IN THE SUPREME COURT OF TONGA
Supreme Court, Nuku'alofa

C 732/00

Tonga Development Bank

v

Carafa

Ford J 
16, 17 October 2001; 24 October 2001

Commercial law – security for loan – security did not belong to defendant 
Practice and procedure – interpleader proceedings to set aside default judgment – upheld 
Land law – dwellinghouse – did not form part of the land on which it stood 

On 11 February 1998 the Tongan Development Bank ("the TDB", the plaintiff), granted a loan of $13,209 to the three defendants to establish a poultry farm. The venture failed and in August 2000 the TDB issued a writ and statement of claim and sought to recover the loan monies together with interest. No statement of defence was filed and on 7 August 2001 the TDB obtained an order for judgment in default. The default judgment included an order requiring the defendants to deliver up to the TDB the assets pledged by them as security for the loan. One of the assets listed in the loan agreement was a "storey dwellinghouse of 'Eneasi situate at Toula together with all materials and contents thereof". 'Eneasi was the second defendant. When the TDB endeavoured to take enforcement action against the "storey dwellinghouse" it was confronted with a claim by the interpleader, Vakalaiti Kaita'eifo, that the house did not, in fact, belong to 'Eneasi. Vakalaiti was 'Eneasi's second eldest son and he claimed that the dwellinghouse in question belonged to himself and his elder brother, Sione 'Amanaki Kaita'eifo, ("'Amanaki"). Vakalaiti issued interpleader proceedings for an order setting aside that part of the default judgment requiring delivery of the dwellinghouse to the TDB. 

Held: 

1. A dwellinghouse did not form part of the land on which it stood

2. The interpleader made out his case and he established that the dwellinghouse did not and never did belong to 'Eneasi. The interpleader's evidence that it had never been explained to 'Eneasi that the documentation he was signing included a pledge of the dwellinghouse was left unchallenged by the TDB. 

3. The interpleader's claim was upheld and the Court order of 7 August 2001 was varied by deleting from paragraph 2 the reference to the "storey dwellinghouse of 'Eneasi situate at Toula". 

Case considered: 
 Kolo v Bank of Tonga (unreported) No 20/97 

Statute considered: 
 Land Act (Cap 132) 

Counsel for interpleader : Mr Taufaeteau 
Counsel for plaintiff : Mrs Vaihu 

Judgment

On 11 February 1998 the plaintiff in this proceeding, the Tongan Development Bank ("the TDB"), granted a loan of $13,209 to the three defendants for the purposes of establishing a poultry farm. The venture apparently failed and in August 2000 the TDB issued a writ and statement of claim seeking to recover the loan monies together with interest. No statement of defence was filed and on 7 August 2001 the TDB obtained an order for judgment in default. The default judgment included an order requiring the defendants to deliver up to the TDB the assets pledged by them as security for the loan. One of the assets listed in the loan agreement was a, "storey dwellinghouse of 'Eneasi situate at Toula together with all materials and contents thereof." 

'Eneasi is the second defendant. He is now 82 years of age. The first defendant, Vika Carafa, is his married daughter. The third defendant, Vilisoni Tokoma'ata, who was apparently the driving force behind the poultry farm business, is 'Eneasi's stepson. Vilisoni's present whereabouts was not disclosed to the court but the evidence indicated that he is now probably overseas. 

When the TDB endeavoured to take enforcement action against the "storey dwellinghouse" it was confronted with a claim by the interpleader, Vakalaiti Kaita'eifo, that the house did not, in fact, belong to 'Eneasi. Vakalaiti is 'Eneasi's second eldest son. He is a schoolteacher. He claimed that the dwellinghouse in question belonged to himself and his elder brother, Sione 'Amanaki Kaita'eifo, ("'Amanaki"). 'Amanaki is also a schoolteacher. He is currently residing in New Zealand. 

Vakalaiti issued interpleader proceedings for an order setting aside that part of the default judgment requiring delivery of the dwellinghouse to the TDB. The matter proceeded to a hearing during the recent circuit in Vava'u. Some issues were agreed to between the parties prior to the hearing in the form of an Agreed Statement of Facts but the bulk of the evidence was given orally. In relation to the dwelling house, paragraphs 6 and 7 of the Agreed Statement of Facts record the following: 

"6. The house is built on the registered town allotment of 'Eneasi Mahe (second defendant). 

7. That the dwellinghouse in question was built through 2 loans of the Interpleader Vakalaiti Kaita'eifo and Sione A ('Amanaki) Kaita'eifo his brother from the Bank of Tonga. The first loan was for $16,700.00 on the 17/5/1989 between the Bank of Tonga and Vakalaiti and Sione Kaita'eifo and the second loan for $12,780.00 to complete the house was on 19 May 1994 between Bank of Tonga and Vakalaiti Kaita'eifo, Sione Kaita'eifo and 'Eneasi Mahe (the second defendant). On the second loan the town allotment of 'Eneasi Mahe was used as a mortgage to the said loan. The Bank of Tonga debt was fully repaid in April 1998." 

Vakalaiti gave evidence. The thrust of what he told the court was that in 1989 he and his brother, 'Amanaki, took out a loan from the Bank of Tonga ("BOT") to build a dwelling house on their father's ('Eneasi's) town allotment. It was a large house with a ground floor and a first floor, containing three bedrooms on the first floor and one bedroom on the ground floor. The new house replaced a dilapidated wooden building which the family had lived in up until then. Vakalaiti said that the brothers knew that the father could not afford to build a house so as they were both working they decided to take out the loan and build it themselves. Vakalaiti arranged the building contractors and he bought all the building materials and supplied the labour. 

Vakalaiti said that the house was completed in two stages, under two different contractors, because the brothers ran out of money. Nothing was done for almost five years and then in May 1994 the BOT advanced a second loan to enable construction to be completed. The Agreed Statement of Facts states that the second loan was for $12,780.00. The first loan had been to Vakalaiti and 'Amanaki only. In the second loan the father, 'Eneasi, was included as a party because the BOT, according to evidence given on its behalf, wanted the added security of a mortgage over the town allotment on which the house was constructed. Both loans from the BOT were paid off in full by the two brothers by automatic deductions from their respective salaries. The loans were repaid in April 1998. 

The evidence was that after completion, the dwellinghouse was used as a family home. The parents lived there up until early this year when they moved into the home of their married daughter, Vika. 'Amanaki lived in the house until he left for New Zealand and, apart from a two-year period when he was stationed as a teacher on Matamoka Island, Vakalaiti has resided in the dwellinghouse throughout. He is unmarried but he continues to live in the house with other siblings. 

Vakalaiti's 69 year-old mother gave evidence. She confirmed that the dwellinghouse was built by the two brothers with loans they took out with the BOT. She said that it was just Vakalaiti and 'Amanaki who had paid off the loans and there was no doubt in her mind that the dwellinghouse belonged to them. In cross-examination she was asked questions about a decision which 'Eneasi had apparently made at some stage when they were living in the dwellinghouse to allow a deacon of the Church and his wife to live with the family until the deacon's own home was ready for occupation. The suggestion being put to Mrs Mahe was that 'Eneasi had made the decision without the obtaining Vakalaiti's approval and this was evidence that in reality he was in charge of the house and, therefore, the real owner. Mrs Mahe rejected the proposition. She said that in the Tongan way the children had to respect the parents but she and 'Eneasi were just living in the house. The boys were the workers and they were the owners. 

82 year-old 'Eneasi gave evidence but he was able to contribute very little. When asked what work he did, his response was: "I am waiting for my call". He could not recollect any business dealings with either Bank and he could not recall signing any papers or having been served with any court documents. He indicated to the court that he had been suffering from memory problems for the last two years or so. It was suggested to him in cross-examination that his memory loss may have been selective and I suspect that there could well be some truth in that proposition but, in the absence of any medical evidence, it is difficult to be certain. On balance, I consider that at the present time 'Eneasi is not mentally competent to enter into any business proposition. 

How 'Eneasi's state of mind was back in February 1998 when he signed the loan agreement with the TDB is something which was not explored in evidence before me but some insight into this issue arose out of part of Vakalaiti's evidence. Vakalaiti said that he had no knowledge whatsoever that his father had pledged the dwellinghouse to the TDB until sometime in 1999 when he saw in the local newspaper a notice by the TDB calling for tenders for what he immediately recognised as his own dwellinghouse at Toula. He told the court that he then asked his father if he had signed something with the Bank and his father replied that he had. Vakalaiti questioned his father further about the matter. He asked him if he had pledged the house to the TDB and his father denied it. He told Vakalaiti that the Bank officer had given him papers to sign relating to the poultry farm but he had not explained them to him. He said that the officer had simply put the papers down in front of him and asked him to sign. Vakalaiti was critical of the TDB. He said that the Bank was in the wrong because it should have made it clear to his father exactly what he was being asked to sign. 

No one from the TDB was called to give evidence and so this part of the interpleader's case was left completely unchallenged. 

The TDB called two witnesses. First, it subpoenaed Mr Mohotomu Tupou, the manager of the Vava'u branch of the BOT. He was unable to produce any records relating to the original loan to the two brothers in 1989 but he did produce the loan agreement relating to the second advance from the Bank in 1994. The securities pledged in that document are described as: 

"Registered mortgage over 'Eneasi Mahe's town allotment at Toula, Vava'u Book 249 Folio 41 plus all properties thereon including dwellinghouse and all contents." 

In earlier evidence, the BOT loans officer, Mr Vahai, who had been called as a witness by the interpleader, had said that in so far as the BOT was concerned, the house was owned by Vakalaiti and 'Amanaki because they had taken out the loans and repaid the loans and the only reason the father had been made a party to the second mortgage was because the Bank wanted to take security over his api as well as over the dwellinghouse but he said that there was nothing in the BOT's records to suggest that the house belonged to 'Eneasi. Mr Vahai also confirmed that the house had been insured in Vakalaiti's name with the bank's interest noted on the policy and Vakalaiti had paid the insurance premiums out of his wages. 

Both Mr Vahai and Mr Tupou were asked questions about a credit check which the TDB had requested from the BOT in about July 1999. The credit check contained a handwritten reference to a charge "over 'Eneasi Mahe's storey block house plus contents at Toula, Vava'u". The person who wrote the statement was not called as a witness and both BOT Bank officers said that the credit check was incomplete. It is also dated well after the TDB loan agreement of 11 February 1998. In the circumstances, I am not prepared to place any weight on the credit check in determining the issue of ownership in relation to this case. 

The only other witness called by the TDB, apart from Mr Tupou, was the current town officer in the village of Toula, Manu Moala. Mr Moala said that he was familiar with the interpleader's family and the dwellinghouse in question. He said that to his knowledge the dwellinghouse was built on 'Eneasi's land but it belonged to his children who had built it. 

In submissions, counsel for the TDB placed reliance upon section 100(1)(iii) of the Land Act (Cap 132). Counsel submitted that the provisions of paragraph (iii) meant that once a registered mortgage over land is taken out then any dwellinghouse on that land automatically becomes "part of the land". The relevant parts of the section read as follows: 

"100(1) the registered holder of a tax or town allotment may grant a mortgage over the whole or part of his tax and town allotment provided that 

(i) the approval of the Minister has been obtained in the manner provided by this Part of this Act 

(ii) …  

(iii) the loan or advance or consideration in respect of which the mortgage is to be granted as security is to be used for the purposes of improvement of the allotment over which the mortgage is to be granted." (emphasis added by counsel) 

I am not prepared to accept that submission. Not only would it involve reading into the paragraph in question provisions which simply are not there, but the principal is contrary to the legal position in Tonga which recognises that a dwellinghouse does not, in fact, form part of the land on which it stands. Thus in Kolo v Bank of Tonga (unreported) No 20/97, which was a case where a mortgage had been taken out over a town allotment containing a dwellinghouse, the Court of Appeal held that it was open to Mr Kolo to pledge his house to the Bank as an item separate from the land on which it stood. 

Counsel for the TDB also submitted that there was "ample other evidence" that the dwellinghouse, in fact, belonged to 'Eneasi. She referred to evidence given by other people from the village who had said that the home was commonly referred to as the house and api of 'Eneasi and she submitted that the fact that 'Eneasi had apparently made the decision to allow the Church deacon to stay temporarily in the home was further evidence that 'Eneasi was in control and he really owned the dwellinghouse. 

I have taken these matters into account but I found the evidence of the villagers equivocal and, in any event, I do not find any of it conclusive on the ownership question. 

In the alternative, counsel submitted that the evidence showed that the dwellinghouse belonged to three people — 'Eneasi and his two sons equally and she submitted, without citing any authority for the proposition, that if the court was so to find then any one of the three owners had authority to pledge the house in his own right. 

Looking at the evidence overall I am left in no doubt that the interpleader has made out his case and he has established to my satisfaction that the dwellinghouse in question does not and never did belong to 'Eneasi. In this regard, I must say that I found Vakalaiti to be a completely truthful witness and I found his evidence quite compelling. As no evidence was called or produced from the TDB, I do not know the basis on which the TDB inserted the words "storey dwellinghouse of 'Eneasi" in the February 1998 loan agreement. No witness from the Bank came forward to say that 'Eneasi had ever said anything confirming that he was the owner of the dwellinghouse. The loan agreement was not produced in evidence and there was no evidence as to the circumstances in which it was drawn up and signed. The interpleader's evidence that it had never been explained to 'Eneasi that the documentation he was signing included a pledge of the dwellinghouse was really left unchallenged. 

The interpleader's claim is, therefore, upheld. The court order of 7 August 2001 is hereby varied by deleting from paragraph 2 the reference to the "storey dwellinghouse of 'Eneasi situate at Toula". The interpleader is entitled to costs to be agreed or taxed.