Charan v Commonwealth Bank of Australia & Ors

Judgment 1HIS HONOUR: These are two applications to strike out the plaintiff's statement of claim and for the proceedings to be summarily dismissed pursuant to r 13.4 of the Uniform Civil Procedure Rules 2005 (NSW) on the basis that the plaintiff does not have an arguable cause of action against the defendants. Counsel for the plaintiff has not opposed an order for the striking out of the statement of claim provided that there is liberty to replead. 2The real question is whether or not the plaintiff's allegations, both as they are to be gleaned from the statement of claim and as appear from the plaintiff's affidavit sworn in opposition to the applications for summary dismissal, disclose arguable claims against either or both sets of defendants. On such a summary application the Court is required to proceed cautiously. It is only in a very clear case that the drastic step should be taken of summarily dismissing a proceeding. If it appears that there is an arguable cause of action then the appropriate course would be to allow any such cause of action to be pleaded. 3At all relevant times the plaintiff, Mr Prabhakar Charan, was registered as proprietor of a property at Yengo Court, Holsworthy. Initially, his wife, Mrs Usha Charan, was registered as a joint tenant with him in respect of that property. 4That property was sold by the first defendant (the Bank) in the exercise of its power of sale as a registered mortgagee on 26 October 2013. Following completion of the sale of the property by the Bank, Mr Charan ceased to be registered proprietor of the Holsworthy property. 5Mrs Charan and the plaintiff's son, Prashant Charan (whom in these reasons I will call by his Christian name, intending no disrespect but to distinguish him from Mr Charan), were the registered proprietors of a property in Flame Tree Street, Casula as tenants in common in shares as to seven-twentieths for Prashant and thirteen-twentieths for Mrs Charan. 6On or about 1 December 2005 the Bank issued a letter of offer to Mr and Mrs Charan and to Prashant for a loan of $700,150. That offer of loan was accepted. On 23 January 2006 Mrs Charan and Prashant executed a mortgage in favour of the Bank over the Casula land and on the same day she and Mr Charan executed a mortgage over the Holsworthy land. The mortgages were given to secure the loan. 7Prashant became bankrupt on 16 December 2006. The second defendant, Mr Gleeson, was appointed as his trustee in bankruptcy. 8Mr Charan deposes: "5 My wife Usha and my son Prashant who were on the titles of the lands and on the mortgage had not contributed any money towards the purchase and developments of the two properties and did not contribute any money towards the service of mortgage and fixed outgoings." 9On or about 24 August 2007 Mr Charan and Prashant signed a contract to borrow jointly a further $70,400 from the bank. The agreement provided that that loan was to be secured by a mortgage over the Holsworthy property and a guarantee from Mrs Charan. Mrs Charan provided that guarantee on 19 September 2007. 10A sequestration order was made against the estate of Mrs Charan on 6 June 2012. The third defendants, Messrs Pascoe and Scott, were appointed as the trustees in bankruptcy. 11By September 2012 the borrowers defaulted on the loan with the Bank. On 14 February 2013 the Bank obtained judgment for possession in respect of both the Holsworthy and the Casula lands. The Bank was put into possession of both properties by the sheriff on 30 April 2013. In the exercise of its powers as mortgagee the Bank sold the Casula property by contracts exchanged on 8 July 2013. The property was sold for $545,000. It sold the Holsworthy property on 26 October 2013 for $526,000. Settlement was effected on 11 December 2013. 12On 13 June 2014 Gadens Lawyers, who act for the Bank, advised Mrs Charan and Prashant that following the sale of the properties approximately $175,000 was held as the balance of the sale proceeds. Gadens noted: "We understand that there has been no resolution between the parties claiming an interest in the balance of funds regarding how they should be distributed. In the absence of our client receiving a joint written direction from all interested parties, our client has instructed us to pay the surplus funds into court." 13Gadens also noted that there had been what they called unspecified allegations against the Bank regarding its conduct in exercising its powers under the mortgage. They said that those allegations were denied and that if they were maintained the Bank intended to exercise its rights under the mortgage to withhold an amount by way of a contingency in respect of any potential balance. They advised that the Bank was presently unable to quantify precisely the contingent liability but in light of the issues raised estimated its contingent costs liability at $50,000. Gadens advised that if an appropriate release were given to the Bank it would pay the balance into court without withholding an amount against contingencies. I understand that no such release has been provided. Nor has the Bank at this stage paid funds into Court. Presumably, the extent of any withholding against contingencies will depend upon the Bank's assessment of its likely exposure to the incurring of costs in defending proceedings, which in turn will be affected by the outcome of the present application. 14Mr Charan had written to Gadens on 26 March 2014 asking for a full accounting in respect of all income and expenses relating to the sale of the two properties. No such accounting has been provided. I was advised by Mr Lewin, who appears for the Bank, that it was proposed to provide to the plaintiff today a settlement statement in respect of the two properties and, I assume, the application of the proceeds of sale. 15Mr Charan filed his statement of claim on 3 July 2014. It is not an easy document to understand. His allegations can be better understood when reference is made both to the statement of claim and to Mr Charan's affidavit relied on in opposition to the applications for summary dismissal. 16I have regard to both documents and to what has been said by counsel on his behalf in seeking to elicit what, if any, arguable cause of action he might have against any of the defendants. Some things, however, are clear and they are what is not currently alleged in the statement of claim. 17Mr Charan has not alleged that the Bank breached any duty owed to him in the manner in which it exercised its power of sale in respect of either property. He does not allege that the Bank failed to use reasonable care to sell the properties at their market value, or at the best price reasonably obtainable for them. 18Counsel for Mr Charan foreshadowed the possibility of a claim for breach of s 420A of the Corporations Act 2001 (Cth) in relation to the manner in which the power of sale was exercised, but no such claim has yet been made in the pleadings. Nor is it raised in Mr Charan's affidavit. A different allegation is made to the effect that the Bank should have sold the properties at a lower price, but at a price sufficient to discharge the mortgage, by effecting a sale to the plaintiff's sons. I deal with that claim below. 19Secondly, the plaintiff pleads in para 24 of the statement of claim that the Casula land was sold on or about 8 July 2014 and the Holsworthy land was sold on or about 27 December 2013 (the latter being almost 8 months after its having taken possession). He pleads that. "To date no receipt of the sale has been given to the mortgagee despite requesting for it and the surplus was not deposited into court." 20The relief claimed in the present statement of claim does not include a claim for an account from the Bank in respect of the surplus proceeds, nor a claim for equitable damages in respect of the conduct of the Bank as trustee of the surplus proceeds. That is to say, there is no present claim for an order that the Bank be required to pay surplus moneys into Court, or that any expense that might have been deducted by the Bank from the moneys received should be falsified or that the Bank should be surcharged with any amount that the plaintiff might contend should have been received by the Bank as mortgagee. 21Thirdly, although the plaintiff pleads (at (5)) that the loan was serviced by the plaintiff alone with his money and rental income, and that the other two parties to the loan were only on the mortgages because their names were on the titles to the lands but had no financial interest in the properties, he does not allege that Mrs Charan and Prashant held their interests in the Casula land on a resulting trust for him, nor that Mrs Charan held her interest as joint tenant in the Holsworthy land on a resulting trust for him. 22The trustees in bankruptcy, that is the second and third defendants, are now registered as proprietors of the interests for which Mrs Charan and Prashant were formerly registered. The plaintiff makes various complaints about that, but he does not allege that he is the beneficial owner of the interests of which the trustees in bankruptcy are the registered proprietors. 23The plaintiff does not claim to be beneficially entitled to any share of the proceeds of sale which after payment of the mortgage debt would be remitted to the second and third defendants. 24Any such claim to a beneficial interest in the bankrupt's property that is now vested in the second and third defendants would be within the exclusive jurisdiction of bankruptcy in the Federal Court or the Federal Circuit Court (Bankruptcy Act 1966 (Cth), s 27(1), Green v Schneller [2001] NSWSC 897 at [22] and National Australia Bank v Hunter [2013] NSWSC 71 at [30]-[35]). 25The relief that is claimed is as follows: "1 Reversion of the whole of the land in folio identifier 6419/881715 located at [x] Yengo Court, Holsworthy in the state of New South Wales ('Holsworthy land') to the plaintiff, original registered proprietor prior to forced mortgagee sale. 2 If the Court is of the view that reversion could not be granted then compensation in the sum of $850,000.00 being the value of the Holsworthy land. This sum to be reduced by $65,000.00 secured debt over the property and $50,000.00 for repairs required on the property. Total of $785,000.00 ('first sum'). 3 Second sum of $500,000.00 ('second sum') for harassment for payment, defect in Statement of Claim, breach of mortgage contract, wrongful possession of land and sale, loss of future investment and transfer of title by mortgagee without the mortgage paid out. 4 Third sum of $300,000.00 ('third sum') for financial loss suffered due to the maintenance of caveat over the inequitable investment property, folio identifier 804/1051230 located at [xx] Flame Tree Street, Casula, in the state of New South Wales ('Casula land') and freeze on future earning power for seven years. 5 The first sum payable by the first Respondent, Commonwealth Bank of Australia, ('the mortgagee') and the second sum to be apportioned to all three Respondents to each party's negligence liability. The third sum to be paid by second (two third liability) and third Respondent (one third). 6 Commonwealth Bank of Australia to indemnify the purchaser of Holsworthy property for the purchase price paid and any work carried out on the property after the purchase if [1] applies. 7 Second and Third Respondents to pay the First Respondent shortfall from the mortgage debt secured over the Casula property together with all the costs related to the sale of the Casula land who were registered proprietors of the land at the time the Statement of Claim was served on the plaintiff and at all time leading to the sale. 8 All Respondents pay the costs of the plaintiff for these proceedings 9 Any further orders the court deems appropriate." 26I was advised by counsel for Mr Charan that the first claim, that is a claim for "reversion" of the Holsworthy land would not be pressed. As I have said, counsel did not oppose an order striking out the statement of claim if there was liberty to replead. So the question is to identify the cause of action that would be sought to be raised in the repleaded statement of claim. 27The first is a claim for an account. As I have said, counsel foreshadowed that a claim might be made against the Bank for a breach of s 420A of the Corporations Act. No accounting has been provided by the bank in respect of any income it might have received as a mortgagee in possession. I understand the Bank's position to be that no such income was received. Nor has any account yet been provided as to the expenses incurred by the Bank in connection with the sale or the holding of the property and nor as to the application of the proceeds of sale. It is not possible to say, on the present materials, that the plaintiff does not have any seriously arguable claim in respect of those matters. He may or may not. But no such claim is the subject of any existing claim for relief. If any such claim were to be made any such claim should not be embarrassed by being joined with other claims which might be untenable. 28Having regard to the limited scope of the existing paragraph 24, it would not itself, without more, establish any cause of action at least for monetary compensation. Having regard to that and to the relief claimed in the statement of claim, the dismissal of the current proceedings would create no res judicata that would preclude the institution of a claim for an account or, perhaps more accurately, a claim for equitable damages now that the Bank is in the position of a trustee of the net proceeds of sale (Commonwealth Bank of Australia v Hadfield [2001] NSWCA 440; (2001) 53 NSWLR 614; (2001) 10 BPR 19,199; and Ultimate Property Group Pty Limited v Lord [2004] NSWSC 114; (2004) 60 NSWLR 646 at [36]). 29Nor could an estoppel arise on the principles in Port of Melbourne Authority v Anshun Pty Limited [1981] HCA 45; (1981) 147 CLR 589 given that the plaintiff has not yet been provided with a settlement statement. I do not think that liberty to replead is required to preserve any claim the plaintiff may properly have under this head. 30The other claims made in the statement of claim which the plaintiff sought to be able to replead were as follows. First, he alleges that the second and third defendants lodged caveats over the properties. Although the caveats were not in evidence and their terms were not pleaded, it appeared to be common ground that in their caveats the trustees in bankruptcy claimed a beneficial interest by reason of the sequestration orders pursuant to which the bankrupts' estates in the land were vested in equity in them under the Bankruptcy Act s 58. By virtue of s 132(3) of the Bankruptcy Act that property did not vest at law in the trustees in bankruptcy until they became registered. 31Pursuant to s 90 of the Real Property Act 1900 (NSW) the second and third defendants were entitled to apply to the Registrar General to become registered as proprietors of the estates of which Mrs Charan and Prashant had been registered as proprietors. They did this and the Bank produced the certificates of title to enable registration to occur. 32The plaintiff makes two complaints about this. Both are misconceived. First, he says that the caveats lodged by the second and third defendants lapsed after those parties were served with lapsing notices. He says that because the second and third defendants did not apply to the Court for an order extending the caveats they therefore had no further interest in the lands (Statement of Claim, pleadings and particulars, para 9). 33This is wrong. The lapsing or removal of a caveat does not deprive a caveator of any estate or interest he may have in the lands. It only removes the statutory protection afforded by a caveat against the Registrar General's registering a dealing which might defeat or adversely affect the interest of the caveator. No such dealing adverse to the second and third defendants was registered in this case. 34Secondly, the plaintiff argued that the Bank and its lawyers ought to have known that land subject to a mortgage could not be transferred without the mortgage being paid out first and that: "Without the consent of the mortgagee the transfer [viz. from the bankrupts to the trustees in bankruptcy] would not have occurred and there is no law which gives the trustees the right to transfer titles without paying the mortgage." 35Understandably, counsel for the plaintiffs did not seek to maintain that position. It is wrong. There was nothing to prevent the trustees in bankruptcy becoming registered. The interests of the bankrupts in the lands vested in their trustees in bankruptcy in equity by virtue of the sequestration orders. The Bank at all times had a registered mortgage. The Bank as mortgagee of Real Property Act land was not the legal owner of the land, but held a statutory charge. The interests of the bankrupts and the trustees in bankruptcy remained subject to that charge. 36A separate and third ground of complaint is made in para 7 of the statement of claim, that after the sequestration order was made in respect of the estate of Mrs Charan, that is after 6 June 2012, the trustees in bankruptcy, the third defendants, "seized whole of the rental income and refused to contribute towards the mortgage payments". 37Mr Charan annexed correspondence to his affidavit indicating that the third defendants demanded that the real estate agent, who was apparently collecting rent on the Casula property, was to pay sixty five per cent of the rents collected to those defendants because that share of the rental income formed part of Mrs Charan's estate. 38Mrs Charan at the time demanded that the money be applied towards servicing the existing mortgage debt. 39Counsel submitted that the trustees in bankruptcy were required to apply the rental income in servicing the mortgage debt so as to maintain the value of the security and to prevent a forced sale of the property by the mortgagee. It was said that the trustees had a duty to all creditors (including the plaintiff) to manage the estate in such a manner as to maximise the available proceeds. 40I know of no basis on which the trustees in bankruptcy would be obliged to make contributions to the secured debt. The Bank would not be entitled to prove for its debt in the bankruptcy unless it surrendered its security to the trustees for the benefit of the creditors generally, or provided an estimate of the value of its security and proved for the difference between the debt due and the estimated value of the security. There is no suggestion that the Bank did, or would ever have been willing to do, either. I do not see how the trustee could properly apply the bankrupt's property (being her share of the rental receipts) in payment of a secured debt that would stand outside the bankruptcy. That would be to the prejudice of the unsecured creditors. 41The plaintiff's claim in this respect is presumably as a creditor of his wife's estate if he paid more than his proportionate share of the debt owed to the Bank, for which he and she, along with Prashant, were jointly liable. In such a case he would be entitled, prima facie at least, to contribution in respect of amounts paid by him towards the debt which was more than his share. 42The suggested breach by the trustees in bankruptcy would apparently be that they refused to make payments that would reduce any such right of contribution, in other words, which, prima facie at least, would give a preference to the plaintiff over other creditors in Mrs Charan's bankrupt estate. I do not think that this claim is arguable. In any event, it appears to me that this claim seeks to invoke the jurisdiction in bankruptcy that is exclusive to the Federal Court or to the Federal Circuit Court. 43The fourth claim is not only against the trustees in bankruptcy but against the Bank. The plaintiff pleads in substance that on 12 December 2012 the third defendants wrote to Gadens, who were acting for the Bank, stating that they were not in possession of the two properties and had no objection to the Bank exercising its power of sale of the properties. (Particulars to para 13 of the statement of claim). The plaintiff pleads: "14 On or about 16 December 2012 the plaintiff had a meeting with Mr Kumar Punchlingam, CBA in-house lender at Liverpool NSW branch and discussed the mortgagee's breach of contract relating to the debt agreement with the mortgagors and transferring the properties to some other people then demanding payment from the mortgagors. 15 The plaintiff discussed with Mr Kumar that to avoid any further costs associated with possession and sale or legal actions, the plaintiff was willing to pay the full debt by way of his sons purchasing the properties from the mortgagee and from him. 16 Mr Kumar referred the matter to CBA Credit Team and the credit team agreed that the existing loan to be paid off with the new loan under the sons['] names. Mr Kumar arranged with CBA mobile lender Mr Marque Kane to arrange the loan application with the sons and an amount of $820,000.00 was approved by CBA on 24 December 2012 on the son's income and rental income from the Casula property." 44The plaintiff complains that instead of the Bank's arranging settlement of the loan and purchase of the properties by his sons, it liaised with the trustees and their solicitors and did not settle the loan for three and a half months. It appears from the correspondence upon which Mr Charan relies that the Bank did seek the consent of the trustees to the sale and initially the trustees in bankruptcy (who by then were only, it appears, the third defendants) initially indicated they had no objection to the Bank exercising its power of sale. It appears from the correspondence relied on by Mr Charan that the Bank had obtained valuations of both properties in an amount of $550,000 each. 45On 12 April 2013 Mr McKone of the Bank advised Mrs Charan that the Bank's approval was based on a purchase price of $550,000 for each property. It appears that by that time she had advised the Bank that it was proposed that the properties be sold to her sons for a price of $420,000 for the Holsworthy property and $400,000 for the Casula property. Mr McKone advised that if her solicitors prepared contracts for sale in those sums then he would talk to the trustees to see if they would accept the prices. He advised that even if the Bank agreed to the sales being for the lower prices, the trustees might not. 46On 18 April 2013 Mr McKone advised Mrs Charan that the trustees had stated that they would not consider the lower purchase prices for her sons to buy the properties. This was formally confirmed by Gillis Delaney, the lawyers acting for the trustees in bankruptcy of Mrs Charan's estate. They wrote: "We note that the bank had obtained valuations of both properties valuing each of the properties at $550,000. Furthermore, we note that the Bankrupt and her family have offered to purchase the properties for $400,000 and put forward various points as to why you should disregard the Bank valuations including their own valuations stating properties in question should be sold to them for $400,000. The Bank had previously agreed the sons of the Bankrupt could purchase each of the properties for $550,000 on the basis the properties have been valued at $550,000. You have now requested we confirm whether the trustees would consent to the sale of the properties for $400,000 each and, indeed, execute contracts for sale of both properties in respect of the offers. Unsurprisingly, both trustees are not prepared to accept the offers particularly in circumstances where the Bank has not marketed the properties to third parties or through auction. If the Bankrupt and her family are prepared to purchase either of the properties at $550,000 then both trustees will consent, if not the trustees require the bank to obtain further valuations and to market the properties to third parties and, indeed, take possession of the properties." 47The plaintiff has no arguable cause of action in respect of these matters. First, he suffered no loss. To the contrary, he was saved the loss that he would have suffered had the properties been sold to his sons at an undervalue. Secondly, he does not allege facts that might arguably show that the Bank bound itself to sell at the suggested price of $820,000. Clearly, had the Bank done so without the consent of other affected parties, at a price which was substantially below its valuations, it would have been in breach of its duties both under s 420A of the Corporations Act and in equity. It would have been sacrificing the property at an undervalue. The parties who would have suffered would be those entitled to participate in the distribution of the estates of Mrs Charan and Prashant as well as the plaintiff himself. 48Those are all of the causes of action, so far as they can be discerned from the plaintiff's materials, that are pleaded or otherwise sought to be raised. With the exception of the matters pleaded in para 24 of the Statement of Claim, they do not raise any arguable cause of action. None of the relief sought in the Statement of Claim relates to the matter in paragraph 24 and paragraph 24 by itself would not support a claim for relief, except perhaps a claim that the Bank provide an account of its receipts and payments and of the net amounts held on trust for the mortgagors. 49In my view the proceedings should be summarily dismissed. But the dismissal of the proceedings will be without prejudice to the plaintiff's right, if any, to an account or to equitable damages against the Bank in respect of its conduct as mortgagee in possession of the subject properties, or in respect of the exercise of its power of sale in respect of those properties, or in respect of a determination of the amount of the net proceeds of sale held on trust by it for the mortgagors (including the plaintiff) or their trustees in bankruptcy. 50Subject to any submissions the parties' legal representatives might have to make in respect of the precise formulation of the orders, I think the appropriate orders are: