Business Editor for the NZ Herald

FAI turns to court over loan to ex-lawyer

Eric Watson.
Eric Watson.

A finance company has gone to the High Court to extend freezing orders over two properties as it chases down a $300,000 loan taken out by a now-bankrupt and struck-off lawyer.

FAI Money, directed by businessmen Mark Hotchin and Eric Watson, lent $300,000 in 2009 to lawyer Edward Errol Johnston.

Johnston was struck off last year after pleading guilty to misconduct charges brought by a committee of the New Zealand Law Society, which said he used client money for his own benefit.

FAI has claimed that Richard Johnston, Edward's brother, and a man named Gavin Crawley guaranteed the $300,000 loan.

Richard Johnston and Crawley were trustees of the Puketaha Trust, whose only asset was a 9000sq m Swanson property where Edward Johnston used to live and which the lawyer told FAI was worth $1.5 million.

In March 2012, FAI served proceedings on the three men, claiming Edward Johnston had defaulted on interest payments and because of the guarantees, the trustees were liable to pay all that was owed.

Johnston was declared bankrupt in November of that year.

The trustees' liability under the guarantee is limited to recoveries from trust assets rather than the defendants' personally, unless the trustees had breached obligations by acting fraudulently or negligently.

FAI claims the trustees had acted negligently by attesting that information provided to the finance company by Edward Johnston was correct. He had allegedly said the Swanson property was not encumbered when in fact Westpac had a $1.1 million mortgage over it.

FAI has also argued that the trustees acted either negligently or dishonestly when the Swanson property was sold to an entity directed by Richard Johnston for some $600,000 less than what his brother had indicated it was worth two years earlier.

FAI's lawyer, Bret Gustafson, told the High Court's Justice Mark Cooper yesterday that no marketing campaign was taken out when the property was sold.

The finance company got freezing orders in April over two properties linked to Richard Johnston and Crawley and Gustafson applied for Justice Cooper to extend these yesterday until the matter went to trial.

In support of this application, Gustafson said his client had a strong, arguable case and there was a risk the frozen assets could be dissipated or disposed of. He said Johnston or Crawley had not said how they would be disadvantaged by the continuation of the freezing orders.

The trustees' lawyer, Simativa Perese, opposed the extension of the freezing order and said the plaintiff did not have a good case. He said the trustees had shown FAI the Swanson property's certificate of title showing it had been mortgaged to Westpac.

Perese claimed the trustees had asserted the accuracy only of the financial information they had provided to FAI, not that provided by Edward Johnston. The judge reserved his decision.

- NZ Herald

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