Bank of Queensland v Fitzgerald

HWL Ebsworth (Plaintiff) NSW Law Society Pro Bono Scheme (Defendant) File Number(s): 2012/00330945

Ex tempore JudgmenT (Revised) 1By notice of motion filed on 29 January 2014, the plaintiff Bank seeks summary judgment under r 13.1 of the Uniform Civil Procedure Rules 2005 (NSW) for possession and for a specified part of the defendant's indebtedness as alleged by the Bank. It relies upon the affidavits of Mr Douglas Smith, a bank officer, sworn on 24 January 2014 together with a documentary exhibit, and a second affidavit sworn on 27 October 2014. I permitted the second affidavit to be read over the objection of counsel for the defendant. It contains a certificate purportedly made under the Memorandum of Mortgage which certifies that as at 27 October the part of the indebtedness to which I've referred totals $1,041,213.14. 2Two facilities were made available to the defendant as part of the arrangements between the Bank and him. One was a home loan, and that is the facility the subject of the certificate to which I've just referred. The other was a line of credit which initially, I think, was in the sum of about $250,000. 3The defendant's defence seeks to attack the Bank's title to possession under the mortgage and under the terms of s 60 of the Real Property Act 1900 (NSW) by calling in aid the provisions of the Contracts Review Act 1980 (NSW). 4The defendant's case in that regard is that the financial arrangements to which I have referred, including the mortgage, are each unjust contracts liable to be set aside under s 7 of the Contracts Review Act 1980 having regard to the criteria enunciated in s 9 of that Act. 5For the purpose of this application for summary judgment, the Bank accepts, whilst not conceding the plaintiff's case is strong, that those issues under that legislation do give rise to a triable issue in respect of its title under its contracts with the defendant. 6Essentially, the defendant says that the circumstances of his borrowing from the Bank constitute what is referred to as "asset lending". That expression is not a term of art but has been used in cases from time to time dealing with the subject of unjust contracts in the context of the provision of financial services. 7The Bank says, however, that notwithstanding that triable issue, it has an alternative basis of obtaining summary judgment. In substance, it relies upon the approach taken by Johnson J in National Australia Bank Limited v Thirup [2011] NSWSC 911. Essentially the Bank calls in aid the doctrine of subrogation relying upon a number of cases analysed in the relevant and helpful written submissions of Mr Jammy of counsel, who appears on its behalf, including Burston Finance Limited v Speirway Limited [1974] 1 WLR 1648. 8I hope it does no injustice to the very careful argument of which I've had the benefit if I summarise it by saying that as it is common ground between the parties that the proceeds of the home loan were advanced for the purpose of discharging an existing mortgage to another lender, and in fact were used for that purpose, the bank argues that "even if" the Bank's mortgage is set aside under the Contracts Review Act 1980, it nonetheless has an indefeasible title to possession and recovery of the principal sum and interest advanced for that purpose by virtue of that aspect of the principle of subrogation discussed by Walton J in the Burston Finance case. The principles according to which a Court will grant summary judgment are not in dispute in this case and are well-known. Although various verbal formulae are utilised in the cases, it needs to be shown by an applicant for summary judgment that, in this case, the defendant's defence is so clearly untenable that the outcome of the proceedings can be predicted without resort to the normal interlocutory steps for the acquisition of evidence and a final hearing on the merits. 9In his written submissions, Mr Martin, who appears for the defendant, of counsel, refers me to a recent decision of the New South Wales Court of Appeal in the State of New South Wales v Williams [2014] NSWCA 177 where Emmett JA in reviewing the established principles pointed out that the established test is a demanding one that may be exercised only in plain and obvious cases, and that a debatable question of law itself may be a sufficiently triable issue to justify a matter going to trial, I would add, even in cases where the case of the applicant for summary judgment, here the plaintiff, on the face of it, appears strong. 10Mr Martin's argument is that as expounded by Walton J in Burston Finance, the principle of subrogation of a present creditor to an earlier mortgage as understood in the context of Australian law depends upon general equitable principle and, in particular, questions of unconscionability. The question of unconscionability relates to whether it would be against conscience for the defendant, in this case, even if he is correct, or found to be correct, in the position regarding the Contracts Review Act 1980 is whether it would be unconscionable for him to retain the benefit of the advance under the home loan and possession of the property. 11Where a case of subrogation is to be determined wholly in the context of equitable principles, a party in the position of the Bank may rely the maxims such as he who seeks equity must do equity; and upon the principle that the equitable relief generally available will be the minimum necessary to do equity in the given case. The Bank relies upon such principles to argue strongly that whatever happens in relation to the contracts review aspect of the case, it is untenable that the Bank would be denied a remedy in respect of the advance of principal and interest due, as well as the title to possession consequent upon default under the previous mortgage, as I have said, by operation of s 60 of the Real Property Act. 12In a case under the Contracts Review Act, it is said that the measure of relief, is perhaps by way of analogy with equity, the minimum necessary to cure the injustice. Mr Jammy relies upon this analogous principle to argue that logically it would be equally untenable to contemplate a situation where the Bank could not recover the principal advanced under the home loan even if the moneys advanced under the line of credit were somewhat in doubt. 13Again, the argument proceeds on the footing that if that is so, then the consequential right of possession by default of the previous mortgage, and by way of subrogation, likewise necessarily follows. 14In answer to this argument, Mr Martin has referred me to the decision of the Court of Appeal in First Mortgage Managed Investments Pty Limited v Pittman [2014] NSWCA 110 at [187] where Sackville AJA, with the agreement of Beazley P and Gleeson JA, said at [187]: I am prepared to accept that there may be circumstances in which an order declaring an unjust loan contract wholly unenforceable is necessary or appropriate to avoid an unjust consequence or result of the loan contract, notwithstanding that the borrower used part of the loan to discharge a valid and enforceable pre-existing loan or mortgage. For example, the lender's actions may have deprived a vulnerable borrower of the opportunity to take an available course, other than refinancing through the lender, that would have permitted the borrower to pay out the earlier loan. A lender who is aware of a borrower's financial position might induce the borrower to take on commitments that are so burdensome and commercially unrealistic that the borrower defaults in all his or her obligations. But if the unjust loan is to be declared wholly unenforceable, the court must explain why such a declaration is necessary or appropriate to avoid an unjust consequence or result. It is clear from the context in which his Honour's observations were made that such a case is likely to be rare or unusual, and to call for detailed exposition and explanation by the judge where it arises. 15However that may be, the experience of the Court, and the specific formulation of the demanding rules limiting the exercise of the Court's powers to give summary judgment, illustrate that the rare and unusual must be accommodated as they do arise from time to time. Even if it seems unlikely, even very unlikely, in a case like the present that the Bank would exit these proceedings entirely bereft of remedy, that circumstance, contemplation or expectation does not of itself engage the demanding General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 test. 16I must say that I do not regard even the English authorities to amount or rise to a principle that it must always be the case that a mortgagee whose mortgage is found to be inadequate to support judgment for possession, or the full amount of its loan, is able, in every conceivable case, to fall back on the terms of a previous mortgage on proof only that a purpose of its loan to the defendant was the discharge of the previously existing mortgage. Something more, in my judgment, is required. 17That something more, in the Australian context, is the demonstration that it would be unconscionable to allow the debtor to escape or avoid liability. The doctrinal basis for the operation of subrogation in the context of a mortgage has been stated by Kearney J in Cochrane v Cochrane [1985] 3 NSWLR 403 where his Honour said at 405: This principle is based on equity's concern to prevent one party obtaining an advantage at the expense of another which in the circumstances of the case is unconscionable. Hence, there is a common thread running through the relevant cases to the effect that the conscience of the mortgagor should beaffected so as to cause the mortgage to be kept alive. This is illustrated in the text book examples first, of a third party not being entitled to a right by way of subrogation where he simply lends the money on an unsecured basis to the mortgagor who then uses such funds to pay off the mortgage; and secondly, of a third party being so entitled where he advances the money to pay out themortgage on the understanding that security would be provided for such advance upon the mortgage being paid out. As a corollary to this basis for the principle, there is no occasion for equity to intervene by way of subrogation where there is available to the third party a remedy at law or in equity sufficient to avoid an unconscionable result. 18I interpolate to record that Mr Jammy argues strongly that the Bank falls into that second category; that is to say, where it says it is entitled to be subrogated because it has advanced money to the defendant to pay out a pre-existing mortgage on the understanding that the defendant would provide security for the loan upon the previous mortgage being paid out. 19Of the dictum of Kearney J in Highland v Exception Holdings Pty Limited (in liq) (2006) 60 ACSR 223, Santow JA, with the agreement of Giles and Hodgson JJA said at [103]: This is premised on a distinct basis, albeit necessarily imprecise, of unconscionable dealing rather than the concept of unjust enrichment. Equitable subrogation has not since emerged as one of those known restitutionary categories foreshadowed by Deane J in Pavey & Matthews, above, under the rubric of unjust enrichment (other references omitted)." Santow JA also referred to Registrar General v Gill (NSWCA, Gleeson CJ, Mahoney and Priestley JJA, 16 August 1994, unreported, BC9402892) unreported where in their joint judgment Gleeson J and Priestley JA said: The equitable principles relating to subrogation aim to adjust the interests of three parties, such as a creditor, a debtor and an insurer or surety, in such a way as to avoid the unconscionable result of double recovery by the creditor or inequitable discharge of the liability of the debtor. (emphasis added). 20The analysis of Santow JA was essentially for the purpose of demonstrating the divergence of Australian law and English law so far as the relevance of the concept of unjust enrichment in this area is concerned. That divergence continues to develop. 21However, what is clear to my mind is that there is no automatic application of the doctrine of subrogation in every case where a debtor refinances a mortgage and for any reason the subsequent, contemplated mortgage for the new lender proves incapable of enforcement. Something more is required and that something more is unconscionability by way of inequitable discharge of the liability of the debtor. It seems to me that such a question, that is to say the essential ingredient of unconscionability is likely to rarely be susceptible to the exercise of the Court's exceptional power to grant summary judgment depending, as it so often must, upon a full examination of all of the circumstances of the case at, and after, a trial. 22I return, then, to the judgment of Johnson J in Thirup. In that case, the defendant argued that the Bank's mortgage was void because it had been obtained by fraud. The Bank argued that even assuming that the fraud went to the Bank's title to possession it remained entitled to summary judgment on the alternative basis of subrogation to the rights and interests of the previous mortgagee, whose mortgage had been discharged by virtue of the Bank's advance. At paragraph [53] to [55], Johnson J said: Accordingly, even if the Plaintiff's registered mortgage was not valid, the Plaintiff can rely upon the principle of subrogation as the basis of its entitlement. The principle of subrogation as applied in the area of mortgage law is that stated by Walton J in Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1649 at 1652. The principle of subrogation has been applied in the area of mortgage law in Australia: Highland v Exception Holdings Pty Ltd (in liq) [2006] NSWCA 318 ; 60 ACSR 223 at [102]; Bofinger v Kingsway Group Ltd [2009] HCA 44; 239 CLR 269 at [6], [88]-[98]; MDN Mortgages Pty Ltd v Caradonna [2010] NSWSC 1298 at [261]-[264]. I accept the Plaintiff's submission that the present case is one where the Plaintiff advanced monies on the basis that it was receiving security for that advance, and there is no basis for inferring that the Plaintiff intended that the previous mortgage would be extinguished if it did not obtain its security. As the Plaintiff had paid out the PCL mortgage, I accept that the Plaintiff is subrogated to the rights of PCL, with the consequence that it is entitled to an order for possession under s 60 Real Property Act 1900 as a consequence of default by the Defendants in paying at least part of the amount secured. 23I observe in passing that as I have sought to demonstrate the case of Highland demonstrates divergence from the doctrine as explained in Burston Finance in the context of Australian law. And indeed, in Highland both at trial and on appeal, the mortgagee was unsuccessful in its subrogation argument. At first instance, Young CJ in Eq (as his Honour then was) held in the words of Giles JA at [28]: ... "the estate" was entitled to be subrogated to Westpac's charge. His Honour held, however, that subrogation did not assist the estate because it had received the security for which it bargained; he said that the charge was valid when it was created, but became void when "the person having the benefit of the charge was lax in not taking the appropriate steps". 24What this illustrates is that the doctrine of subrogation, as I have said, is not capable of automatic application in any, or every, case regardless of the circumstances. There are cases which hold that the fact of the incoming creditor was negligent in failing to register its mortgage is not a disentitling circumstance to the application to the doctrine of subrogation. On the other hand, as I have said Highland shows that laxity in all the circumstances of the case may be. 25There is a particular difficulty in this case that wasn't present in the circumstances of Thirup. There, Johnson J was dealing with a matter involving only, the application of general law principles of fraud on the one side and subrogation on the other. Here there is an additional complexity. What the plaintiff relies upon is statute. By that statute he argues that he is entitled to have, what would otherwise be lawful, set aside. Clearly statute law will trump the application of principles derived wholly from the general law. It does not seem plain and obvious to me that if the defendant makes good his claim for relief under the Contracts Review Act about which, as I have said there is no argument that there is a triable issue, that there will be no flow-on from the circumstances established for that purpose capable of undermining what might appear to be a strong case for application of the doctrine of subrogation. 26Of course it's irrelevant for me to express any view about the strength or otherwise of the plaintiff's case. And the comments I have made in that regard are only to illustrate or highlight the demanding nature of the test that I am required by law to apply. 27I am not satisfied to the requisite standard, unlike Johnson J in Thirup, that even if this Bank's registered mortgage is set aside under the Contracts Review Act, it is beyond argument that the plaintiff can rely upon the principle of subrogation as the Bank's of its entitlement to obtain judgment for possession of the secured property and that part of the plaintiff's indebtedness referable to the home loan. For these reasons my order is: (1)The plaintiff's application for summary judgment is dismissed. 28Mr Martin applies for costs and properly Mr Jammy acknowledges he is in no position to resist the application. (2)I order the plaintiff to pay the defendants costs of and incidental to the application for summary judgment after they have been assessed or agreed. (3)I list the matter for directions before the Common Law Case Management Registrar at 9am on Tuesday, 18 November 2014.