A finance company directed by Mark Hotchin and Eric Watson has convinced a High Court judge to keep 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 Hanover's Hotchin and 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 Gavin Crawley, his father-in-law, 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.
Court documents reveal that in December 2011 when Edward Johnston updated FAI on his deteriorating financial position there was a reference to the Swanson property being encumbered to Westpac for $3.7 million.
FAI has also argued that the trustees acted either negligently or dishonestly when the Swanson property was sold in 2011 to a company directed by Richard Johnston for some $600,000 less than what his brother had indicated it was worth two years earlier.
FAI argued that no marketing campaign was taken out when the property was sold.
The companies which the Swanson property was transferred to in this sale are listed as the third defendants in this case.
The finance company got freezing orders in April over two properties linked to Richard Johnston and Crawley and in June applied for Justice Mark Cooper to extend these until the matter went to trial.
This was opposed by Crawley and Richard Johnston's lawyer.
In his decision, released publicly today, Justice Cooper said the whole circumstances surrounding the sale of the Swanson property were "suspicious".
"...as is the very low price obtained for the property and the apparent absence of any real attempt to market it," Justice Cooper said.
"In the absence of any valuation evidence, or any other evidence indicating that the sale process that took place when the property was transferred to the third defendants was robust, the dramatic fall in value of the property is essentially unexplained. It is not without significant that Richard Johnston made no real effort to explain why the purchase price was so low. Give the connection between all three defendants the absence of such explanation is telling," the judge said.
"In the circumstances, I have concluded that there is a good arguable case sufficient to justify making the freezing order," Justice Cooper said.