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IN THE GRAND COURT OF THE CAYMAN ISLANDS HOLDEN AT GEORGE TOWN CIVIL DIVISION Cause No: G 0139/2012 BETWEEN: 1. PHILLIP HYRE 2. KEVON HYRE PLAINTIFFS AND: HSBC BANK (CAYMAN) LIMITED DEFENDANT Appearances: Mr. Dennis Brady for the Plaintiffs Mr. William Jones of Ogier for the Defendant Before: The Hon. Mr. Justice Charles Quin Heard: 26th October 2012 and 9th November 2012 JUDGMENT
This is the hearing of Plaintiffs’ Originating Summons dated the 14th March 2012 in which they claimed the following relief: i. An injunction restraining and prohibiting the Defendant whether by itself, its servant or agent or otherwise from any and all action pursuant to s.64(2) of the Registered Land Law (2004 Revision) (“the Law”) the objective of which is to proceed to sell the several properties owned by the Plaintiffs and for which properties the Defendant holds the first legal charges. ii. An order of mandamus that the Defendant provides the requisite consent to: a) the stratifying of the housing units situated at Registration Section Prospect, Block 22E Parcels 78 and 80; b) the sale of raw land situated at Registration Section, West Bay North West Block 4E Parcels 118, 119 and 120; c) the sale of the apartment units after being stratified in order that the Plaintiffs might realise monies from the sale of the said units in order to pay off the sum of monies owed to the Defendant. iii. An order that the two percentage surcharge by the Defendant be reversed. The Plaintiffs believe that the Defendant equally contributed to the problems by failing as a lender to work with the Plaintiffs. In short there was no contract of an uberrimae fidei. Had the Defendant allowed the Plaintiffs not only to stratify the property but also allowed the sales to be effected based on paragraph 8 clause 9 of the Covenants section of the Mortgage Loan contract, the loan would have been paid off.
The evidence supporting the Plaintiffs’ Originating Summons was taken from the affidavits of the Plaintiffs dated the 14th March 2012; the affidavits of Bennard Sherrin Ebanks and Torrance Bobb – both filed on the 18th October 2012; the affidavit of Nicole Bogle-Stewart filed on the 19th October 2012; and, the evidence of the First Plaintiff before the Court on the 26th October 2012.
The Defendant relied on the evidence contained in the First Affidavit of Ms. Levada Burton (“Ms. Burton”) dated the 1st May 2012 and Ms. Burton’s evidence before the Court on the 9th November 2012. CHRONOLOGY
Many of the material facts in this matter are not in dispute and there is common ground relating to much of the documentation as set out below. The dispute between the parties relates to the interpretation of the documentation and surrounds the steps which were taken, and the steps which were not taken, by the First Plaintiff and the Defendant.
On the 10th February 2009 the Plaintiffs made an application to the Defendant for a credit facility to assist with the refinancing of mortgages over five parcels of property on Grand Cayman namely: i. An existing Duplex at Registration Section Prospect Block 22E Parcel 78, which became known during the hearing as ("the Duplex"); ii. An existing Triplex at Registration Section Prospect Block 22E Parcel 80, which became known during the hearing as ("the Triplex") and which is adjacent to the Duplex; iii. Three parcels of raw land at Registration Section West Bay North West Block 4E Parcels 118, 119 and 120. THE MORTGAGE FACILITY
On the 26th March 2009 the Defendant offered the Plaintiffs the credit facility in the form of a mortgage – offering the sum of US$1,189,024.66 on a 23-year term at a variable interest rate of the bank’s base rate plus .50% per annum, with an effective rate of 3.75% per annum at the time of the offer. The Plaintiffs accepted the Defendant’s offer and the bank proceeded to lend the Plaintiffs the sum of US$1,189,024.66, pursuant to the terms and conditions of the Facility Letter dated the 26th March 2012, agreed to by the parties. SECURITY OF THE MORTGAGE
As part of the security for the mortgage the Defendant registered (a) first legal charges against the properties by way of a variation of charge against the Triplex, which was previously charged to Scotia Bank and (b) collateral charges against the Duplex and the raw land. CONDITIONS OF THE MORTGAGE
The terms and conditions of the mortgage agreement entered into by the Plaintiffs and the Defendant were: i. The mortgage was to be repaid by way of variable monthly repayments representing blended payments of principal and interest amortized over the 23-year term, with payments initially in the sum of US$6,436.05 per month, with the first payment due on the 30th April 2009. ii. Interest on overdue monthly repayment sums would be charged at a rate of 2% per annum above the variable interest rate. iii. The Plaintiffs were to obtain adequate all-risks insurance for the full replacement value of the Duplex and Triplex, with the Defendant noted as the mortgagee on the insurance policy. iv. The Plaintiffs were to maintain life insurance in amounts sufficient to cover the mortgage at all times. v. The Plaintiffs agreed not to sell, part with possession, lease, let or mortgage the properties without first obtaining the Defendant’s approval. vi. The Plaintiffs agreed to promptly notify the Defendant of the occurrence of any event which could reasonably be expected to materially and adversely affect their ability to perform their obligations under any Facility document. vii. The conditional assignment of all rents received from the rental of units in the Duplex and the Triplex. viii. The Plaintiffs were to provide cash security in the sum US$97,500.00. ix. The mortgage loan will remain payable on demand at the Defendant’s discretion.
On the 24th April 2009 the Defendant agreed to amend the cash security provision set out in the Facility Letter dated the 26th March 2009, and waived the requirement for a cash security deposit in the sum of US$97,500.00. In its place, the agreement was amended for the Plaintiffs to make a lump sum payment of CI$20,000.00, with monthly payments of US$5,000.00 until the sum of US$97,500.00 was reached. This amended condition was agreed to by both Plaintiffs on the 24th April 2009. On this date, the Defendant advanced the loan to the Plaintiffs and the charges were registered against the aforesaid properties.
On the 27th April 2009 the Plaintiffs and the Defendant agreed to vary the said charge over the Triplex so that the principal sum of CI$349,000.00 was reduced to CI$345,726.19 and converted to the US$ amount of US$411,578. The principal was then increased by US$777,445.20 to give a total principal of US$1,189,024. In addition to varying the Defendant’s charge over the Triplex, on this date the Plaintiffs agreed to charge their interest in the Duplex and the land as collateral charges to secure the repayment of the principal amount to the Defendant.
On the 29th June 2009 the Registrar of Lands’ Variation of Charge against the Triplex and the variation of collateral charges against the Duplex, and the land, were duly registered. PLAINTIFFS’ PAYMENTS FROM MAY TO OCTOBER 2009
In accordance with the amended agreement dated the 24th April 2009 the Plaintiffs made their monthly payments towards the cash security provision (referred to in paragraph 7 above) from May until October 2009, making a total deposit of US$21,207.00. In November the Plaintiffs failed to make their monthly payment towards the required cash security and instead withdrew the sum of US$11,500.00. Accordingly, the balance on the Plaintiffs’ account was reduced from US$21,207.00 to US$9,707.00.
In January 2010 the Defendant’s liaison officer, Ms. Laveda Burton ("Ms. Burton"), conducted a review of the Plaintiffs’ mortgage facilities and discovered that in addition to the failure to make the monthly cash security payments of US$5,000.00, the property insurance certificate which the Plaintiffs supplied related in part to an incorrect property, namely Block 20D Parcel 78, which is not the Duplex – Registration Section Prospect Block 22E Parcel 78. In addition, Ms. Burton discovered that the property insurance certificate provided that each of the properties was insured for the sum of CI$300,000.00, which meant that the Triplex and the Duplex were underinsured by approximately CI$90,000.00 each. The agreed replacement cost of each building was CI$390,000.00 as set out in the property appraisals performed by Deloitte on the 10th February 2009.
On the 20th January 2010 the First Plaintiff and Ms. Burton had a meeting to review the Plaintiffs’ mortgage. The First Plaintiff stated that they would be able to pay the monthly mortgage installments but not the US$5,000.00 per month towards the cash security.
The First Plaintiff stated that the withdrawal of the US$11,500.00 was due to damage to one of the apartments by a former tenant.
The First Plaintiff said that they would increase the level of property insurance to the required and agreed amounts as soon as possible.
At this meeting on the 20th January 2010 the First Plaintiff also told Ms. Burton that he intended to sell the raw land, which had a value of CI$220,000.00 and also that he hoped to achieve this sale in 3 to 5 months.
As a result of the representations made by the First Plaintiff the Defendant agreed to waive the requirement, pursuant to the amended agreement, for the Plaintiffs to pay US$5,000.00 per month towards the cash security for a period of six months, in order to allow the Plaintiffs to sell the land.
The Defendant agreed to this 6-month waiver on condition that the Plaintiffs provide proof of their efforts to advertise the land for sale. Furthermore, the Plaintiffs agreed that if they were unable to sell the land within six months, they would make payments of US$7,500.00 per month towards the cash security, in addition to the monthly mortgage installments. 19. On the 25th January 2010 the Plaintiffs duly accepted the new conditions, and the Defendant granted the six-month waiver.
On the 25th July 2010 the agreed six-month period within which the land was to have been sold had expired.
In September 2010 Ms. Burton conducted a further review of the Plaintiffs’ mortgage facilities and discovered the following issues: a. The Plaintiffs had failed to sell the land within the six-month timeframe. b. The Plaintiffs had failed to provide any proof of their advertising of the land for sale as agreed with the Defendant on the 20th January 2010. c. The Plaintiffs had failed to make the increased payments of US$7,500.00 towards the cash security for the months of July, August and September 2010. d. The Plaintiffs were frequently included in the Defendant’s delinquent reports in respect of their mortgage facilities and their credit cards. PLAINTIFFS’ APPROACH TO SCOTIABANK
On or about this time Mr. Burton received a telephone enquiry from a representative of Scotiabank Cayman Ltd as to the Defendant’s policy for granting second or third charges on a secured property.
It is unchallenged that the Scotiabank representative informed Ms. Burton that the Plaintiffs were seeking credit financing from Scotiabank to construct additional apartments on the properties on which the Triplex and Duplex were built, and against which the Defendant held the first and collateral charges.
In her evidence before the Court Ms. Burton said that, as a consequence of the aforesaid breaches of the agreement of the 25th January 2010, and as a consequence of receiving the information that the Plaintiffs seemed to be attempting to obtain second charges on the mortgaged the properties without first obtaining the Defendant’s approval, she wrote to the Plaintiffs on the 10th September 2010 to raise these issues, which were of concern to the Defendant. Ms. Burton’s letter of the 10th September 2010 also included a request for the Plaintiffs to provide the cash security of US$97,500.00 as collateral security for the mortgage facility, by close of business on the 17th September 2010. In this letter Ms. Burton highlighted the fact that the properties Registration Section West Bay North West Block 4E Parcels 118, 119, and 120 had not been sold – either by the 24th July or even by the 20th August 2010. Ms. Burton expressed the Defendant’s concern that the Plaintiffs had not honoured their agreement to produce evidence that the properties had been advertised for sale, and further, that there was no evidence of any efforts on the part of the Plaintiffs to sell the properties. In addition, Ms. Burton highlighted the Defendant’s concern regarding the prospect of the Plaintiffs borrowing against the property at Registration Section Prospect Block 22E Parcel 78 and Parcel 80, and made reference to the Plaintiffs’ application for the approval for new loans from another financial institution in relation to these two properties. Ms. Burton reminded the Plaintiffs in her letter that the Defendant had already declined the request to amalgamate these properties given the amounts of the Plaintiffs’ existing obligations. Finally, Ms. Burton stated in her letter of the 10th September 2010, on behalf of the Defendant, that if the required cash collateral security was not met by the 17th September the Defendant would increase the mortgage rate by an additional 2%, and, that the outstanding balance of the credit cards would be set off from the funds currently held in the Plaintiffs’ accounts, and the credit cards would be cancelled.
On the 14th September 2010 the Plaintiffs wrote to the Defendant and apologized for the “areas of concern”. The Plaintiffs then stated that the sale of the West Bay properties – Block 4E Parcels 118, 119 and 120 had been advertised, but no sale had been realised. In addition, in this letter, the Plaintiffs admitted that they had sought financing for the amalgamation of Registration Section Prospect Block 22E Parcels 78 and 80, and said it was likely that they would receive approval for this financing. The Plaintiffs indicated that they could meet the bank’s request for US$90,000.001 as collateral security, but asked for further time. The Plaintiffs also stated in this letter that they had received Planning permission to construct four one-bedroom apartments on Registration Section Prospect Block 22E Parcel 78 and 80, and that construction had already commenced. 1 The Court recognises that this figure commenced as US$97,500.00. However, the figure changes at this point in the Judgment in keeping with the Exhibits placed before the Court. The Plaintiffs stated that the estimated costs to construct these new four new units would be CI$355,000.00. The Plaintiffs estimated that the combined sales of the new units would be approximately CI$500,000.00, which would realise a profit of CI$145,000.00 to the Plaintiffs. The Plaintiffs asked that the additional financing be granted to them on the premise that all four new units are pre-sold. The Plaintiffs requested permission to amalgamate the properties on which the Triplex and Duplex were built.
On the 17th September 2010 Ms. Burton replied to the Plaintiffs, stating that the Defendant Bank had decided that, due to the Plaintiffs’ failure to provide the required collateral cash security of US$90,000.00, the Bank had decided to continue with the actions contained in the letter dated the 10th September 2010. The mortgage rate was to be increased by an additional 2%, and the outstanding balance of the Plaintiffs’ credit card will be offset from the funds currently held in their bank account, and the credit cards cancelled.
On the 14th February 2011 the First Plaintiff wrote to Ms. Burton thanking her for meeting with him previously. He stated in this letter that the Plaintiffs were experiencing financial difficulties and they were seeking the Defendant’s permission to sell all the properties held as collateral with the Defendant. In order to sell the properties, the Plaintiffs were also seeking permission to stratify the units on Registration Section Prospect Block 22E Parcels 78 and 80 – because they felt the stratification into individual units would make it easier to sell the property. The First Plaintiff said they would undertake to ensure that all the proceeds from the sale would go towards paying off the debt.
On the 11th March 2011 the First Plaintiff wrote another letter to the Defendant with a further request to amalgamate the Triplex and Duplex properties, and thereafter, to stratify the apartments. Again, the First Plaintiff stated that once the development and sale of the property were completed, the proceeds would go towards reducing the loan provided by the Defendant. Included in this letter was a proposal asking the Defendant to provide the Plaintiffs with additional financing in the sum of US$358,000.00 in order to finance the remainder of the construction of the four new apartment units and to refinance the mortgage. In support of this request the Plaintiffs provided property valuations from JEC Property Consultants Limited ("JEC") dated the 20th March 2011. The JEC valuation disclosed that the Plaintiffs' had already invested the sum of CI$101,540.00 towards the construction of the four new apartment units.
In her affidavit and in her viva voce evidence in Court, Ms. Burton said that this recent disclosure that the Plaintiffs had invested funds in the four new apartment units on the mortgaged property caused the Defendant additional and considerable concern, because the investment occurred while the Plaintiffs remained in breach of the conditions of their Facility Letter dated the 26th March 2009. The Plaintiffs had failed to provide the cash security in the sum of US$90,000.00. The Plaintiffs' property insurance and life insurance obligations remained due and in arrears. Ms. Burton told the Court that she and the First Plaintiff had several conversations in which she sought an explanation for the Plaintiffs’ failure to provide the required cash security to the Defendant whilst being able to invest over CI$100,000.00 in a construction project on the mortgaged property.
Ms. Burton informed the Court that the Defendant’s credit committee considered the Plaintiffs’ request to amalgamate and to stratify the apartments, and to refinance the mortgage and decided that, in light of the Plaintiffs’ failures to comply with the terms and conditions of the mortgage, the Defendant would refuse both requests.
On the 18th March 2011 Ms. Burton wrote to the First Plaintiff and referred to his letters dated the 14th February 2011 and the 11th March 2011 which requested the stratification of the properties registered as Registration Section Prospect Block 22E Parcels 78 and 80 and the refinancing of the existing mortgage facility and advised the Plaintiffs that the Defendant had made the decision to decline both requests. Ms. Burton explained to the Plaintiffs that this decision was based on the Plaintiffs’ breach of the terms and conditions of the mortgage agreement – as outlined in the Defendant’s letter dated the 10th September 2010.
In this letter Ms. Burton also reminded the Plaintiffs that their life and property insurance payments remained due and owing.
The Plaintiffs did not respond to Mr. Burton’s letter of the 18th March 2011 and failed to provide the Defendant with the requested cash security or the requested life and property insurance certificates.
On the 31st May 2011 the First Plaintiff wrote to Ms. Burton stating that he had received an offer to purchase Registration Section West Bay North West Block 4E Parcel 119 and that closing was take place on or before the 17th June 2011. The First Plaintiff stated that all proceeds from the sale, except the real estate commissions, would go towards paying down the Plaintiffs’ loan balance. In this letter the First Plaintiff also stated that he had listed the other properties for sale and, again, restated his request for the Defendant to grant permission for him to combine Registration Section Prospect Block 22E Parcels 78 and 80 so that he could sell the apartments individually. The First Plaintiff enclosed a copy of the purchase agreement for Registration Section West Bay North West Block 4E Parcel 119 and confirmed that all sale proceeds would go towards paying down/off the mortgage.
As a result of this letter, Ms. Burton’s evidence is that she conducted a further review of the Plaintiffs’ mortgage facilities, which revealed that the Plaintiffs had failed to make the monthly mortgage payments for over a month. At that time, the most recent payment was a partial payment on the 26th April 2011 in the sum of US$1,124.38.
Ms. Burton’s evidence is that the Plaintiffs proposed to sell Registration Section West Bay North West Block 4E Parcel 119 for CI$48,000.00 – which is CI$17,000.00 below the JEC valuation of March 2011. Ms. Burton said that, as a result of this shortfall the Plaintiffs’ debt ratio between the outstanding amount of the mortgage and the total value the Defendant’s security would increase to 85% - which figure exceeded the Defendant’s maximum allowable ratio of 80%. Accordingly, Ms. Burton said the Defendant decided to refuse the Plaintiffs’ request and thus deny them permission to sell Registration Section West Bay North West Block 4E Parcel 119 and also deny them permission to amalgamate and stratify the apartments.
Ms. Burton told the Court that she had telephoned the First Plaintiff and advised him that the Defendant had refused their request.
On the 8th June 2011 a member of the Defendant’s credit board, Ms. Megan Campbell (“Ms. Campbell”), wrote to the Plaintiffs advising them that their mortgage payments were in arrears in the sum of US$16,075.23, and that the payments had been overdue for a period of 44 days. Ms. Campbell’s letter demanded that the Plaintiffs bring their mortgage account up to date within seven (7) days, failing which, the Defendant would have no choice but to refer the account to the Defendant’s legal counsel.
On the 16th June 2011 the Plaintiffs wrote to the Defendant. In this email the Plaintiffs stated that their financial situation had worsened and that, as a result, they were not able to honour their mortgage obligations unless their circumstances changed. In this email the Plaintiffs again sought permission to stratify the apartments and requested a sabbatical or loan holiday whilst they continued with their efforts to liquidate their assets.
Ms. Burton told the Court that she passed on this request to Ms. Campbell and the Defendant’s credit board. Ms. Burton said that it was her understanding that the Plaintiffs were advised by telephone that the Defendant was unwilling to allow the Plaintiffs to stratify the apartments or to grant any loan holiday.
On or about the 13th July 2011 Ms. Burton conducted a further review of the Plaintiffs’ mortgage facility with the Defendant. Ms. Burton told the Court that this review raised additional matters of concern which were: a. Despite repeated requests by email and by telephone the Plaintiffs had failed to bring the mortgage into good standing and the facility was delinquent by 74 days; b. The Plaintiffs remained in breach of both the property insurance and the life insurance conditions set out in the facility letter of the 26th March 2009; c. The Plaintiffs had failed to provide the Defendant with the cash security in the sum of US$90,000.00.
In this review, as in a previous review, Ms. Burton noted that the First Plaintiff’s company, Hycam Enterprises, was continuing to offer financing to the public. Ms. Burton downloaded the Hycam Group Limited letter which invited the public to “call us now – it’s quick and easy to get a personal loan for any purpose. Hycam Group is involved in construction, CCNN Forex, Loans and Real Estate.” Hycam was described as a lending institution which is licensed by the Cayman Islands Trade and Business Licensing Board – a Department of Commerce and Investment of the Cayman Islands Government. Hycam also states that the company facilitates small personal loans by way of financial leverage to qualified individuals living and working in the Cayman Islands. Hycam also states that it offers no security down and a quick turnaround in terms of uncollateralized loans. Hycam sates that its services are convenient and provides a streamlined service to all borrowers. In his evidence before the Court the First Plaintiff said he was a 50% shareholder of Hycam, and the Second Plaintiff was the other 50% shareholder.
On the 13th July 2011 Ms. Burton wrote to the First Plaintiff. Ms. Burton referred to the Plaintiffs’ numerous requests for approval to stratify the properties Registration Section Prospect Block 22E Parcels 78 and 80 and for further refinancing. Ms. Burton in this email confirmed that the Defendant would not approve these requests. Ms. Burton also told the First Plaintiff that the Defendant would not consider any further requests until the Plaintiffs’ mortgage facility had been brought into good standing. Ms Burton highlighted that the mortgage facility was now in arrears in the sum of US$24,123.65 and that the life insurance and property insurance conditions remained unfulfilled.
The evidence is that the Plaintiffs failed to bring the mortgage into good standing and the Defendant decided to write to the Plaintiffs to make formal demands for payment in full on the mortgage.
On the 29th August 2011 the Defendant served formal demand notices on each of the Plaintiffs pursuant to s.64(2) and 72 of the Registered Land Law.
No payments were made by the Plaintiffs in response to these notices and there is an outstanding principal amount to the Defendant of US$1,128,327.04, with outstanding interest in the sum of US$31,418.69 – making the total sum due US$1,159,745.73, with interest continuing to accrue at a rate of 6.25% per annum or US$195.89 per day.
The Plaintiffs failed to repay the mortgage in full or at all within in the prescribed three months.
On the 28th November 2011 the First Plaintiff wrote to Ms. Burton stating that he had misplaced the letter from the Defendant’s attorneys and requested a copy of same.
Ms. Burton then provided to the First Plaintiff HSBC’s attorneys’ details and contact information for Mr. William Jones ("Mr. Jones").
On the 1st December 2011 the Defendant’s attorneys emailed the Registered Land Law Notices to the First Plaintiff, stating that the Plaintiffs’ mortgage balance, as at the 1st December 2011 was US$1,179,022.57 and indicating that, in light of the Plaintiffs’ failure to repay the full outstanding balance within the prescribed three months the Defendant intended to proceed to sell the properties.
On the 20th January 2012 the First Plaintiff telephoned the Defendant’s attorneys’ offices to request a meeting to discuss the status of the mortgage.
On the 25th January 2012 the First Plaintiff met with the Defendant’s attorneys and asked for a further three to four months to allow him to refinance the mortgage with another bank. Additionally, the Plaintiff again sought permission to stratify the properties to be able to sell the apartments individually.
On the 31st January 2012 the First Plaintiff wrote to the Defendant’s attorneys – referring to their meeting of the 25th January 2012 – and asking whether the Defendant would agree to the request for a 3-month period to secure refinancing.
On the 31st January 2012 the Defendant’s attorneys wrote to the First Plaintiff and said that the Defendant agreed to hold off on commencing the public auction of the Plaintiffs’ properties for a period of 30 days from the 31st January 2012, in order to allow the Plaintiffs time to refinance the mortgage facility with another Bank.
The Plaintiffs were unable to refinance the mortgage by close of business on the 1st March 2012.
On the 14th March 2012 the Plaintiffs issued the proceedings which are now before this Court. PLAINTIFFS’ SUBMISSIONS
The Plaintiffs maintain that the First Plaintiff ran a successful real estate company and a successful construction company, whilst, at the same time, he ran Hycam Corporation. However, the First Plaintiffs’ evidence was that from 2008 and onwards he ran into some “bad luck” and, as a result, both his real estate company, and his construction company, were failing.
The First Plaintiff sought the Defendant Bank’s approval to agree to the amalgamation of the properties on which the duplex and triplex stood, because he had approval from the Planning Department for further development of these properties and, he contends, that there were interested buyers for a pre-sale initiative. The Plaintiffs submit that the Defendant Bank was unreasonable in not supporting these proposals.
The Plaintiffs do not argue that the Defendant Bank has not complied with the Law. In particular, the Plaintiffs accept that the Defendant Bank followed the provisions of s.72 of the Law.
However, the Plaintiffs submit that the Defendant Bank is in breach of s.75(1) of the Law, which is the provision in the Law dealing with power of sale and reads: “A chargee exercising his power of sale shall act in good faith and have regard to the interests of the chargor, and may sell or concur with any person in selling the charged land, lease or charge, or any part thereof, together or in lots, by public auction for a sum payable in one amount or by installments subject to such reserve price and conditions of sale as the chargee thinks fit, with power to buy in at the auction and to resell by public auction without being answerable for any loss occasioned thereby.” In addition, the Plaintiffs rely upon the provisions of s.67(f) and (g) of the Law. Section 67(f) reads: "In the case of a charge of land or of a lease not to lease the charged land or any part thereof, or sublease the whole or any part of the land comprised in the charged lease for any period longer than one year without the previous consent in writing of the chargee, but such consent shall not be unreasonably withheld." And s.67(g) reads: ".....not to transfer the land, leased or charged or any part thereof without the previous written consent of the chargee, but such consent shall not be unreasonably withheld."
The Plaintiffs submit that the Defendant Bank’s decision not to consent to the amalgamation, stratifying and sale of the properties could “never be viewed by any right-thinking, objective observer as commercially professional”. The Plaintiffs further submit that the Defendant’s decision now to sell the properties is exactly what the Plaintiffs were trying to acquire the Bank’s consent for over the past two years. The Plaintiffs state that this is the clearest evidence of the Bank acting in “bad faith” – having previously unreasonably withheld its consent to the sale of the said properties.
The Plaintiffs rely upon the case of John Kennedy Appellant v. Mary Annette de Trafford 1897 A.C. 180 where the Privy Council held: "The only obligation incumbent on a mortgagee selling under and in pursuance of a power of sale in his mortgage is that he should act in good faith. In determining whether the mortgagees conduct in that respect comes up to the required standard regard must be had to the circumstances of the particular case." Furthermore the Plaintiffs rely on the dicta on Lord Hershell in John Kennedy Appellant where he states on page 185: . .... If he (the mortgagee) willfully and recklessly deals with the property in such a manner that the interests of the mortgagor are sacrificed, I should say that he had not been exercising his power of sale in good faith."
The Plaintiffs’ counsel submits that bad faith does not become evident and relevant only in the period that the mortgagee (the Defendant) decided to exercise its power of sale. Counsel for the Plaintiffs submits that if the Defendant Bank’s conduct can be shown to have crafted the circumstances leading up to the exercise of this “bad faith” the Plaintiffs’ claim concerning the Defendant’s bad faith is equally cogent. The Plaintiffs submit that the Defendant Bank’s conduct leading up to the decision to sell the Plaintiffs’ properties demonstrates bad faith, and that is the inescapable conclusion from the circumstances of this particular case.
The Plaintiffs submit that, for reasons best known to the Defendant, the Defendant unreasonably withheld its consent for the Plaintiffs to amalgamate the properties, stratify them and proceed with the sale options they, the Plaintiffs, had proposed. The Plaintiffs submit that they were real estate dealers and were strategically placed and qualified to get the best price for the properties. For example, the Plaintiffs submit that the Defendant’s position that parcel 119 was being sold under value is at best, unmeritorious.
The Plaintiffs submit that the Defendant’s terms and, in particular, the added percentage to the monthly payments on the mortgage, were “unconscionable” in all the circumstances, and demonstrated a pattern of conduct which appeared to be designed to psychologically impact the Plaintiffs in a negative way.
The Plaintiffs maintain that they were always, and at all material times, best suited to conduct the sale of the properties, as they had every assurance that they would obtain the best prices.
The Plaintiffs rely on Barrett v. Halifax Building Society (1996) 28 HLR 634. In that case it was held: “(2) The fact if the sale went ahead it would not accord with the policy of the respondents (Bank) not to permit borrowers with negative equity themselves to conduct sales of their property, without also, at the same time, making proposals for repayment of the resulting deficiency, was not a circumstance which ought to be taken into account in the exercise of the court’s discretion; the only possible advantage to the respondents appeared to be that in the event of conducting the sale themselves they would take the full benefit of the purchase price payable, and would leave the agents and solicitors who had acted for the mortgagors without payments when in due course the sale was completed, no doubt through their own agents and solicitors; in the circumstances, where the Court had expressly stayed the possession order in order to enable the mortgagor to obtain the best possible purchase price for the property, this was not an advantage which ought to be taken into account. (3) There was no discernible advantage to the Respondents in refusing to allow the sale, whereas there was an obvious advantage to the applicants in completing the proposed sale at what was accepted to be the market price; the advantages which the Court was obliged to balance came down demonstrably in favour of the applicants.”
The Plaintiffs rely on the dicta of Evans-Lombe J. in Barrett v. Halifax Building Society. The Plaintiffs submit that the Defendant’s conduct was inexplicable and, in addition, the Defendant was in breach of the implied agreements set out in s.67(f) and s.67(g) of the Law not to unreasonably withhold its consent to the Plaintiffs’ desire to sell the mortgaged properties.
Mr. Brady, counsel on behalf of the Plaintiffs, submits that on the facts as set out above, the Defendant unreasonably withheld its consent and therefore acted in bad faith. To put it another way Mr. Brady submits that the Defendant engineered the circumstances in which the Plaintiffs ultimately found themselves and the Defendant’s behaviour towards the Plaintiffs was unconscionable and unreasonable.
Mr. Brady on behalf of the Plaintiffs relies upon the Cayman Islands Court of Appeal decision in Paradise Manor Limited (In Liquidation), W.M. Becker and M.L. Becker v. Bank of Nova Scotia 1984-85 CILR 437 and submits the exercise of this power of sale be tempered with the requirement of the mortgagee to be seen to act in good faith. Counsel goes on to submit that, from an examination of the conduct of the Defendant, it is apparent that the Defendant had some ulterior motive which drove the withholding of consent to the sale proposals put forward by the Plaintiffs – which the Plaintiffs maintain would have resulted in the realization of money to pay down the Plaintiffs’ debt. DEFENDANT’S SUBMISSIONS
The Defendant submits that the Plaintiffs’ application is entirely misconceived and, the Originating Summons dated the 14th March 2012 should be dismissed in its entirety.
Mr. Jones, counsel on behalf of the Defendant, submits that the Plaintiffs have sought to cast the Defendant in a negative light, despite the fact that the Defendant has complied with its obligations under the Facility Letter, and despite the fact that the Defendant gave the Plaintiffs a number of opportunities to comply with their own obligations, before proceeding to demand repayment of the loan.
Counsel for the Defendant submits that the Plaintiffs have been in breach of the cash security condition of the facility letter since the grant of the mortgage in March 2009, despite the Defendant’s efforts to work with the Plaintiffs by twice agreeing to amend the terms of the facility letter.
Counsel further submits that the Plaintiffs were, in fact, capable of complying with that cash security provision as the requirement was for cash security in the sum of US$97,500.00 and it was subsequently discovered by the Defendant that the Plaintiffs had already invested CI$101,540.00 in the construction of the apartment complex.
The Defendant contends that the Plaintiffs have failed to make a single mortgage repayment since the partial payment on the 26th April 2011 and the Plaintiffs have failed to provide the Defendant with the current property insurance or life insurance since March 2011.
The Defendant submits that in light of the Plaintiffs’ ongoing failures to comply with the terms and conditions of the Facility Letter, and to make the required mortgage repayments since April 2011, the Defendant was fully entitled, under the Law, to instruct its attorneys to serve the notices on the Plaintiffs on the 29th August 2011. The Defendant submits that the said notices fully complied with the provisions of the Law and that the Defendant is therefore entitled to proceed to sell the properties by public auction.
The Defendant contends that having complied with the provisions of the Law the Plaintiffs’ decision to issue the Originating Summons in circumstances where the Defendant Bank is fully entitled to sell the properties by public auction, is a textbook example of improper and unreasonable conduct.
Counsel for the Defendant argues that the reasonableness of the Defendant’s conduct is further illustrated by the fact that the Defendant, at the Plaintiffs’ request, agreed to hold off on proceeding with the public auctions for a period of 30 days, to allow the Plaintiffs to re-finance the mortgage – giving the Plaintiffs a total of six months since the date the notices were served. However, the Defendant maintains that, rather than attempting to refinance the mortgage, the Plaintiffs proceeded to use that window to prepare and issue the Originating Summons.
The Defendant relies on the evidence of Ms. Burton who states in paragraph 58 of her affidavit: "In light of the Plaintiffs’ inability or failure to make a single payment towards the mortgage for over a year, the Bank therefore seeks an order that it be permitted to recover its costs from the sums realised once the properties are sold by the Bank."
Moreover the Defendant submits that the Plaintiffs’ Originating Summons should be dismissed and the Plaintiffs pay the Defendant’s costs on an indemnity basis pursuant to GCR O.62 r.4(11), in that the Plaintiffs have "conducted the proceedings improperly, unreasonably and negligently." ANALYSIS AND CONCLUSION
The Court must ask itself whether the Defendant, exercising its power of sale, is acting in good faith and with regard to the interests of the chargor, and further, whether the Defendant, at any time, unreasonably withheld its consent for the Plaintiffs to transfer, lease or charge the land. Before answering these questions, the Court must examine the conduct of both parties from March 2009 up to the 14th March 2012 when the Plaintiffs issued and filed their Originating Summons.
I have read the affidavits filed by both parties and I have heard the viva voce evidence given by the First Plaintiff and by Ms. Burton on behalf of the Defendant Bank.
When one reviews the terms set out by the Defendant in its Facility Letter dated the 26th March 2009 and accepted by the Plaintiffs, together with the covenants which the Plaintiffs agreed to in the variation of charge executed by the Plaintiffs on the 21st day of April 2009, the following facts emerge: i. The Plaintiffs never, at any time, lodged the agreed cash security sum of US$97,500.00. ii. The Plaintiffs failed to make their monthly payments agreed to in the variation of the 27th April 2009. iii. The Plaintiffs failed, at any time, to make the lump sum payment of US$20,000.00 or after October 2009, the monthly payments of US$5,000.00, referred to in paragraph 9 above. Instead, the Plaintiffs actually withdrew the sum of US$11,500.00, and, by doing so, failed to honour their agreement in relation to the cash security provision. iv. The Plaintiffs failed, since March 2011, to provide adequate all-risks insurance for the Duplex at Registration Section Prospect Block 22E Parcel 78 and the Triplex at Registration Section Prospect Block 22E Parcel 80. v. The Plaintiffs failed, at any time, to provide the assignment of life insurance policies in amounts sufficient to cover the loan amount.
On the 20th January 2010 the Defendant waived the requirement for the Plaintiffs to provide cash security payments for a period for six months in order to allow them time in which to sell a parcel of the raw land2. The Defendant agreed to the six-month waiver on the monthly payments towards the cash security, on the condition that the Plaintiffs provided proof of their efforts to advertise the mortgaged land for sale. It transpired that the Plaintiffs failed to sell the mortgaged land within the six-month period. What must have been of more concern to the Defendant is that the Plaintiffs failed to provide any evidence whatsoever of any efforts on their part to sell or advertise for sale the mortgaged property. 2 See paragraph 18 of this Judgment. Furthermore, at the expiry of the six-month waiver period, the Plaintiffs failed to make the agreed monthly payments of US$7,500.00 towards to the cash security to cover the months of July, August and September.
In addition, there is clear evidence that the Plaintiffs had begun making arrangements to re-mortgage the properties without first notifying the Defendant of their plan to do so and without first obtaining the approval of the Defendant.
The Plaintiffs had not notified the Defendant that they had applied for and had received Planning permission to construct four one-bedroom apartments on the Duplex and Triplex properties at Registration Section Prospect Block 22E Parcels 78 and 80. Further, the Plaintiffs had not notified the Defendant that construction had already commenced on the mortgaged property.
Consequently the Plaintiffs were in breach of their contractual agreement made with the Defendant in the schedule to the variation of charge not to make or permit or suffer to be made, any material change to the properties without first obtaining the Defendant’s written approval. Additionally, the Plaintiffs were in breach of their agreement to promptly notify the Defendant of the occurrence of any event which could reasonably be expected to materially and adversely affect their ability to fulfill their contractual financial obligations to the Defendant.
When one examines the evidence, it is clear that the Defendant complied with Plaintiffs’ requests, and was accommodating of the Plaintiffs’ delays and defaults in payment from the date of the Facility Letter – the 26th March 2009. The Defendant complied with the Plaintiffs’ request for more time in which to pay the cash security deposit. It was only after the Plaintiffs had failed to sell the land and had failed to provide evidence of trying to sell the land that the Defendant showed an unwillingness to be flexible. Consequently, on the basis that the Plaintiffs had consistently failed to comply with the existing terms and conditions of the mortgage, in late 2010 and in 2011, the Defendant denied the Plaintiffs’ requests to amalgamate and to stratify the apartments and to refinance the mortgage.
I carefully listened and watched as Ms. Burton gave evidence in Court on behalf of the Defendant. Even under rigorous and detailed cross examination from counsel for the Plaintiffs, I find her to be an honest and reliable witness. I could find no evidence placed before the Court which could support the Plaintiffs’ contention that the Defendant was acting with any ulterior motive.
The Defendant had given the Plaintiffs a number of opportunities to make payments on the security deposit and the mortgage. The Defendant also granted the Plaintiffs time to sell the properties and waited for the Plaintiffs to provide proof that the properties had been advertised for sale. The Plaintiffs had not only failed to sell the properties, but produced no evidence whatsoever of any attempts to advertise the properties on the open market during the 6-month waiver period in 2010.
The Defendant was faced with chargors who had failed to honour their obligations under the mortgage agreement. The Plaintiffs had failed to make the mortgage payments and made a final partial payment in April 2011.
The Court finds that the Defendant was entitled to serve the formal demand notices on the Plaintiffs pursuant to s.64(2) and s.72 of the Law – which give the Defendant the power to sell the mortgaged properties by public auction and private treaty. Accordingly, I reject the Plaintiffs’ claim for an injunction to restrain and prohibit the Defendant from selling the mortgaged properties pursuant to the terms of the mortgage and the provisions of the Law.
The Court notes that the Plaintiffs operated a business known as Hycam Enterprises. The First Plaintiff appeared to be the directing mind of this enterprise, which advertises that it is able to provide personal loans for any purpose. The Plaintiffs’ company, Hycam, represents that these loans can be obtained without the borrower providing any security, and the company claims that a quick turnaround for disbursements can be provided for uncollateralized loans. Based on the clear evidence of the First Plaintiff’s involvement in the Hycam Group of companies, which included loans for any purpose, property development and construction, the Court can infer that the First Plaintiff was a person who understood the commercial operation of loans and mortgages. Consequently I find that at all material times the Plaintiffs were fully aware of the terms and conditions of the mortgage and the agreed amendments.
On the evidence before me I find that the Defendant acted reasonably and accommodated many of the Plaintiffs’ demands. On the other hand, the Plaintiffs constantly breached the terms and conditions of the mortgage and did not update the Defendant with any information regarding their application for Planning permission and the construction they had already commenced on the mortgaged property.
On the evidence before me, I reject the Plaintiffs’ contention that the Defendant acted in bad faith and I reject the Plaintiffs’ contention that the Defendant somehow crafted the circumstances leading up to the exercise of this purported bad faith.
Accordingly, having reviewed the evidence put before the Court on the 26th October and the 29th November 2012, I find that it was quite reasonable for the Defendant not to provide its consent to the stratifying of the housing units situated at Registration Section Prospect Block 22E Parcels 78 and 80 and not to provide its consent to the sale of raw land situated at Registration Section West Bay North West Block 4E Parcels 118, 119, and 120 and to the proposed sale of the apartment units set out in the Plaintiffs’ Originating Summons.
For all the reasons set out above I hereby dismiss the Plaintiffs’ Originating Summons.
At the hearing on the 9th November 2012 counsel for the Defendant applied for costs to be paid on an indemnity basis pursuant to GCR O.62 r.4(11). Subsequent to the hearing counsel for the Defendant referred the Court to paragraph 14 of the schedule relating to the variation of charge executed by the parties on the 24th April 2009 and registered on the 29th June 2009. Paragraph 14 reads: "That the Plaintiffs shall pay on demand ...all fees and expenses that may be hereafter incurred by the (Defendant) of, and incidental to, the protection and enforcement from time to time of the [Defendant’s] rights."
Mr. Jones, on behalf of the Defendant, submitted in writing that in light of that provision, and pursuant to GCR O.62 r.4(3), that the Defendant is entitled to recover its legal fees and expenses from the Plaintiff in full without the need for taxation.
Before making a final order in relation to costs I think it is only fair to give counsel for the Plaintiffs the opportunity to respond to the submissions made in this regard by counsel for the Defendant.
Accordingly, I grant both parties until the 1st February 2013 to submit their written submissions on the question of the costs of these proceedings. Dated this the 4th day of January 2013 Honourable Mr. Justice Charles Quin Judge of the Grand Court