FAI claims the loan to Edward fell into arrears in June 2011 and the parties then agreed to a repayment plan whereby the debt and interest would be paid by June 2012.
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 of what was owed.
No defences were filed and FAI then applied to have a judgement against the defendants sealed.
There was a possible issue with a statement of claim being served on the defendants before the repayments were due in June 2012 but in that month Associate Judge Roger Bell noted FAI was entitled to file amended pleadings and that the amount owed had increased from the time when the original documents were filed against the defendants.
While Associate Judge Bell said an amended statement of claim should be served on the defendants, it is believed this never took place.
Instead, FAI filed for judgement against the defendants on the lower amount in the original statement of claim. This was was entered in August 2012 against the defendants for $423,517, interest of $60,381 and costs of almost $13,000.
This judgement was then used to request bankruptcy notices be issued against Crawley and Richard Johnston, which were served in June last year.
Yet Richard Johnston and Crawley applied to set the judgement aside and their lawyer Simativa Perese appeared in the Auckland High Court yesterday before Associate Judge Tony Christiansen.
The trustees argued the judgement should be set aside because it was "irregularly obtained" and that an amended statement of claim wasn't served upon them. They claimed they had a good defence to the claim because any obligations they had under the guarantee was limited to the assets of the trust rather than their own.
The only asset in the trust was the Swanson property, Perese told the court.
However, FAI lawyer Bret Gustafson submitted to Associate Judge Christiansen that the trustees could not rely on these limited liability provisions because of their "dishonesty and negligence" .
He submitted that despite a pledge the trustees would not encumber the Swanson property, they let a mortgage be registered over it in 2011 and allowed it to be sold in March 2012.
The property was allegedly sold to an entity directed by Richard Johnston for $640,000 less than what his brother had indicated it was worth two years earlier.
According to evidence from Johnston, a bank which had a priority mortgage over the property took all of these sale proceeds.
In his decision setting aside the August 2012 judgement against the trustees yesterday, Judge Christiansen said this was indeed "irregularly obtained".
"But even if that was not so, then sufficient grounds exist to indicate the second defendants have a defence to the claim," the judge said in his oral judgement.
"Guarantees were provided by the trustees, but any liability of theirs was limited to the assets of the trusts except if the trustees acted in any manner which was dishonest or fraudulent," he said.
"The court cannot accept protestations of dishonest or fraudulent behaviour on the part of the [trustees Johnston and Crawley] - at least without a further and full enquiry being made...issues of dishonesty, fraud and the like require better inquiry than is available from evidence contained in affidavits," the judge said.
As well as setting aside the judgement, Associate Judge Christiansen ordered the bankruptcy notices served on the trustees be set aside.
