C2C Developments Pty Ltd v Commonwealth Bank of Australia [2012] NSWSC 1162 | Case summary

Judgment 1This is the hearing of the defendant's notice of motion filed 24 August 2012 in which they seek that the statement of claim filed on 20 July 2012 be struck out and at the proceedings be dismissed. 2Before dealing with the history of the matter, it is useful to note that details of the statement of claim and the relief sought, in short, the statement of claim seeks an accounting of the defendant bank's action in respect of the sales of four (4) properties. The pleadings are in these terms: 1.At all relevant times hereto, the Plaintiff was the owner of the undermentioned properties: (a)the land comprised in folio identifier 72/817399 situated at and known as 43 lluka Circuit, Taree in the State of New South Wales; (b)the land comprised in folio identifier 322/807761 situated at and known as 9 Manning River Drive, Taree (also known as Lot 322 Manning Drive, Taree) in the State of New South Wales; and (c)the land comprised in folio identifier 560/1082760 situated at and known as 2 Duroby Street, Harrington (also known as Lot 560 Cnr Lazzarina & Duroby Drive, Harrington Waters) in the State of New South Wales. 2.During the course of 2010, the Plaintiff agreed to give to the Defendant possession of the properties as chargee/mortgagee in possession pursuant to consent orders made by this Honourable Court on 28 September 2010. 3.The Defendant duly took possession of the aforesaid properties and sold them and retained the proceeds. 4.Notwithstanding demand, the Defendant has failed and or refused to account to the Plaintiff for the aforesaid sales.

The claims made by the defendant 19The defendant makes two points in support of its notice of motion, the first being that there is no allegations of fact in the pleading which entitles the plaintiff to a taking of accounts and secondly, that the filing of the proceedings was an abuse of the court's process in that they were commenced improperly to delay, frustrate, or interfere with the winding up proceedings. 20I turn to the first ground. The request for an accounting in respect of the sales of the properties was made on 27 June 2007 before the commencement of the proceedings. No documents were provided by the bank and it indicated that it would respond by dealing with the Financial Ombudsman Service complaint. The result of that was nothing was given to the plaintiff. The plaintiff brings these proceedings because they say that they did not have any information at the time of the commencement of proceedings as to the sales price of the various properties, the costs and expenses of sale, the bank's costs, and other charges levied by the bank in respect of the defaults. 21The defendant bank's response to this is that its duty to account as a mortgagee, having exercised the power of sale, only arises once there is a surplus resulting from the sale. It says in this case there is a substantial amount still due to the bank. On the correctness of this proposition, which is at the heart of the bank's first claim, I was referred to a number of texts and cases dealing with the questions of accounts after a mortgagee exercises its power of sale. A brief summary of available rights are set out in Meagher, Heydon, and Leeming, Equity Doctrines and Remedies, 4th ed at par [25-070]: "One of the most common actions for accounts is the action between mortgagor and mortgagee. This action will not be dealt with in detail here and the reader is referred to the more specialised learning on this subject which will be found in W Clark (ed), Fisher and Lightwood's Law of Mortgage, 11th ed, Butterworths, London, 2002, pp 875-906; C H M Waldock, The Law of Mortgages, 2nd ed, Stevens & Sons, London, 1950, pp 302-7; and E I Sykes and S Walker, The Law of Securities, 5th ed, Law Book Co, Sydney, 1993, p 142. However, a brief summary of the law in this regard is offered. Accounts between a mortgagor and his mortgagee are essential in all redemption and foreclosure actions; in addition, in the case where a mortgagee has exercised his power of sale, the mortgagor may successfully demand accounts if he is suing to recover surplus proceeds of sale. When accounts are ordered, they may comprise the following five items: (a) the principle debt; (b) interest thereon; (c) the costs of sale, redemption or foreclosure; (d) the costs of the mortgagee incurred in relation to the mortgage debt or the mortgage security; and (e) the cost of litigation property undertaken by the mortgagee in reference to the mortgage debt or security." 22In more recent textbook namely On Equity by the authors Peter W. Young AO, Clyde Croft, and Megan Louise Smith, the authors say at p 1131: "Right to an account [16.1320] Both at law and in equity, a plaintiff must first satisfy the court that he or she is entitled to some money from the defendant and that the defendant is bound to render an account. As Drummond J observed in Re Sharpe: The taking of an account is only appropriate once it has been established that the parties involved are in an accounting relationship with each other, that is, only once it has been established that one party is liable to pay to the other anything that is found, on the taking of the account, to be due to that other. In most situations this will be clear. For instance, every agent is under an implied contractual obligation to account if called upon by the principal while every employee is bound to account if called upon by the employer, though at the employer's expense. Partners are also entitled to an account upon dissolution of the partnership without the need for the partner seeking an account to establish that money will be found owing to them. While the partnership is still in existence, the partners' rights ad duties with respect to the partnership accounts are set out in the Partnership Act 1890 (UK) and its local adaptations: see particularly ss 24(9) and 28 of the English Act. In the absence of any relevant statutory provision, account is the only remedy properly available to a mortgagor. The basis upon which the mortgagor is entitled to an accounting is that, once the mortgagee has, from the proceeds of sale, repaid to themselves the amount outstanding under the mortgage, they then hold any surplus upon trust for the mortgagor. Other relationships, even non-fiduciary relationships, such as the relationship between co-owners of land, carry an obligation to account. Joint venturers also have a right to call for an account unless the venture agreement provides to the contrary: Marcolongo v Mattiussi. In the past, accounts between executors and beneficiaries were traditionally dealt with in administration suits: see Chapter 13 (at [13.70], [13.110]-[13.150]). Now they are carried out under statute in the part of the court handling probate. However, the accounting principles are the same as with other accounts: see Northey v Juul." 23In Fisher and Lightwood's Law of Mortgage, 2nd ed, the authors say: "Accounting for proceeds of sale [39.21] On a sale of the mortgaged property by the mortgagee under his power of sale, the mortgagor, and a second and subsequent mortgagee (Adams v Bank of New South Wales [1984] 1 NSWLR 285) - at least if there is a surplus (on the basis of there being a trust of the purchase money, see 20.24) - is entitled to an account of the proceeds: see also Ramsbotham, Coote's Treatise on the Law of Mortgages, 9th ed, Stevens and Sons, Sweet & Maxwell, London, 1927, p 946." 24In Tsatsaulis & Anor v Trigamist Holdings Pty Ltd [2000] NSWSC 900, Master McLaughlin, as he then was, dealt with some of these principles in this area. In paragraphs 45 to 46, His Honour said the following: "In the latter case the basis upon which the mortgagor is entitled to an accounting is that, once the mortgagee has from the proceeds of sale repaid to himself the amount outstanding under the mortgage, he holds any surplus upon trust for the mortgagor (see Adams v Bank of New South Wales [1984] 1 NSWLR 285 at 295 per Hutley JA, where His Honour quoted with approval Charles v Jones (1887) 35 ChD 544 at 549-550 per Kay J). It is not appropriate to order the taking of an account unless it be established that there is, or is likely to be, a surplus after the satisfaction of the mortgage debt (see Batthyany v Walford (1887) 36 ChD 269 at 276 per Cotton LJ, with whom Bowen and Fry LLJ agreed)." 25Since His Honour's decision, the Court of Appeal in Residential Housing Corporation v Esber [2011] NSWCA 25, has referred to Adam's case and the quote referred to by Master McLaughlin. The case concerned a mortgagee who exercised the power of sale, which resulted in a surplus over and above the debt. The mortgagee accounted to a third mortgagee rather than the owner. The dispute centred upon that fact and that obligation to account. At paragraphs 133 to 143, the Court said: "133In Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222 Holland J (at 223) gave a reason why a subsequent mortgagee was not entitled to interfere in a proper exercise by a mortgagee of its power of sale: "As well as being required by s 58(3) to apply surplus proceeds in payment of subsequent mortgages, the first mortgagee is liable by the general law to account to the holder of a subsequent encumbrance of which he has notice: West London Commercial Bank v Reliance Permanent Building Society (1885) 29 Ch D at 954."(Citation supplied) Holland J is saying here that the obligation to account is owed to any subsequent encumbrance holder of whom the selling mortgagee has notice, not just to the next one in line. 134In Banner v Berridge (1881) 18 Ch D 254 Kay J said (at 269) that when there is a surplus upon a sale of a mortgaged personalty: "... there is sufficient fiduciary relation between the mortgagor and mortgagee to make the mortgagee constructively a trustee of the surplus, in case it is shewn there is a surplus. But that seems to me to be a case not of express trust at all but of constructive trust, that is to say, a case of a trust which only arises on proof of the fact that there was a surplus in the hands of the mortgagee after paying himself." 135In re Bell; Jeffery v Sayles [1896] 1 Ch 1 held the person entitled, under a will trust, to receive ₤1,000, had mortgaged it to Jeffery, then assigned his rights subject to that mortgage. The will trustees had notice of the assignment. Jeffery's mortgage secured considerably less that ₤1,000. The court rejected his contention that the will trustees should pay him the whole ₤1,000, and permit him to administer what remained after paying off his own security. 136In Lloyd's Bank NZA Ltd v National Safety Council of Australia Victorian Division (in liquidation) [1993] 2 VR 506, Marks J at 511 and J D Phillips J (with whom Fullagar J agreed) at 514 collect extensive authority dating from Thornbrough v Baker (1676) 1 Ch Cas 283; 22 ER 802 that under the general law, and independent of any statutory provision, a constructive trust is impressed on surplus money received from the sale of mortgaged property, whether the property be land or chattels (though Marks J thought that its characterisation "in modern terms might well be a resulting trust"). That constructive trust was held to exist in favour of the mortgagor. (The case did not involve any mortgagee subsequent in priority to the selling mortgagee.) See also Baypoint Pty Ltd v Baker (1994) 6 BPR 13,687 per Young J, at 13,689, recognising "under the general law, a trust of the surplus in favour of the subsequent encumbrancers and the mortgagor". 137Adams v Bank of New South Wales arose when a registered first mortgagee exercised a power of sale, at a time when there was also a registered second mortgage. Hutley JA, at 295, said that in that situation: "Upon the sale being completed, the mortgagee is bound to furnish to the person or persons entitled to receive those moneys an account, if demanded, of his claims under the mortgage in respect of principal, interest and costs: Coote on Mortgages, 9th ed (1927) at 945, 946. His position after sale, qua a second mortgagee, is clearly stated by Kay J, in Charles v Jones (1887) 35 Ch D 544 at 549, 550: 'His duty is to say, "I have paid my debt: this property which is pledged to me, and in respect of which I now hold this surplus in my hands, is not my property. I desire to get rid of this surplus, and hand it back to the person to whom it belongs." ... I hold, therefore, that the Defendant Jones is liable to pay interest at 4 per cent upon the money remaining in his hands after he had paid himself his debt and costs. That amount is now known, and he must be charged with interest upon it from the date of the completion of the sale, and, as I have said, I cannot give him any costs of the accounts.' ... The second mortgagee has no claim against the fund beyond what he was entitled to up to 2 May 1980 because the balance was held on trust for the mortgagor. Any delay in payment by the first mortgagee attracts interest which the first mortgagee has to pay, but his default cannot penalize the mortgagor." 138Hutley JA, at 299, said that the first mortgagee: "... as a trustee, was bound to produce accounts to beneficiaries. It has been held that similar words to those appearing in the Real Property Act 1900, s 58, in the Real Property Act 1862 of Tasmania did not alter the mortgagee's duties as trustee from those which would have obtained in equity: Re Morrison; Bennell v Smith [1962] Tas SR 337. Asquith J in Weld-Blundell v Synott [1940] 2 KB 107 at 115 said: 'That duty is to hold the balance of the proceeds after satisfying his own debt in trust for those encumbrancers, but I do not think there is on him an additional duty comparable to that of the army paymasters in the two cases I have cited, at his peril to inform the second mortgagee correctly of the true state of the account.' This was a case of a first mortgagee who had had exercised a power of sale accounting to a second mortgagee for a sum in excess of what the second mortgagee was in fact entitled to and his Lordship's remarks were in answer to a defence of estoppel. They cannot, in my opinion, be used to exempt the first mortgagee from the duty to account in his capacity as a trustee, a duty established as early as 1714: Wilson v Tooker 5 Bro PC 193; 2 ER 622." (Citations supplied) That passage is referred to with apparent approval in Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 at footnote 51, though Bofinger , at 291, left undecided whether the relationship was a trust relationship rather than a fiduciary relationship. Similarly in Adams v Bank of New South Wales Moffitt P, at 289, specifically left open whether s 58(3) created a trust. 139Bofinger now puts beyond doubt that a mortgagee holding surplus proceeds owes an obligation to account to all subsequent interest-holders. In Bofinger Gummow J, Hayne J, Heydon J, Kiefel J and Bell J said, at [35]: "Adams v Bank of New South Wales [1984] 1 NSWLR 285 is authority that s 58 is to be read in a manner consistent with the equitable duty of the first mortgagee to account to puisne mortgagees as a trustee for any surplus. The position in equity was described as follows by Kay J in Charles v Jones (1887) 35 Ch D 544 at 549-550 as follows: 'I have never heard it doubted that where a mortgagee sells, and has a balance in his hands, he is a trustee of that balance for the persons beneficially interested. He takes his mortgage as a security for his debt, but, so soon as he has paid himself what is due, he has no right to be in possession of the estate, or of the balance of the purchase-money. He then holds them, to say the least, for the benefit of somebody else, of a second mortgagee, if there be one, or, if not, of the mortgagor. What, then, is he to do? Surely he has a duty cast upon him. His duty is to say, "/ have paid my debt: this property which is pledged to me, and in respect of which I now hold this surplus in my hands, is not my property. I desire to get rid of this surplus, and hand it back to the person to whom it belongs" ... The duty of this mortgagee was at least to set this money apart in such a way as to be fruitful for the benefit of the persons beneficially entitled to it. To that extent and in that manner he was, according to my understanding of the law, in a fiduciary relation to the persons entitled to the money. It was so held in the case of Quarrell v Beckford (1816) 1 Madd 269, and so far as I know has always been so held, and although I quite agree that the Court is very reluctant to treat a mortgagee as being a trustee in any sense while any money is due to him, still when he has paid himself, and has money remaining in his hands which is no longer his property, how can he be treated as other than a trustee of such money? (Emphasis added.)" (Some citations supplied) 140Their Honours recognised at [47]: "... that the term 'constructive trust' may be used not with respect to the creation or recognition of a proprietary interest but to identify the imposition of a personal liability to account upon a defaulting fiduciary." 141At [48] their Honours quoted with approval the remarks of Crennan J in Jones v Southall & Bourke Pty Ltd (2004) 3 ABC (NS) 1 at 17, that: "... the term 'constructive trust' covers both trusts arising by operation of law and remedial trusts. Furthermore, a constructive trust may give rise to either an equitable proprietary remedy based on tracing or, whether based on or independently of tracing, an equitable personal remedy to redress unconscionable conduct. The equitable personal remedies include equitable lien or charge or a liability to account." 142The obligation of the mortgagee to account was held by their Honours at [49] to be "fiduciary in character". Their Honours concluded at [50]: "In respect of its misapplication of the surplus moneys and securities and the consequent loss to the appellants the first mortgagee is to be treated as a constructive trustee to the extent that it must account to the appellants as a defaulting fiduciary. It is unnecessary to seek to determine upon the agreed facts whether the first mortgagee was a trustee in a fuller sense which afforded the appellants a beneficial interest in the assets in question." 143It is not necessary for the purpose of the present appeal to decide the question that their Honours left undecided in Bofinger, of whether a mortgagee holding surplus proceeds of sale is a fully-fledged trustee. The authorities that I have set out make clear that a mortgagee who holds surplus proceeds of sale is under a fiduciary obligation to all subsequent interest holders to account to them for the manner in which the surplus is disposed of, and not to prejudice their interest in the surplus by the manner in which he disposes of it." 26The court went on to discuss the principle, upon which that fiduciary obligation arose. At par144, it said: "144Though the existence of this fiduciary obligation on a mortgagee is clearly established by authority, its basis in principle is not hard to find. The selling mortgagee who holds a surplus, or a subsequent mortgagee to whom the selling mortgagee hands more of the proceeds of sale than that subsequent mortgagee is entitled to, are each in the position of holding property that is not their own. That position of control of the property gives rise to a fiduciary obligation not to harm the interest of the person beneficially entitled to the property. It is analogous to the fiduciary obligation that a bailee has to the owner of the goods bailed (Re Hallet's Estate (1880) 13 Ch D 696 at 708-709; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 101 per Mason J; Brambles Security Services Ltd v Bi-Lo Pty Ltd [1992] Aust Tort Reports 81-161 per Clarke JA, with whom Kirby P agreed). It is the sort of obligation that arises from holding property one knows is not one's own. Thus, it is capable of applying to any subsequent mortgagee into whose hands the surplus proceeds come." 27This finding of the basis of the principle clearly shows that the principle is dependant upon there being a surplus. If there is no surplus then there is no obligation to account. 28Any claim thus for an account in these circumstances, where a mortgagee has sold a property must establish or plead as a material fact that there is a surplus owing. That has not been pleaded. In my view it is a necessary material fact and the claim is liable to be struck out. Given that the evidence discloses that there is no surplus the proceedings being limited to this form of account should be dismissed. 29Much was made in submission of the failure of the defendant to respond to this one request a few days before the proceedings were commenced to give details of sale proceeds in costs and expenses. It was then suggested that the information was impossible for the plaintiff to ascertain otherwise and therefore there must be a duty to respond and advise the details of what had transpired in relation to the sale. 30It did not seem to occur to the plaintiffs that at least some of the information that they needed to see to determine whether there was a surplus may have been publicly available. As the properties were sold the transfers were registered and these would be available for inspection. 31The Register of land titles is a public record and access to the Register is available as prescribed by s 96B of the Real Property Act 1900. Section 115 of the Real Property Act permits the provision of certified copies of registered instruments to be used as evidence in a proceeding: (1) The Registrar-General, upon payment of the prescribed fee, shall furnish to any person applying for the same a certified copy of any registered instrument affecting land under the provisions of this Act. (2) Every such certified copy signed by the Registrar-General and sealed with the Registrar-General's seal shall be received in evidence in any Court or before any person having, by law or by consent of parties, authority to receive evidence as prima facie proof of all the matters contained or recited in or recorded on the original instrument. 32Copies of transfers are routinely tendered in court to prove the purchase price of sales. I would also assume that the bank statements would be available to the plaintiffs, which would show the amounts owing to the bank although not all costs and expenses. Estimates can be made of such expenses like agent's commissions, solicitors' costs, and legal costs not known to the plaintiffs. 33The proper way of proceeding would have been to commence proceedings for preliminary discovery pursuant to the UCPR 5.3. That application would have entitled them to inspection of records, which they did not have such as cost charge by the bank to see whether there was a surplus and whether they were thus entitled to bring the action. 34I turn to the question of whether the proceedings were an abuse of process. I have already set out the basis of the abuse of process. It is clear that if the proceedings were brought for the predominate purpose of achieving same advantage for which they were not designed there is an abuse of process. See Williams v Spautz [1992] HCA 34; [1992] 174 CLR 509. 35This case it is said that the improper purpose was: "(a) to interfere with the C2C Investments winding up proceedings by providing some alleged basis for a EFLS complaint (b) C2C Investments opposition to the substitution application and/or (c) C2C Investments opposition to the extension application." 36It is clear that the issue of the statement of claim and the complaints made about the request and non-supply of the particulars were used in the three matters mentioned above. There is little evidence which would suggest that the purpose of bringing these proceedings was simply to delay those proceedings. 37There has been no cross-examination of Mr Shannon, who gave evidence in the proceeding, to suggest that this was the case and there is no suggestion that the plaintiff did not believe that its claim for relief was not genuine. If anything, they may have been brought because of ignorance of the law in this area. In these circumstances, it seems to me that the abuse of process has not been demonstrated and accordingly, I would not have set aside the matter on this ground. 38I also note that the plaintiff has now brought further proceedings in the Common Law division, which are probably the type of proceedings, which should have initially been brought in the present case after an application for preliminary discovery. 39I order that the proceedings be dismissed and that the plaintiff pay the defendant's costs of the proceedings. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 October 2012

C2C Developments Pty Ltd v Commonwealth Bank of Australia

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