FMC’s interest as mortgagee would be protected if it held a valid mortgage and was not involved in the relevant offence.23 [55] In summary on the first appeal point, we agree with the High Court that the properties (the Ballarat sections and the Prospect Trust property) were instruments of Mr Smith’s crime. Did FMC have an interest in the properties? [56] The next issue is whether FMC is entitled to relief against forfeiture. To be entitled to relief, FMC was required to establish both that it had an interest in the properties and also that it was not involved in Mr Smith’s offending.24 [57] Mr Blanchard submitted that, even if it could be said the properties were instruments of crime, Nation J erred in his conclusion that FMC lacked a valid interest in the properties. Prima facie, FMC’s registered mortgages were valid. That gave FMC an interest in the properties. That interest could only be defeated if the mortgages were void ab initio. [58] FMC itself was not guilty of fraud. To find the mortgages were void ab initio required a finding of fraud by its agent(s) in the creation and registration of the mortgages. Nation J applied the Supreme Court decision in Dollars & Sense to find Mr Smith was acting as the agent for FMC.25 That finding underpinned the Judge’s conclusions that FMC lacked a valid interest in the properties in terms of 22 23 24 25 Sentencing Act, s 4(1)(a)(ii): victim means “a person who, through, or by means of, an offence committed by another person, suffers physical injury, or loss of, or damage to, property …”. High Court judgment, above n 3, at [54]. Sentencing Act, s 142L(1)(b). High Court judgment, above n 3, at [148]–[149]. s 142L(1)(b)(i) of the Sentencing Act, its registered mortgage having been obtained by fraud for the purposes of ss 62 and 63 of the Land Transfer Act 1952.26 It also supported his conclusion that FMC was involved in the offending in terms of s 142L(1)(b)(ii).27 [59] Mr Blanchard submitted that Dollars & Sense was distinguishable on its facts. In his submission, the crucial distinction was that Dollars & Sense had implicitly agreed to the appointment of a sub-agent and had placed no restrictions on who that sub-agent could be. By contrast, FMC had placed express restrictions on the extent of the sub-agency. FMC had instructed Mr Woulfe’s firm of Murdoch James & Roper to act as its agent. It specifically required the firm to comply with the New Zealand Law Society guidelines when registering the mortgage. [60] The guidelines contained important provisions relating to the identification of persons signing the A&I forms. Compliance with the Land Information New Zealand standard was required. The standard itself provided that verification of identity could only be delegated to an “independent trusted person the practitioner can reasonably rely on” and that it would not be reasonable to rely on documents witnessed by “a friend or relative selected by the client”.28 Importantly, it also provided the witness must “not be a party to the transaction”.29 [61] Mr Blanchard argued that FMC expressly incorporated the guidelines and the standard in its instructions to Mr Woulfe’s firm. They excluded sub-delegation of verification of Mr Ross’ identity to Mr Smith, who was a party to the transaction and clearly not an independent party. Mr Blanchard submitted that it followed the sub-delegation by Mr Woulfe to Mr Smith was invalid and without FMC’s authority. As Mr Woulfe was not able to appoint Mr Smith as a sub-agent, the present case was distinguishable from Dollars & Sense. 26 27 28 29 At [150]–[151]. At [152]–[156]. See [84] below. Registrar-General of Land Standard for verification of identity for registration under the Land Transfer Act 1952 (Land Information New Zealand, LINZS20002, 30 October 2013) at 4 and G2. At 6. [62] We will return to Mr Blanchard’s submissions focused on FMC’s instructions and their relevance to Mr Smith’s actions shortly, but it is clear that Mr Woulfe was authorised to act as agent for FMC. The District and High Courts both found that Mr Woulfe was dishonest in certifying that he had personally witnessed Mr Ross’ signature on the A&I form and in certifying that he had established the person signing as Mr Ross was in fact Mr Ross.30 The A&I form was a document relied upon in the registration process of the FMC mortgages, so that FMC obtained their mortgage over the Ballarat properties, in part, through the dishonesty of Mr Woulfe while he was acting as their agent. The mortgage over the Ballarat sections was wrongfully registered through a combination of Mr Smith’s forgery and Mr Woulfe’s dishonest certification. Without Mr Woulfe’s dishonesty, the documents could not have been registered. [63] On that basis alone, FMC obtained its mortgages over the Ballarat properties by a fraud sufficient to vitiate that mortgage. FMC had no valid interest in the Ballarat sections as the mortgage over them was void ab initio. [64] Quite apart from Mr Woulfe’s involvement, we consider that Dollars & Sense is not distinguishable and that the evidence supports Nation J’s finding that Mr Smith was FMC’s agent.31 [65] With respect to Mr Blanchard’s argument that FMC placed express restrictions on the sub-agency so that Mr Smith was not able to act as agent for FMC for the purpose of verifying Mr Ross’ identity, we consider it proceeds on a misapprehension of the factual position and a misreading of the relevant documents. [66] Mr Blanchard accepted that the instructions did not expressly proscribe sub-delegation, but he argued they did place express limits on the type of person to whom the task of verifying the identity of persons signing the A&I form could be delegated. He argued that as Mr Smith was a party to the transaction and was not independent, the task of verifying Mr Ross’ identity could not be sub-delegated to him. 30 31 District Court judgment, above n 2, at [99]; and High Court judgment, above n 3, at [100]. High Court judgment, above n 3, at [148]–[149]. As Mr Woulfe was not authorised to sub-delegate that task to Mr Smith, FMC could not be held vicariously liable for Mr Smith’s fraud. [67] However, the task of verifying Mr Ross’ identity on the A&I form was never delegated to Mr Smith by Mr Woulfe. Mr Smith was not the verifier of Mr Ross’ identity on any occasion. That always remained Mr Woulfe’s responsibility. [68] FMO’s instructions to Mr Woulfe were set out in the letters of instruction and the solicitor’s certificates, which required him to: (a) attend to disclosure to the borrowers and guarantors; (b) return the executed lending documents; (c) where the documents were signed by a corporation, ensure the documents had been executed so the corporation’s acceptance of those was valid and enforceable; [69] (d) provide a certified copy of all debtors’ identifications; and (e) effect registration of the mortgage. Mr Woulfe effectively sub-delegated Mr Smith to provide borrower disclosure, ensure Mr Ross agreed to guarantee the Prospect Trust loan, and obtain Mr Ross’ signatures and driver’s licence. The obligation to certify Mr Ross’ identity, however, was not sub-delegated to Mr Smith. [70] The standard itself confirmed that ultimate responsibility for certifying Mr Ross’ identity rested with Mr Woulfe:32 A practitioner may discharge these obligations by personally conducting the identity checks or by delegating these functions to some other independent trusted person the practitioner can reasonably rely on. In either case, the practitioner who provides the certification is responsible for the adequacy of the identity verification. 32 Registrar-General of Land, above n 28, at 4. For the above reasons, Mr Woulfe remained FMC’s agent for that purpose. [71] In carrying out the general sub-delegation, which included obtaining Mr Ross’ signature, Mr Smith signed the documents for himself and forged Mr Ross’ signature. We consider Mr Smith’s sub-agency in relation to those tasks is analogous to the sub-delegation to Rodney Nathan in Dollars & Sense. [72] In Dollars & Sense, the Supreme Court accepted the approach of the Court of Appeal and rejected the appellant’s argument against the sub-agency: [22] The majority also rejected an argument that Mr Thomas, himself an agent of D & S, had no power to appoint Rodney as a sub-agent. There was nothing in the evidence to suggest that D & S had expressly prohibited the delegation of functions by Mr Thomas. Nor would that have been sensible. Mr Thomas was in Auckland. It would have been quite routine, for example, for him to arrange with a Kerikeri solicitor to deal with the Nathans or their solicitor in matters relating to the execution of the documents. … [28] The argument that Mr Thomas, himself an agent, had no power to create a sub-agency, was renewed before us but has no weight, for the reasons given by the Court of Appeal majority. By instructing an Auckland solicitor when documents were likely to be signed in Northland D & S implicitly agreed to the appointment of a sub-agent. We add that there was no evidence concerning ordinary practices of solicitors in this respect. (footnotes omitted) [73] In the present case, similarly, both Mr Hutchison and Mr Woulfe knew Mr Ross lived in Picton. FMC, through Mr Hutchison, authorised Mr Woulfe to take whatever steps were necessary for the documents to be executed. Mr Hutchison accepted in his evidence that he knew from the company searches that Mr Ross lived in Picton. He said he anticipated Mr Smith would be discussing with the other shareholders what was proposed with regard to Ballarat. Neither of FMC’s agents, Mr Hutchison nor Mr Woulfe, attempted to contact Mr Ross or to discuss the documents with him. They left that task to Mr Smith. Mr Hutchison implicitly agreed to the appointment of Mr Smith as agent for that purpose and ultimately, for execution of the documents. [74] We accept Ms South’s submission that the only differences between Dollars & Sense and this case were the additional step in Dollars & Sense when the solicitor returned the documents to Mr Nathan to have them witnessed and the fact that in the present case, Mr Hutchison also sought a General Security Agreement from the borrowers, including from Ballarat. Dollars & Sense is not materially different from this case and is not distinguishable on the basis argued for by Mr Blanchard. [75] In Dollars & Sense, it was accepted for Dollars & Sense that, for the purposes of establishing fraud in terms of ss 62 and 63 of the Land Transfer Act, Rodney’s forgery must be treated as the fraud of Dollars & Sense if he was acting in the course of an agency for Dollars & Sense when he committed the forgery, regardless of the absence of any knowledge of the fraud by Dollars & Sense or its solicitor.33 The Supreme Court recorded the concession was properly made. 34 The issue was whether Rodney had actual authority, whether either express or implied, to obtain execution of the documents from Dollars & Sense.35 [76] Similarly, in the present case, Mr Smith had actual authority to obtain Mr Ross’ signature on the relevant documents. This was an important task directed at perfecting FMC’s security. He was acting as FMC’s agent to achieve this. His frauds are the frauds of FMC as a lender. As the Supreme Court held, the liability of the principal is not dependent upon imputation of the knowledge of the agent to the principal, but rather the liability arises because the agent has done an act which the principal is vicariously liable for.36 The Supreme Court further noted:37 … the signing of the documents was central to this agency and that is what, in relation to his mother, Rodney took it upon himself to do, albeit in a criminal manner. It could fairly be said that, despite that centrality, forging a signature was exactly what D & S did not want Rodney to do to fulfil the task entrusted to him. But cases like Lister v Hesley Hall have demonstrated that an act can be within the scope of an agency even when it is the antithesis of what the principal really wanted. The true test is whether the tortious act has a sufficiently close connection with the task so that the commission of the tort can be regarded as the materialisation of the risk inherent in that task. If that is so, what the agent did can fairly be treated as an improper mode of fulfilling the allocated task… [77] Mr Smith’s forgery was sufficiently closely connected to an authorised act, the obtaining of Mr Ross’ signature on the relevant documents, to be treated as a means 33 34 35 36 37 Nathan v Dollars & Sense Ltd, above n 11, at [6] and [44]. At [6]. At [9]. At [44]. At [46]. of performing it and was therefore, within the agency. Mr Smith’s fraud took place to achieve the very thing he was asked to do as an agent and is properly characterised as an improper mode of fulfilling the authorised task. It is the act, not the knowledge, of the agent which is the critical element.38 FMC implicitly authorised Mr Smith to represent it in its dealings with Mr Ross concerning Mr Ross’ signature of the documents. [78] Further, FMC accepted the documents and acted upon them, thereby ratifying Mr Smith’s authority. As the Supreme Court said in Dollars & Sense: [26] In view of this engagement of Rodney by D & S, through Mr Thomas, to get the mortgage signed and then witnessed, it would be artificial and commercially unrealistic to take the view that there was no relevant element of agency in what Rodney did. Any doubt about Mr Thomas’s acceptance of Rodney’s role was removed when the documents came back witnessed by a lay person, no objection was taken, the advance was made and the mortgage was presented for registration. If it were necessary to determine the point, we would be inclined to the view that, at the very least, this acceptance amounted to a ratification by Mr Thomas of Rodney’s authority to arrange execution of the documents. [79] Mr Smith’s fraud renders the mortgages over the Ballarat sections and the Prospect Trust property void ab initio. [80] Mr Blanchard repeated his alternative argument that, in the case of the mortgage over the Prospect Trust property, Dollars & Sense was distinguishable on a further, more fundamental basis. The Prospect Trust mortgage was not obtained using forged documents. It was properly executed by Mr and Mrs Smith. Therefore, even if Mr Smith were treated as FMC’s agent in that transaction there was no fraud to be imputed to FMC as the FMC mortgage of the Prospect Trust property was validly registered. [81] But again, while the mortgage itself might have been validly executed by Mr and Mrs Smith, without Mr Smith’s forged guarantee of the Prospect Trust’s borrowing by Ballarat, FMC would not have made the advance to the Prospect Trust and the mortgage would not have been registered. The signature of Mr Ross on 38 At [45]. the guarantee which gave effect to the cross-collateralisation was central to FMC accepting the security of the Prospect Trust property. [82] Next, Mr Blanchard argued that even if the mortgage over the Prospect Trust property was found to have been obtained by fraud, it was a fraud committed by the registered proprietors themselves, again a distinction from Dollars & Sense. The registered proprietors and the mortgagor are the one and the same. To apply agency principles in this situation and find Mr Smith was acting as agent for FMC would be to state in effect that FMC obtained its mortgage as a result of fraud by Mr and Mrs Smith against Mr and Mrs Smith, which cannot be correct. But the issue is the validity of the mortgage, not the interest of the registered proprietors. [83] For the above reasons, we agree with Nation J that FMC does not have an interest in the proceeds of sale. It is unnecessary in the circumstances to determine the extent and value of FMC’s interest or Ms South’s submissions based on the case of Westpac New Zealand Ltd v Clark which were directed at that issue.39 Was FMC involved in the qualifying instrument forfeiture offence? [84] As we have found against FMC on the argument that the properties were not instruments of Mr Smith’s crime and have also concluded that FMC does not have an interest in the proceeds as the mortgages were void ab initio, it is strictly unnecessary to consider whether FMC can satisfy the Court it was not involved in the commission of the offence which is the second element required for relief under s 142L(1)(b)(ii). [85] Although Mr Blanchard noted that the High Court relied on the Supreme Court decision of Dollars & Sense to also find that FMC was involved in Mr Smith’s offending, and as noted, he sought to distinguish Dollars & Sense, he did not develop a separate argument on the issue of whether FMC was involved in Mr Smith’s offending in his written submissions or in his oral submissions. [86] In any event, we agree with Ms South that there are a number of ways in which FMC could be said to have been involved in the offence: 39 Westpac New Zealand Ltd v Clark [2009] NZSC 73, [2010] 1 NZLR 82. (a) vicarious liability for Mr Smith’s fraud as the lender’s agent, applying Dollars & Sense; (b) vicarious liability for Mr Woulfe’s dishonest certification as FMC’s agent; or (c) taking all of the facts and circumstances into account, FMC was, through its agents, Mr Woulfe, Mr Smith, Mr Hutchison and FMO, so enmeshed in Mr Smith’s offending that it cannot establish it was not involved. [87] As this Court confirmed in Lyall v Solicitor-General, something less than participation as a party will suffice as involvement.40 A material association with the offending is enough.41 [88] The following circumstances point to FMC’s involvement in Mr Smith’s offending in that way: (a) FMO and Mr Hutchison offered and then advanced the lending in breach of FMC’s policies and procedures (Mr Hutchison did so primarily because he was satisfied as to the security available and offered by Ballarat). (b) Both Mr Hutchison and Mr Woulfe relied on Mr Smith. They should have ensured Mr Ross was independently aware of the borrowing proposal, particularly as the Ballarat equity was to be tied to more substantial borrowing for the benefit of Mr Smith rather than Ballarat. (c) FMC delegated the job of perfecting its securities to Mr Woulfe who passed on key tasks to Mr Smith and then later dishonestly certified he had personally verified Mr Ross’ signature. The wilful blindness as to 40 41 Lyall v Solicitor-General [1997] 2 NZLR 641 (CA) at 648. At 648. proper attestation by Mr Woulfe also meets the test of FMC being involved in the fraud for the purposes of s 142L(1)(b)(ii). (d) Mr Smith was the lender’s dishonest agent acting within the scope of his apparent agency procuring all necessary signatures through fraud. (e) By applying s 142N of the Sentencing Act and by considering the total combination of facts and circumstances, both lower Courts were correct in their conclusions FMC was involved. (f) The entire fraud would have collapsed had any of the professionals involved carried out their functions competently. [89] For the above reasons, FMC was materially associated with Mr Smith’s offending. Result [90] The appeal is dismissed. Solicitors: DLA Piper, Wellington for Appellant Crown Solicitor, Christchurch for First Respondent