The plaintiffs submit that these principles should apply in the present case. Norbrik is what could be described as the double claimant, having access as the result of its lien to two parcels of shares mortgaged to each of the single claimants, Tehuso and Chase. This assumes the validity of the lien over the Chase shares, which I have held to be valid, and the existence of the lien over the Tehuso shares. The defendants do not dispute the principles of marshalling by apportionment. Norbrik submits that it was entitled to claim its right of lien against whichever of the parcels of shares it chose and is not liable for having permitted Tehuso to have its shares transferred. Tehuso for its part submits that for several reasons marshalling should not have occurred in the circumstances of this case.
30 As the judgment of Cohen J showed, marshalling took an altogether different course as it developed in the United States of America in the 19th century and since, and there rests on the basis of an equity which the claimant can enforce against the prior mortgagee, conceivably extending to injunctions or other judicial remedies controlling the exercise by the prior mortgagee of his rights. If the law developed in this way, the will and motivations of the prior mortgagee, and the state of a prior mortgagee's knowledge of the interest of the claimant would be prominent considerations. The law in England and Australia developed in a completely different way; the prior mortgagee can exercise his rights as he sees fit and the claim for marshalling does not depend on impugning the prior mortgagee's decision or conduct. In my opinion it is not correct in principle to treat the will or election of a prior mortgagee as a significant part of the ground for a claim for marshalling.
31 Apportionment was spoken of in National Bank of New Zealand v Caldesia Promotions Ltd [1996] 3 NZLR 467 at 475 by Elias J. Her Honour said:
In the case where a double claimant is secured in respect of the same debt by mortgage over two separate lands held by the mortgagor, junior mortgagees having a single claim in respect of one of the lands would be disadvantaged if the double claimant resorts in the first instance to the land against which their security applies. That disadvantage will be mirrored by junior mortgagees in respect of the other block, should the double claimant decide to resort to it. In those circumstances, a type of marshalling operates to apportion the debt owed to the double claimant rateably between the two lands according to their value: Lanoy v Duke and Duchess of Athol (1742) 2 Atk 444; Barnes v Racster (1842) 1 Y&C Ch Cas 401; Bugden v Bignold (1843) 2 Y&C Ch Cas 377; Flint v Howard [1893] 2 Ch 54; Baglioni v Cavalli (1900) 83 LT 500; Mir Bros Projects Pty Ltd v Lyons [1977] 2 NSWLR 192 ; Gibson v Seagrim (1855) 20 Beav 614; Victoria & Grey Trust Co v Brewer (1970) 14 DLR (3d) 28; Smyth v Toms [1918] 1 JR 338. The principle is often referred to as "marshalling by apportionment", although some cases have suggested that it is not properly part of the doctrine of marshalling and Meagher, Gummow and Lehane (supra) at para 1124 suggests that it is probably better understood as an application of the doctrine of contribution. Whatever its proper classification, I am satisfied from the authorities cited that it is a principle of general application applying wherever a double claimant can disappoint another creditor by electing to satisfy his claim from one fund or security. The doctrine does not interfere with the right of the double claimant to realise his securities as he sees fit. It applies in application of a form of subrogation where the double claimant is indifferent as to whether he is satisfied from one security or the other, or as to the proportions in which he achieves satisfaction from each. Rateable apportionment in such circumstances is the equitable solution and does not prejudice the junior creditors of each security.
32 Her Honour's words "… wherever a double claimant can disappoint another creditor by electing to satisfy his claim from one fund or security" became part of the support claimed by Senior Counsel for the proposition that it is only where the claimant had been defeated by an election or decision of the double claimant that the doctrine applies. I am satisfied that it was not Elias J's intention to exclude circumstances arising otherwise than by election. Reasoning by corollary in this way is not a reliable method of understanding judgments.
33 It must respectfully be said that Aldrich v Cooper is not a decision which is distinguished for clarity. The facts do not relate to competing security holders, but to competition between the holder of a security over freehold and copyhold estates and also over personal assets of an intestate, in competition with simple contract creditors who, under the law of that distant time, could enforce their claims only against personal assets. Lord Eldon's chief concern was the authority of Robinson v Tonge, a case decided by Lord Hardwicke LC on 15 October 1739 which had never been cited and was completely unknown until referred 60 years later to by Cox, the editor of the fifth edition of Peere Williams Reports. See Cox's note to Clifton v Burt (1720) 1 Peere Williams 678, 24 ER 566 at P. Wms 681 ER 568. What Robinson v Tonge was said to be authority for and the reason why it was said to be significant in Aldrich v Cooper was this: "But the Court said that copyhold estates were not liable either in law or equity to the testator's debts further than he subjected them thereto; and ordered that the copyhold estate should bear its proportion with the freehold estate for payment of the mortgage, and should not be liable to make satisfaction for the specialty debts." In other words, specialty debts could not be marshalled against the copyhold estates, although those estates were liable to the mortgage debt under the mortgage which the testator had given over them. This caused evident difficulty to Lord Eldon. He did not deliver a single judgment but spoke about the state of his opinion on three different occasions, finally deciding not to follow Robinson v Tonge. The third time his Lordship embarked on giving reasons he described Robinson v Tonge as "… not reconcilable with the general classes of cases" and included the copyhold estates in the marshalling exercise. The editors of the sixth edition of Peere Williams added this to Cox's note, and this is what we have at 24 ER 568. Mr Cox's note is appended to Clifton v Burt, a decision of Lord Parker in 1720. Lord Parker is better known to history as Lord Macclesfield, and his chief distinction is his impeachment and disgrace over corrupt involvement in the South Sea Bubble scandals. Clifton v Burt itself related to competition among beneficiaries in circumstances now long obsolete.
34 Cox's note can be taken to list all the cases in the 18th Century and earlier which bear on marshalling and can now be retrieved; many related to claims of beneficiaries against deceased estates, many to claims of creditors against deceased estates and some to both. The first proposition in Cox's note at P. Wms 681, ER 568 is "… It has been long settled, that where one claimant has more than one fund to resort to, and another claimant only one, the first claimant shall resort to that fund, on which the second has no lien, Lanoy v Duke of Atholl 2 Atk. 446". In the course of his notes Cox said "… It is to be observed, that none of the rules above-mention subject any fund to a claim to which was not before subject, but only take care that the election of one claimant shall not prejudice the claims of the others, 2 Atk. 438; …" (again referring to Lanoy v Duke of Atholl).
35 Lord Eldon went to some trouble to find out, apparently from Cox himself, the source of the reference to Robinson v Tonge, accepted that the note of that case was correct, but overruled it. See 8 Vesey Junior 390, 32 ER 406. In the course of showing why he was unwilling to follow Robinson v Tonge Lord Eldon made an exposition of marshalling at 8 Vesey Junior 394-395 32 ER 407, in the course of which he said (of a specialty creditor whose debt arose under a covenant or in a deed and under the law of that time was enforceable against the heir of the debtor after the debtor's death): "In that case then the Court says, as that specialty creditor by his specialty contract can affect the land, he has two funds; the freehold and the personal estate; and he shall not by his election disappoint the natural and moral equity of the creditor by simple contract to be paid out of the single fund, which his debt affects. [395] The simple-contract creditor therefore has no more in law any claim against the freehold estate than the specialty creditor in Robinson v Tonge had upon the copyhold estate. But in the former case the Court has said, the caprice or election of a bond creditor shall not operate to the prejudice of the simple-contract creditor; …".
36 Caprice and election were referred to by Lord Eldon to illustrate one case where marshalling is available, not to delimit the availability of marshalling. Lord Eldon also said, in a further illustration "But it is the ordinary case to say a person having two funds shall not by his election disappoint the party having only one fund; and equity, to satisfy both, would throw him, who has two funds, upon that, which can be affected by him only; to the intent that the only fund to which the other has access; may remain clear to him." These observations could be seen and indeed have been seen as a basis for two propositions which I do not accept. One is that the Court will control the decisions of the prior creditor and compel him to exercise his rights in any way which will advantage the subsequent creditor entitled to marshalling. When Lord Eldon spoke of throwing him who has two funds upon that which can be affected by him only, his Lordship was not speaking about compelling the conduct of any prior creditor, but about carrying out an accounting exercise and allocating debt which had been paid against one fund rather than another. Another proposition I do not accept is that it is only where the incidence of the exercise of the prior creditor's rights adverse to the subsequent creditor resulted from caprice or election, that is, from deliberate decision, that marshalling applies. It was not Lord Eldon's concern to establish any such rule, and none of the reasons which he stated would show any principle to support such a rule. In my opinion there is no basis in principle for such a limitation.
37 To my reading it does appear from Cox's note and from Lord Eldon's judgment that it was not, even at that time, a part or a consequence of the law of marshalling that the caprice, election or decision of the prior creditor was controlled by the Court; the Court's concern was to adjust rights among other persons affected by the prior creditor's decision.
38 In Lanoy v Duke of Athol (1742) 2 Atkyn 445, 26 ER 668, already a classic authority in 1803, Lord Hardwicke LC at Atk 446, ER 669 stated the Court's practice without referring to election, caprice or any similar element. References to election and caprice appear frequently in expositions of marshalling. However I have not seen it stated that it is essential that a decision of the prior creditor should underlie a marshalling remedy.
39 It is conceivable that restraining or controlling the conduct of the prior creditor may have underlain the origins of marshalling in equity, where a prior creditor obstructed the subsequent creditor by a choice made with malice against the subsequent creditor or for some other improper purpose; although I have not seen any reference to such a case. Observations in Webb v Smith (1885) 30 Ch D 192 at 200 by Cotton LJ could be understood as supporting intervention to control the conduct of the prior creditor; but this is not what courts have done; they have rather conformed with the view expressed briefly by Page-Wood VC in Wallis v Woodyear (1855) 2 Jur NS 179 at 180 to the effect that the prior creditor has "a right to take the first money that is realised by any of his securities which first comes to hand." The authorities and text writers are referred to in Meagher, Gummow & Lehane's Equity Doctrines and Remedies 4th ed at [11-010].
40 I have been referred to Bondi Securities Pty Ltd v AGC (Advances) Ltd an unreported decision of Master Windeyer (as Windeyer J then was) of 31 August 1990 (not reported). In that case Master Windeyer gave summary judgment against the claim for marshalling on the ground that no reasonable cause of action was disclosed. The puisne mortgagee of a property had sold the property under its power of sale but had then been obliged by Conveyancing Act 1919 s 112 to pay the whole proceeds to the prior mortgagee. The first mortgage was thus satisfied in part. The first mortgagee then sold another secured property, paid itself out completely and paid the surplus to a second mortgagee of the other property, which had priority over the plaintiff, a third mortgagee of that other property. Master Windeyer held that subrogation of the interests of the first mortgagee could not assist as the first mortgage had been discharged. The claim to subrogation and also the claim to marshalling depended on treating the surplus of realisation paid to the prior mortgagee under s 112 as if it had been paid by the claimant from its own funds; but that was not the case.
41 In the course of his reasons Master Windeyer referred to Porter v Associated Securities (1979) 1 BPR 9279 (Needham J) and also to Aldrich v Cooper and to Lord Eldon's observations. Master Windeyer referred to the fact that the prior mortgagee had made no election; but this to my reading was not part of the ground upon which he decided that no reasonable cause of action was disclosed. In Porter Needham J referred to a claim that the plaintiff had remedies under the doctrine of subrogation at 9295-9296. In a passage enmeshed in the facts of that case Needham J referred to Lord Eldon's observations and to the fact that the prior mortgagee in that case had made no election. His Honour said at 9296 "It was the defendant who sold the beachfront land under its power of sale. In my opinion it cannot complain that, in accordance with its statutory duty in such circumstances, it was obliged to pay the debt of the prior encumbrancer out of the proceeds of sale. No equity arises in such a case". That was the point of decision; it has no application to the present case, although it was relevant to Bondi Securities Pty Ltd v AGC (Advances) Ltd. A little earlier at 9295 Needham J said "There seems little doubt that, if the bank had acted under its first mortgage to sell the beachfront land and taken from the proceeds the whole of the debt owed to it, leaving insufficient money to meet the defendants claimed, the defendant would have been able to rely upon the doctrine of marshalling".
42 In the present case NAB did not take all the available proceeds of the sale of Rose Bay because of a deliberate decision or any chosen course of action by NAB which threw its claim against Rose Bay rather than against Pyrmont. Across Australia attended to the sale of Rose Bay first, and this meant that Across Australia had to pay the proceeds of sale of Rose Bay to NAB to induce NAB to release Rose Bay from its mortgage. When some months later NAB had to be asked to release Pyrmont from its mortgage, less than all the proceeds of Pyrmont was required. From the point of view of Mr Hill and also from the points of view of Across Australia and of NAB, an accidental circumstance decided the order in which the proceeds of sale of the two properties were applied to NAB's debts. Accident is a classic basis for equitable intervention.
43 It is inappropriate, in the realisation of mortgages under the control of the Court, that one or other of the puisne mortgagees should be disadvantaged or advantaged by the accidental circumstance of the order in which the properties were sold and the first mortgagee was satisfied. The appropriate equitable disposition is, without imposing any liability or responsibility on the first mortgagee NAB, that the Court should carry out its accounting or reckoning of the funds to which Mr Hill and Across Australia should have access on the basis that NAB was satisfied not by first taking all the proceeds of the Rose Bay property and then as much of the proceeds of the Pyrmont property as it needed, but by taking proceeds of both the properties over which it held security in rateable proportions.
44 Senior Counsel for Across Australia put forward a number of contentions against acting in this way, some in written submissions only and some developed orally.
45 It was contended that Mr Hill's claim and the declarations and orders which he seeks should not have been sought by Notice of Motion in the proceedings, and that he should have filed a cross-claim. I do not accept this. In proceedings commenced by Across Australia seeking judicial sale, application by persons who have security interests for directions relating to the proceeds are interlocutory business which it is appropriate to commence by Notice of Motion.
46 It was also contended that a previous Notice of Motion applying for identical relief had been dismissed and that the Court should not permit the claim to be reagitated. That Notice of Motion was dismissed for non-appearance, for a procedural failure, without consideration of the merits, and the present Notice of Motion does not seek re-opening of any earlier consideration.
47 Senior Counsel for Across Australia contended that marshalling is generally limited to cases where two properties were originally mortgaged for the same debt. As both properties were subject to "all moneys" mortgages to NAB, this is not an adverse consideration.
48 Counsel also referred to case law - Re Holland (1928) 28 SR (NSW) 369 at 378-9 where the action of the first mortgagee was dictated by a statutory or contractual obligation to the debtor relating to the order in which funds were applied. There is no such element in the present facts.
49 It was also contended that it was significant that Mr Hill had an opportunity to take security from Mr Kalls over the Pyrmont property and decided not to do so. Counsel referred to Re Mower's Trust (1869) LR 8 Eq 110, in which I find no assistance. I see no principle on which it is relevant to examine how mortgagees came to lend the amounts they did and not other amounts, to take the securities they did and not other securities, or generally to examine the wisdom of their conduct in making loans, which has no relation to equitable adjustment of rights as between them. Marshalling will not give Mr Hill a security which he earlier chose not to have: he will not get security over or any interest in the Pyrmont property.
50 Senior Counsel also contended that the third defendant was defeated, or that it was a strong discretionary consideration adverse to giving the third defendant a remedy, that (as evidence of Mr Hill's solicitor showed) Mr Hill had an opportunity, long before Across Australia took security over the Pyrmont property, to take security over the Pyrmont property in addition to security over the Rose Bay and another property for this debt; but decided not to do so. It was contended that the present application is the reverse of the intention upon which Mr Hill acted when he had an opportunity to take security over Pyrmont and decided not to do so; it was contended that he is now seeking security over the Pyrmont property; and counsel said that this is a special fact encountered in this case, not encountered elsewhere, which defeats the application.
51 Across Australia was not involved in that event and did not lend any money or take any security until many months later. Its conduct was not shaped or affected by any decision by Mr Hill not to take security over Pyrmont. In my opinion Mr Hill's decision not to do so is irrelevant now. There is no reason in principle why these circumstances should prevent him from having the advantage of marshalling. He is not (as Senior Counsel sought to characterise him) seeking now to have security over the Pyrmont property.
52 Evidence of Across Australia's solicitor shows that Across Australia has incurred legal costs and expenses relating to this litigation and the sale of the Pyrmont property, which have not all been paid. When the sale of the Rose Bay property was completed on 30 August 2007 real estate agent's commission, conveyancing costs and similar charges were paid out of the proceeds of sale before payment to NAB of the balance of $2,134,811.75. Before completion of the sale of the Pyrmont property took place Across Australia gave to the Court, in these proceedings, an undertaking which specified how the proceeds of sale were to be applied; accordingly when the sale was settled on 28 March 2008 the proceeds were applied to pay charges relating to the property and $1,936,335.81 was paid to NAB. The charges and expenses paid in this way were municipal and water rates, outstanding strata fees and land tax, the first mortgagee's legal costs and discharge and agents' commission. Across Australia also incurred marketing costs of $15,279.41 to its estate agents and conveyancing costs of $5,494.35 to its solicitors. In the ordinary course of business these would have been paid out of the proceeds of sale but the terms of the undertaking prevented this. For the purposes of the marshalling exercise, the proceeds of Rose Bay should first be charged with the conveyancing costs and marketing costs, that is $21,044.95.
53 Across Australia has also incurred legal costs relating to these proceedings. Its solicitor has set out on affidavit the amounts of five tax invoices related to costs of these proceedings, the most recent dated 2 April 2008; the total is $111,426.61. Across Australia has remedies in respect of these costs; it is no doubt entitled under the mortgage clauses to payment of these costs by Mr Kalls; and Across Australia has the benefit of an order for costs made in the proceedings against Mr Kalls. As Mr Kalls is a bankrupt there can be no confidence that these entitlements will actually produce any payment. In my opinion costs reasonably incurred by Across Australia in conducting this litigation up to the tax invoice of 2 April 2008 should be seen as expenses which it was necessary to incur to produce the fund now under dispute. In the absence of exercise by NAB of its powers of sale as first mortgagee, proceedings for judicial sale by Across Australia or some puisne mortgagee were necessary to produce any results for puisne mortgagees; neither Mr Hill nor Across Australia could use the powers of sale under the Real Property Act 1900 available for holders of registered mortgages. If proceedings for judicial sale had not been brought, the puisne mortgagees would have been left to wait until NAB took some action to realise its securities; it is not known how long that would have taken, but preserving the positions of puisne mortgagees would not have been a factor in NAB's course of action. Interest liabilities to NAB at default rates would have increased for an unknown period of time adversely to puisne mortgagees. In these circumstances the Court should in my opinion regard the payment of costs reasonably and properly incurred by Across Australia up to 2 April 2008 as a charge on the fund with priority over mortgage debts.
54 I do not take the same view of any costs incurred by Across Australia in the litigation after 2 April 2008 as I attribute those costs to the dispute relating to marshalling.
55 Before adopting or moderating the costs charged in the tax invoices there should be some process of assessment or other consideration to establish that the charges are charges for appropriate amounts as between Across Australia and its solicitors.
56 I will publish these reasons and ask the parties to consider how it should be established that the solicitors' charges are appropriate before I take the proceedings under further consideration.
57 Order:
(1) The proceedings are reserved for further consideration.
(2) Liberty to apply.
**********