Bofinger v Rekley Pty Ltd

LEGISLATION CITED : Law Reform (Miscellaneous Provisions) Act 1965, s 3

Aldrich v Cooper (1803) 8 Ves 382; 32 ER 402 Allen v De Lisle (1856) 3 Jur NS 928 Austin v Royal (Giles CJ Comm D, 14 May 1998, BC 9801770) Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR 335 Aylwin v Witty (1861) 30 LJ Ch 860 Dawson v Bank of Whitehaven (1877) 4 Ch D 639 CASES CITED : Drew v Lockett (1863) 32 Beav 499; 55 ER 196 Highland v Exception Holdings Pty Ltd (2006) 60 ACSR 223 Lloyd's Bank NZA Ltd v National Safety Council of Australia Victorian Division (1993) 115 ALR 93 McColl's Wholesale Pty Ltd v State Bank of New South Wales [1984] 3 NSWLR 365 Muschinski v Dodds (1985) 160 CLR 583 Quarrell v Beckford (1816) 1 Madd 269; 56 ER 100 Silk v Eyre (1875) 9 IR Eq 393

Ronald John Bofinger (P1) Sandra ANne Bofinger (P2) Rekley Pty Ltd (D1) Kingsway Group Limited (formerly Willis & Bowring Mortgage Investments Limited) (D2) PARTIES : David Joseph Levi and John Maxwell Morgan (Joint Liquidators of B & B Holdings Pty Limited (in liq)) (D3) John Edward Skehan (D4) Ron Tosolini (D5) Adrian Mattiussi (D6) Lou Polito (D7) Peter Hatheier (D8)

G McVay (P) C Harris SC (D1 & 4) COUNSEL : D R Sibtain (D2 & 8) N Craven (S) (Submitting Appearance for D3) N Perram SC and L Grindley (D5, 6 & 7)

Warren McKeon Dickson (P) Bransgroves Lawyers (D1 & 4) SOLICITORS : Watson Mangioni Lawyers Pty Ltd (D2 & 8) McMahons National Lawyers (Submitting Appearance for D3) Middletons (D5, 6 & 7)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2451/06 - BOFINGER v REKLEY PTY LTD JUDGMENT 1 HIS HONOUR: I am trying a separate question that arises in these proceedings. The actual question as stated by Associate Justice Macready on 16 November 2006 is: "In the circumstances of the case, were the sums of $268,307.33 and $432,712.53 and the securities over Lots 1 and 14 SP75069 held by the second defendant in trust for the plaintiffs as at 8 February 2006?" 2 I heard argument on the separate question on 14 September 2007. On that occasion, Mr G McVay appeared for the plaintiffs, Mr C Harris SC appeared for the first and fourth defendants, Mr D R Sibtain appeared for the second and eighth defendants, Mr N Perram SC and Mr L Grindley appeared for the fifth to seventh defendants and Ms Craven, solicitor, appeared for the third defendant, the liquidator; she submitted to any order the court might make and was excused further attendance. 3 Probably the best way of introducing the topic is to set out the dramatis personae and then set out what Mr Harris summarised in his submissions of 10 September 2007. 4 The plaintiffs are Ronald John Bofinger who was at all material times a director of B & B Holdings Pty Ltd, and his wife, Sandra Anne Bofinger. I will refer to the plaintiffs as "the Bofingers" and the company as "B & B". 5 The first defendant, Rekley Pty Ltd, is the second mortgagee over property at Enmore which is referred to in agreed facts as "the Land". The fourth defendant is the third mortgagee over that land. 6 The second defendant was the former first mortgagee of the land and the eighth defendant was an officer of that company. The third defendant is the company, B & B in liquidation. The fifth to seventh defendants are solicitors who are said to have an accessorial liability. I will refer to them as "the Solicitors". 7 Mr Harris nicely summarises the issues involved on this question, and I will set out what he says, not as a direct quote as I have made some alterations to his terminology, but essentially, what I set out in [8]-[11] is what he wrote. 8 The separate question as framed involves the following two matters:

(1) The Bofingers guaranteed debts of B & B to the three mortgagees over the land. They gave a mortgage to the third mortgagee over their house and investment unit to secure those guarantees. They subsequently sold those properties and all of those proceeds were paid to the first mortgagee in reduction of the debt secured by the first mortgage. In fact, the amount paid exceeded the amount required to pay out that debt and the first mortgagee paid the excess to the second mortgagee which used the money to reduce the debt owed under that mortgage. No further moneys were ever received by the second mortgagee and no moneys were ever received by the third mortgagee. 9 The Bofingers now assert that their payment to the first mortgagee of B & B's debts gave them a right of subrogation which entitled them to the payment of the excess remaining in the first mortgagee's hands after it said it had been repaid in priority to the payment of the debt secured by the second and third mortgages. 10 Whether a right of subrogation arose, and whether it "trumped" the rights of the unpaid second and third mortgages, is at the heart of the separate question because the "trust" referred to in the separate question depends on the Bofingers having a right of subrogation which gives them priority over pre-existing secured creditors. 11 (2) The Bofingers assert that the documentation between them and the second mortgagee was not effective to give the second mortgagee a second mortgage over their house and investment unit as security for their guarantee of the B & B debt. This matter also falls for determination as part of the separate question, although a determination in the Bofingers' favour will not obviate a decision on the priority issue referred to above since the third mortgagee will, in that eventuality, virtually become the second mortgagee. 12 In view of Mr Harris' statement of issues, I do not need to set out the full text of the statement of agreed facts. For precision, however, I need to set out paras 10 and following. To make these meaningful, I should state that paras 8 and 9 of the agreed facts identify the personal assets of the plaintiffs as the Willarong Road property and the Bulwarra Street property and that the proceeds of the sale of these which were paid to the first mortgagee were $1,519,234.40. 13 Paras 10 and following of the statement of agreed facts read as follows: "10. The sum of $1,519.234.40 referred to in the preceding paragraph hereof, is made up as follows: (a) Proceeds of sale of the Plaintiffs' Willarong Road Property on 21 July 2005 - $868,723.36; (b) Balance of deposit arising from the sale of the Willarong Road Property on 25 July 2005 - $25,320.78; (c) Proceeds of sale of the Bulwarra Road Property on 5 October 2005 - $625,190.26. 11. The First Mortgagee knew of the sales in paragraph 9 hereof and the payments totalling $1,519,234.40 in reduction of the Company's debt to the First Mortgagee. 12. Pursuant to its mortgage, and between about November 2005 and February 2006, the First Mortgagee exercised its power of sale over certain properties on the Land, including Lot 13 and Lot 5, and applied the proceeds of sale of those properties (save for Lot 5) in reduction of the amount then owing to the First Mortgagee by the Company. 12A. On or about 2 February 2006, the sale of Lot 13 (by the First Mortgagee exercising its power of sale) was completed and the proceeds of sale were paid to the First Mortgagee. The full amount owing to the First Mortgagee, and secured by mortgage number 9497834T, as varied, was paid to the First Mortgagee. Only part of the proceeds of sale of Lot 13 was required to pay out the moneys borrowed from the First Mortgagee and referred to in paragraph 5(a) above. 12B. On or about 7 February 2006, the First Mortgagee paid to the Second Mortgagee's solicitors an amount of $268,307.33 from the proceeds of sale of Lot 13, being the balance of the proceeds of sale of Lot 13 after payment out of the moneys borrowed from the First Mortgagee and referred to in paragraph 5(a) above. 13. On or about 8 February 2006, the First Mortgagee provided to the Second Mortgagee the certificates of title for 2 townhouses on the Land (Folio Identifiers 1/SP75069 and 14/SP75069) which were then unsold, together with a discharge of mortgage number 9497834T, as varied, then held by the First Mortgagee, over the land in the said folio identifiers. 14. The discharge of the First Mortgage over the said folio identifiers in paragraph 13 was registered on or about 8 February 2006. 15. As at 8 February 2006, loans made by the Second Mortgagee and Third Mortgagee to the Company were outstanding in sums of $1,935,671.23 and $464,267.12 respectively. 16. On or about 21 February 2006, the First Mortgagee paid to the Second Mortgagee's solicitors an amount of $432,712.53 representing the whole proceeds of sale of Lot 5, which was sold by the First Mortgagee exercising its power of sale." 14 Mr McVay, for the plaintiffs, first referred to the proposition which is expressed in Rowlatt on Principal and Surety, 5th ed [7-34] which reads as follows: "The surety's right to the securities of the creditor is prior to that of later encumbrancers, who are subject to the creditor's mortgage. This is on the basis that the surety stands in the place of the creditor he pays off and because the subsequent security is not lessened by the coming in. Thus it does not seem material whether a subsequent encumbrancer had notice of the suretyship." 15 The footnotes to this passage refer to Drew v Lockett (1863) 32 Beav 499; 55 ER 196; Silk v Eyre (1875) 9 IR Eq 393; Aylwin v Witty (1861) 30 LJ Ch 860 and Dawson v Bank of Whitehaven (1877) 4 Ch D 639. 16 In Drew v Lockett, Sir John Romilly MR said at 505 (198): "… a surety who pays off the debt for which he became surety must be entitled to all the equities which the creditor, whose debts he paid off, could have enforced, not merely against the principal debtor, but also as against all persons claiming under him. It is to be observed that the second and any subsequent mortgagee is in no respect prejudiced by the enforcement of this equity; when he advances his money he knows perfectly well that there is a prior charge on the property …". 17 Similar statements appear in other leading books; see eg O'Donovan & Phillips, The Modern Contract of Guarantee, 4th loose leaf edition [12.3150]. 18 Mr McVay says that it follows from this principle that the plaintiffs, as at 3 February 2006, had an entitlement to the benefit of the first mortgage enforceable in equity due to their payment of $1,519,234.40 off the principal debt. The first mortgagee was then obliged to deal with its mortgage and the certificates of title to the unsold units, Lots 1` and 14, by delivering them to the plaintiffs to allow the plaintiffs to enforce their rights. Instead, the first mortgagee transferred those securities to the second mortgagee and the latter holds them on trust for the plaintiffs. 19 The Bofingers rely on subrogation as an equitable doctrine. In the alternative, they rely on statutory rights in the nature of subrogation recognised under s 3 of the Law Reform (Miscellaneous Provisions) Act 1965. However, this statute really does not advance the rights over and above as they existed in equity in the present type of case. 20 Mr Harris for the second and third mortgagees, says that in this case there was no right of subrogation, but even if there was, the Bofingers had contracted out of it. 21 Mr Harris also submits that whilst it is true that the Bofingers' mortgage over the Willarong Road property and the Bulwarra Street property in favour of the second mortgagee is not expressed as a mortgage to secure their obligations under the guarantee of B & B's debts to the second mortgagee, such a term ought to be implied into the mortgage. 22 Mr Sibtain adopts the argument put up by Mr Harris. Mr Perram joins in Mr Harris' submission that there has been a waiver of any right of subrogation, but also says that even if this were wrong, no trust arises, at best, the right created is a mere charge. 23 From what I have just said, four issues arise which I will deal with separately and then, as a fifth issue, pull the thoughts together and give my decision on the separate question. Accordingly, I will address the following matters:

1. The construction of the mortgage from the Bofingers to the second defendant over Willarong Road and Bulwarra Street.

3. Whether the benefit of subrogation has been waived.

5. The result of the case. 24 1. I will, for ease of reference, call the mortgage given on 14 March 2003 from the Bofingers to the second mortgagee as "the Rekley mortgage". This is to distinguish it from the second mortgage, even though the mortgagee in each case is Rekley Pty Ltd. 25 I have set out Mr Harris' submission in [21] above. 26 Mr Harris says:

(i) the Rekley mortgage, the Bofingers' guarantee of B & B's obligations to the second mortgagee and the second mortgage were all executed contemporaneously;

(ii) the principal amount secured by the Rekley mortgage is the same amount as the loan from Rekley to B & B;

(iii) the Rekley mortgage is stamped as a collateral mortgage to the second mortgage;

(iv) at the time of the execution of these various documents the Bofingers also executed a statutory declaration confirming that they were executing their mortgage as "third party mortgagor, surety mortgagor, (and/or) indemnifier for 'B & B' ";

(v) when the second mortgage was varied to increase the principal the same variation was made to the Rekley mortgage;

(vi) at the same time as the mortgages were varied, the Bofingers signed an acknowledgement noting that the amount of B & B's debts which had been guaranteed by them had increased. 27 I consider that these indications show that Mr Harris' submission is established. Indeed, Mr McVay did not argue strenuously against it. 28 2. All parties have acknowledged that the right of subrogation is an equitable right. If authority is needed for it, more than one member of counsel cited to me the words of Powell J in McColl's Wholesale Pty Ltd v State Bank of New South Wales [1984] 3 NSWLR 365, 378. Although English authorities have recently flirted with the idea of subrogation having something to do with restitution and unjust enrichment, the law in New South Wales remains that it is based on unconscionable conduct; see eg Highland v Exception Holdings Pty Ltd (2006) 60 ACSR 223. 29 Mr Harris says that at the time of the sales by the Bofingers of the Willarong Road and Bulwarra Street properties, there were existing first mortgages over each of those properties and a first mortgage over each of the B & B properties in favour of the first mortgagee, a second mortgage over each of those properties in favour of the second mortgagee, and a third mortgage over each of those properties in favour of the third mortgagee. The mortgages provided by the Bofingers over the Willarong Road and Bulwarra Street properties were to secure the guarantees they provided for the B & B debts. 30 He then puts that on this basis, one would have expected that each of the mortgagees would receive payment in full of their debt subject only to the prior payment of the debts of the mortgagees with priority before the Bofingers would be entitled to any money from the proceeds of the sale of any of the properties. However, unless and until a mortgagee went into possession of any of these properties, the Bofingers would be free to sell them or any one or more of them in whatever sequence and at whatever time they thought fit, so long as the proceeds of sale were used to discharge the mortgages. 31 He then notes that had B & B sold all of its properties first, leaving the Bofingers' personal properties to be sold last, then there is no doubt that the second mortgagee would have been entitled to the proceeds of the sale of the Bofingers' personal properties. The order in which the properties were sold should not have an effect on this. 32 Mr Harris' bottom line is that the second mortgagee received no unconscionable advantage from the receipt of the balance of the proceeds of sale from the Bofingers' personal properties. Indeed, Mr Harris submits, that to recognise a right of subrogation and require the second mortgagee to account to the Bofingers for those funds would give the Bofingers an unconscionable advantage over the second mortgagee. 33 He further submits that the secured right to the proceeds of sale of the Bofingers' properties to which the second mortgagee was entitled under the Rekley mortgage would effectively be converted into an unsecured right to recover those moneys under the personal covenants in the mortgage merely because of the arbitrary decision of the Bofingers to sell the properties before all the B & B properties had been sold. 34 Mr McVay's submissions proceed along the lines that whilst subrogation is a principle of equity, by the beginning of the 21st century, the circumstances in which equity will judge a matter to be unconscionable had been standardised and that, at least apart from the extraordinary case, where a surety has partly paid off a first mortgage, then the principle stated by Rowlatt should be applied. Note that this is the sort of approach taken by Snell's Equity, 31st ed [43-20]. 35 I believe the answer is somewhere between the two submissions. That is, that whether the court applies subrogation does depend on whether unconscionability is involved, but the court will normally assume that certain situations will give rise to the equity unless the circumstances otherwise dictate. When considering whether the circumstances should otherwise dictate, one must bear in mind the warning of Deane J in Muschinski v Dodds (1985) 160 CLR 583, 615 that equitable remedies must not be doled out on the basis of indulging idiosyncratic notions of fairness and justice of individual judges. 36 Although the law of subrogation has moved on since 1803, it is useful to note the remarks of one of the great fathers of equity, Lord Eldon, in Aldrich v Cooper (1803) 8 Ves 382, 389; 32 ER 402, 405, where his Lordship said: "So, in the case of the surety, it is not by force of the contract; but that equity, upon which it is considered against conscience, that the holder of the securities should use them to the prejudice of the surety; and therefore there is nothing hard in the act of the Court, placing the surety exactly in the situation of the creditor." 37 These words were applied by Gibbs ACJ in Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR 335, 348. Again, the Judge emphasised the question of unconscionability. 38 In my view, basically for the reasons given by Mr Harris, there is no unconscionability involved in the respective parties being bound by their position at law and, accordingly, there is no room for applying the equitable doctrine of subrogation as it affects sureties. 39 3. Even if I am wrong in the answer that I have given to 2, I am also of the view that in the instant case any right to subrogation has been waived. 40 The authorities are clear, as was mentioned in the submissions of all counsel, that a surety's right of subrogation may be waived by him expressly in the contract of guarantee or by implication from his conduct. In saying this I have slightly paraphrased Meagher, Gummow and Lehane, Equity Doctrines and Remedies 4th ed [9-230]. 41 In the Rekley mortgage, clauses 6.4 and 7.1 read as follows: "6.4 Waiver by Guarantor Each Guarantor waives the Guarantor's rights as surety whether legal, equitable, statutory or otherwise which may be inconsistent with the provisions of this deed or in any way restrict the Lender's rights, remedies or recourse. 7.1 Guarantors Not To Claim Benefits Or Enforced Rights Until the Guaranteed Money is paid in full and all obligations of the Borrower under the Mortgage are fully and finally discharged or released, a Guarantor must not in any way: (1) claim the benefit or seek the transfer (in whole or in part) of any other guarantee, indemnity or security held or taken by the Lender; (2) make a claim or enforce a right against any other Obligated Person or against the estate or any of the property of any of them (except for the benefit of the Lender); or (3) raise or claim any set-off, counterclaim or defence available to any other Obligated Person in reduction of the Guarantor's liability under this deed." 42 Clause 10.14(1) of the mortgage given by the Bofingers to secure their guarantee to the third mortgagee is in not dissimilar terms. 43 In my view, the clauses I have set out clearly show that the sureties are not to claim their rights of subrogation to prejudice the secured rights of the second and third mortgagees in the mortgages from B & B which the Bofingers have guaranteed. 44 Accordingly, if there was any right of subrogation, it has been given away by contract. 45 4. It is thus academic to consider whether there was any right in the plaintiffs which could be enforced by proceedings in equity, and whether that right was a trust rather than some lesser right such as a charge. 46 Mr Perram has taken me through a series of cases, in some of which the word "trust" is used in connection with what right the surety has in this sort of situation (see Allen v De Lisle (1856) 3 Jur NS 928), but the predominant view is that there is only a charge and that it is not appropriate to impose a trust. 47 The most detailed consideration of the matter, even though it was obiter, was by Giles CJ Comm D in Austin v Royal (14 May 1998, BC 9801770) at pp 61-62. Austin v Royal is partly reported in [1998] NSW ConvR 55-863, but not the relevant passage. The case went to the Court of Appeal, where it is reported as Austin v Royal (1999) 47 NSWLR 27, but not on this point. 48 It does appear with some clarity that where a mortgagee sells and there is a surplus, that the mortgagee will hold the surplus on trust for the mortgagor; see Quarrell v Beckford (1816) 1 Madd 269, 279; 56 ER 100, 103 and Lloyd's Bank NZA Ltd v National Safety Council of Australia Victorian Division (1993) 115 ALR 93, 99. However, that is principally because traditional equity considered that the mortgagee was a trustee of the legal estate which was vested in him and so it followed that when the legal estate was sold, he was also a trustee of the proceeds. The same does not translate across into the situation where the claimant's right in equity is under the principles of subrogation. 49 The reasons given by Giles CJ Comm D in Austin's case were that it would be quite unclear what obligations would be on the trustee if there were such a trust and there are particular commercial difficulties in subjecting the creditor to the responsibilities of a trustee in the state of knowledge that he may have. 50 It may be that there is a more valid reason than in the ordinary subrogation case to declare a constructive trust in the instant case because, technically, there was a surplus in the hands of the first mortgagee at the time when the last of the town houses was sold that was necessary to discharge the first mortgage. However, even then I would be inclined to give relief by way of a charge, if any relief was to be given in view of what Giles CJ Comm D said. However, as I say, the point does not really arise in the light of my answers to the other questions. 51 5. It follows from what I have said that the answer to the separate question is "No". The plaintiffs must pay the costs of the argument of the separate question. However, there may be an argument as to whether more than one set of costs should be allowed for the defendants. The costs of the third defendant will obviously have to be allowed against the plaintiffs on a submitting basis. 52 Accordingly, I need to put the matter into my list for mention on a date suitable to counsel and unless I am advised to the contrary I will do that at 9.30 am on the first Thursday after I have delivered these reasons. On that occasion, I should also be either given some short minutes as to the ongoing conduct of the proceedings, or alternatively, the parties should suggest a date when the matter should be put in the Registrar's list for direction.

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