UNJUST ENRICHMENT CLAIMS
257 The third set of claims I am required to consider were referred to by the parties as the "equitable accounting" claims. These claims concern the extent to which, if any, the Trustees ought to account to the McNivens for their equity payments (including both the mortgage interest payments and the rates, taxes and other outgoings paid in relation to the Properties) and personal efforts claims. The claims also raise the question of whether the Trustees or the McNivens are entitled to the increase in the capital value of the Properties.
258 These claims are, properly understood, claims for restitution by the McNivens based on the principle of unjust enrichment. Accordingly, I approach the questions on that juridical basis.
259 The leading authority relied upon by the parties in respect of these claims was Draper. Briefly stated, the facts of that case are as follows. Mr Draper became bankrupt on 12 July 1989. The day before, he and his wife, Mrs Draper, had become jointly registered as the owners of a property in MacDonald Park. Mr Draper's bankruptcy severed the joint tenancy, such that he and his wife became tenants in common.
260 On 16 November 1989, the trustee of Mr Draper's bankrupt estate became registered as the holder of Mr Draper's half interest in the MacDonald Park property. Some 16 years later, in 2005, the MacDonald Park property was sold. At that time, the trustee remained registered as the holder of Mr Draper's half interest in the MacDonald Park property, even though Mr Draper was discharged from bankruptcy by operation of law on 25 July 1992.
261 The issue before the Full Court of this Court was, in essence, whether the trustee was, and remained, entitled to a one-half interest in the MacDonald Park property. Relevant to that issue, Mrs Draper had repaid all the money in relation to the loan over the property, including principal and interest. Meanwhile, the trustee took no steps from 1989 to 2015 to dispose of or realise his interest in the MacDonald Park property.
262 Each of their Honours (Mansfield, Rares and Besanko JJ) wrote separately in allowing the appeal. In short, the majority held that Mr Draper held his interest on trust for Mrs Draper, that having been their intention from the outset. The matter was in turn remitted to the Federal Magistrates Court (as it then was) in relation to the claim for an express trust and equitable accounting.
263 As to the question of whether there should be an equitable accounting in that case, Mansfield J said at [54]-[57]:
The trustee, by submissions filed after the hearing, accepts that in any event the appeal should be allowed for the purpose of determining the extent of any accounting which the trustee should give to Mrs Draper or the Drapers for moneys paid in respect of the MacDonald Park property.
The starting point for such an accounting in equity is the contributions made to the payment of capital and interest on the two mortgages. As noted, there is evidence Mrs Draper paid off the vendor mortgage; and it is unlikely that Mr Draper could have done so during bankruptcy. The direct evidence also is that Mrs Draper paid all the capital and interest payments on the first mortgage, including a lump sum of $5,500 in 1996 to finally discharge it; whether that resulted from the pooling of income is a matter which, in my view, should, if relevant, be determined upon the rehearing. However, again any significant payments by or with the support of Mr Draper during his bankruptcy should be known to the trustee. After his discharge from bankruptcy, any payments made by Mr Draper should be taken into account in equity for the purposes of the accounting in any event. For example, if after his discharge Mr Draper paid to discharge the mortgage or for improvements, there would appear to be no reason why the trustee should not have to account to him for those payments. The rehearing can also address the amount of payment for recurrent outgoings and for improvements by Mrs Draper, and by Mr Draper or the Drapers jointly after Mr Draper's bankruptcy came to an end. The payments by Mrs Draper, and the payments by Mr Draper or by the Drapers jointly after 25 July 1992, should be brought to account.
Any benefit to Mrs Draper through the use and occupation of the MacDonald Park property should also be taken into account: Baumgartner v Baumgartner 164 CLR at 151 per Mason CJ, Wilson and Deane JJ. The trustee should be entitled to a proper rental, but on the evidence that could not exceed half of $30 per week.
Re Pavlou (a bankrupt) [1993] 1 WLR 1046 suggests that the accounting should reflect the extent to which the value of the MacDonald Park property increased by reason of the improvements. That would be significant only in respect of improvements Mrs Draper paid for, or those made after 25 July 1992. In the light of the amount in issue, it may not be necessary to take that step. My rough estimates, assuming most of the capital repayment of the first mortgage was "back ended", ie effected towards the end of the loan period, is that the amount to be brought to account (assuming that the payments in respect of the first mortgage were from joint resources) will include the capital and interest on the vendor mortgage, part of the interest and most of the capital on the first mortgage, and depending when the improvements were made (assuming they were jointly funded), some of the improvements. If Mrs Draper is accepted to have made all the repayments, the amount to be brought to account increases. I have assumed in those estimates the recurrent outgoings for rates and taxes approximates the allowance the other way for occupation rental, but so far as I can see there is no evidence of the amount of the outgoings; that would have to be addressed at any further hearing.
[Emphasis added]
264 Justice Rares said at [106]-[114] of Draper:
Mrs Draper appears to have paid the capital instalments on the mortgage and thereby increased the overall equity of redemption. Those payments benefited the trustee in its own right, and, in respect of her pre-bankruptcy payments, increased the value of the property. These payments have to be taken into account on the basis that the wife's contributions had increased the estate.
Here, the payments by the Drapers were completely responsible for the increase in the value of the equity of redemption, since the trustee never made any payment. In that circumstance, it seems to me, that, subject to hearing from the parties, this may well be a case where it would be practicable to apply the solution suggested by Millett J (Re Pavlou (a bankrupt) [1993] 1 WLR at 1051C-D) where he said that if the trustee in bankruptcy insisted on strict accounts being taken, then he is entitled to do so unless it could be seen in advance that the amounts were likely to be so similar that the taking of accounts would be a waste of time and the costs would outweigh any possible advantage to be gained thereby. He continued:
In such a case the Court might well impose its own solution of directing the interest element in the mortgage instalments to be set off against the use and occupation without any further enquiry. In some cases the Court may be able to infer an agreement between the parties that that procedure should be adopted …
The trustee's attitude was that Mrs Draper could remain in occupation of the property provided she paid the mortgage and the outgoings. If she paid the value of the whole of the equity of redemption through that means, maintained the upkeep of the property, and the payment of rates, taxes and other outgoings, it would be, prima facie, unconscientious of the trustee now to insist upon some strict accounting or to assert some beneficial entitlement in the equity of redemption to the extent to which was gained wholly or in part by the exertions and efforts of Mrs Draper. And the trustee cannot get any benefit from payments or pooling by Mr Draper after his discharge from bankruptcy. The trustee engaged in years of uncooperative and unhelpful inaction. The trustee had the full armoury of the Bankruptcy Act with which to conduct public examinations of Mr and Mrs Draper (which he did) and any other persons who might be involved in relation to the acquisition of the property.
As between itself and Mr and Mrs Draper, the trustee had made no contribution to the equity of redemption. Mrs Draper paid the $1,000 for the initial equity in the MacDonald Park property. It has not been shown that there was any equity acquired by Mr Draper at the time of the sequestration order other than a half share (if there be no resulting trust) for which he had not paid and which, apart from the $1,000 equity, was fully encumbered by the two mortgages. Thereafter either Mrs Draper paid in full or Mr Draper's income was used to assist in paying for the amounts due under the mortgages and for the other outgoings referable of ownership of the MacDonald Park property. The trustee must give credit, in respect of his half share, to Mr and Mrs Draper for those payments, their exertions (except any during his bankruptcy which exceeded what he could have retained under s 116(2)(c) or any other statutory exception), the interest that they paid at the time the mortgages were current and the value of their investment during the remaining period.
In Ex parte James; Re Condon (1874) LR 9 Ch App 609 at 614 James LJ famously said:
I am of opinion that a trustee in bankruptcy is an officer of the Court. He has inquisitorial powers given him by the Court, and the Court regards him as its officer, and he is to hold money in his hands upon trust for its equitable distribution among the creditors. The Court, then, finding that he has in his hands money which in equity belongs to someone else, ought to set an example to the world by paying it to the person really entitled to it. In my opinion the Court of Bankruptcy ought to be as honest as other people.
In my opinion, no different result should flow when the trustee has held an asset in his name for years and, effectively, deprived the person entitled to it from using or enjoying the asset to the full extent of the person's right, title and interest.
It seems to me that unless the trustee were made to account for the value of the principal payments which Mrs Draper made and, to the extent that the source was not property divisible among his creditors which Mr Draper made, so as to acquire 100% of the equity of redemption, thereby improving the estate, the trustee would gain a windfall at the expense of Mr and Mrs Draper. As James LJ said: "The Court of bankruptcy ought to be as honest as other people."
If an accounting is to be ordered, then regard will need to be had to the value of the principal contributions and interest payments made by Mrs Draper and, Mr Draper, (with his own property not divisible among his creditors) any benefit enjoyed by Mrs Draper, and after his discharge, Mr Draper through the use and occupation of the property during the period prior to its sale, the value of any improvements made by Mr and Mrs Draper to the property of a capital nature and any outgoings paid by them for the purposes of retaining the use and occupation of the property. Except for any property Mr Draper used which was divisible among his creditors, the trustee must give credit for the interest on the capital payments which Mrs Draper and her husband had made, thereby discharging the trustee from its obligation to contribute one half of the principal and interest payments for the whole of the period during which the property was in their ownership. Unless the trustee gives credit for those principal repayments which exonerated its half share of the estate, it will have the windfall of the benefit of those payments, namely the increase in the value of the equity of redemption and the relief of the property from the imposition of the mortgage together with the obligation to repay principal and interest, while giving no credit to the co-owners who had spent the money and were entitled to enjoy some of the fruits of that expenditure.
It would be inequitable to require Mr and Mrs Draper to pay an occupation rent for the trustee's half share of the property without the trustee accounting for the value of the payments which had been made to exonerate that half share from interest and principal charges under the mortgages and other outgoings like rates and taxes. And, to the extent that Mr and Mrs Draper effected improvements on the property, again the trustee must account for the value of those improvements: Baumgartner v Baumgartner 164 CLR at 150-151 per Mason CJ, Wilson and Deane JJ.
[Emphasis added]
265 Justice Besanko also relevantly said at [160]-[163] of Draper:
If Mrs Draper's claim of an express trust succeeds on a rehearing then there will be no need to consider the rights of the respective parties on an equitable accounting. If, on the other hand, it fails, then it will be necessary for the magistrate to consider claims on an equitable accounting. The trustee concedes that this is so now that the property has been sold, although the present trustee submits that Mrs Draper is entitled to nothing more than what she has already received because she cannot establish that she paid more than one half of the expenses that are recoverable on an equitable accounting.
Before considering the magistrate's findings it is appropriate to set out some general principles about the rights of parties on an equitable accounting.
A right of contribution may arise both at law and in equity where one of two or more joint debtors pays more than his or her proportionate share. As between the appellants or Mrs Draper alone on the one hand, and the trustee on the other, that right is not relevant in this case except perhaps as to the payment of rates, taxes and other outgoings in relation to the property. A right to recover moneys paid in excess of a person's proportionate share of a liability may also arise between the co-owners of a property. It would seem that that right does not arise or is not enforceable from time to time but arises in certain circumstances such as on an order being made for partition or sale of the property or in analogous circumstances. One analogous circumstance mentioned in the authorities is an action to determine the distribution of the proceeds of a co-owned property after a mortgagee's sale: Re Cook's Mortgage (No 2); Lawledge v Tyndall [1896] 1 Ch 923. It seems that the circumstances in which the right arises or is enforceable are limited: Forgeard v Shanahan 35 NSWLR 206 at 224 per Meagher JA. I mention these matters for two reasons. First, in this case the property was sold pursuant to an agreement between the parties. It was not argued by the trustee that the Court's power to order an equitable accounting between co-owners does not arise in these circumstances and I will proceed on the basis that it does, noting that the contrary was not suggested. Secondly, these observations may be relevant to whether Mr Draper has a claim on an equitable accounting should facts be established that otherwise give rise to such a claim.
In the circumstances of this case, the principles relevant on an equitable accounting are as follows:
1. A co-owner who has not occupied the property will not have a claim for occupation rent from a co-owner who has been in occupation unless he or she was excluded from the property (and there appears to be no evidence of this) or the co-owner who has been in occupation makes a claim for the cost of improvements: Scapinello v Scapinello [1968] SASR 316; Chatterton v Chatterton (1989) 52 SASR 337; Forgeard v Shanahan 35 NSWLR 206; Ryan v Dries (2002) 10 BPR 19,497. I would follow what Sheller JA and Hodgson JA said in Ryan v Dries and hold that the same principle applies if the co-owner in occupation makes a claim in relation to mortgage repayments instead of the cost or value of improvements. I note that in Re Pavlou [1993] 1 WLR at 1051, Millett J said the repayments of interest may be offset against a claim for occupation rent.
In this case, Mrs Draper makes a claim for the cost of carrying out improvements in excess of her one-half share and a claim based on the repayment of the mortgage debts in excess of one half. In those circumstances on the face of it she will be liable to the trustee for an occupation rent.
2. If one of two co-owners makes improvements to the property then, on partition or sale, or in analogous circumstances, he or she may have a claim against the other co-owner. The claim is restricted to the lesser of one half of the cost of the improvements or one half of the increase in the value of the property resulting from the improvements. I have already referred to the relevant authorities (at [135]).
The cost of repairs and maintenance to a property are recoverable on the same basis as improvements if, and only if, they have increased the value of the property: Leigh v Dickeson (1884) 15 QBD 60; Ryan v Dries 10 BPR 19,497 at [66]-[67] per Hodgson JA.
3. If a co-owner in the position of Mrs Draper repaid more than one half of the mortgage debts, either by way of capital or interest, then that co-owner is able to recover that excess from a co-owner in the position of the trustee. That right arises because by repaying the mortgage debts that co-owner has increased the value of the property for those entitled to it (or the proceeds of sale) after the mortgages have been discharged. Without more, the right does not give rise to a trust, constructive or otherwise, but a right to recover moneys paid by a co-owner in excess of his or her proportionate share.
4. If one of two co-owners of property pays more than one half of the rates, taxes and other outgoings in relation to the property then on a partition or sale, or in analogous circumstances, he or she may have a claim for the amount paid in excess of one half. Whether the co-owner has such a claim will depend on whether there is a joint liability for the rates, taxes or other outgoings or some other basis for liability: Scapinello v Scapinello [1968] SASR at 319 per Bright J. I will say nothing more about rates, taxes and other outgoings which, as I have said, were not considered by the magistrate. They can be considered on the rehearing if it is necessary to conduct an equitable accounting.
[Emphasis added]
266 For completeness, I note that Besanko J earlier said at [133]-[135]:
Reference was made to Re Pavlou (a bankrupt) [1993] 1 WLR 1046 a decision of Millett J (as he then was). In that case, a husband and wife bought a house in 1973 and became joint tenants of the property. They lived together in the house until 1983 when the husband finally left. Thereafter, the wife remained in sole occupation and paid the mortgage instalments as they fell due. She also paid for repairs and improvements in 1985 and 1989. In March 1987 a bankruptcy order was made against the husband and a trustee in bankruptcy was appointed. The joint tenancy was thereby severed and, thereafter, they owned the property as tenants in common in equal shares. Millett J was asked to rule on when the equitable accounting (which the parties agreed needed to take place) should begin. That is not the issue here but in the course of his reasons for judgment, Millett J said (Re Pavlou [1993] 1 WLR at 1049):
I must make it clear of course that, in deciding as I do that the wife is entitled as against the trustee in bankruptcy to credit for one half of any repairs or improvements, there has to be an inquiry as to the amount expended and the increase, if any, in the value of the property thereby realised. Much expenditure on property is not reflected in any increase in value, and most expenditure on property results in a much smaller increase in value than the amount expended. The wife will be entitled, as against the trustee in bankruptcy, to credit only for one half of the lesser of the actual expenditure and any increase in the value realised thereby.
The same applies in my judgment to any capital element in the repayment of mortgage instalments. The repayment of the capital element in each instalment increases the value of the equity of redemption which inures to the benefit of both joint tenants. Accordingly, the wife is entitled to credit for one-half of the increase in value of the equity of redemption which results from the capital element of the mortgage payments since the date on which the husband left the property in 1983, and not merely since the date of the bankruptcy order.
The observations in the second paragraph cited above were made in the context of the issue in that case and I do not think that they are authority for the proposition that a constructive trust arises by reason of the repayment of the capital element of a mortgage debt.
There are other reasons why the repayment of a mortgage debt does not give rise to a constructive trust. First, the High Court has said that before the court imposes a constructive trust as a remedy it should first decide whether, having regard to the issues in the action, there are other means available to quell the controversy: Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566 at [42]; Giumelli v Giumelli (1999) 196 CLR 101 per Gleeson CJ, McHugh, Gummow and Callinan JJ at [10]. See also, Meagher, Heydon and Leeming, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed, 2002) at [25-065]. There is another means in this case, namely, the recognition of rights on an equitable accounting. Secondly, although a co-owner making improvements to jointly-owned property is different from a co-owner paying more than his or her proportionate share of a mortgage debt, in my opinion it would be odd if the latter situation gave rise to a superior remedy for a claimant compared with the former situation. A co-owner making improvements is restricted to the lesser of the cost of the improvements or the increase in the value of the property as a result of the improvements: Re Pavlou [1993] 1 WLR at 1049; Forgeard v Shanahan (1994) 35 NSWLR 206 at 223 per Meagher JA (with whom Mahoney JA agreed). I reject the submission that on the assumption that Mrs Draper repaid the whole of the mortgage debts a constructive trust arose in her favour.
[Emphasis added]
267 The principles articulated in Draper are not directly applicable on the facts of this case. Among the various factual differences between Draper and this case, the following are significant. First, in Draper, the trustee remained idle for a period of 16 years after Mr Draper became bankrupt and made no attempts to dispose of its half interest in the MacDonald Park property. In this respect, Rares J observed that the trustee "engaged in years of uncooperative and unhelpful inaction" despite having the full armoury of the Bankruptcy Act at its disposal. That inaction is in stark contrast to the diligence of the Trustees in this case, particularly after the settlement of the Anylock Mortgage. Second, Draper involved a balancing of rights as between a trustee and the wife of a bankrupt, where the wife was a co-owner of the property. Here, both the husband and wife were concurrently bankrupt for the relevant period. Upon Mrs and Mr McNiven being declared bankrupt, the Properties vested in the Trustees and the McNivens ceased to have any interest in the Properties. Nonetheless, the observations of their Honours in Draper provide a useful analogy for determining whether and to what extent the McNivens are entitled to an amount for the equity payments and personal efforts claims as restitution for unjust enrichment.
268 Prior to analysing the various claims, it is relevant to set out the McNivens' pleading in respect of these claims at 4-(ab) of the amended defence and cross-claim:
As to paragraph 4, the Respondents:
…
a. say further that since the commencement of the bankruptcies of the Respondents, the Respondents have made all:
i. loan payments to St George Bank Limited secured by Mortgage AF777718Y in relation to the Templestowe Property;
ii. loan payments to St George Bank Limited secured by Mortgage AD230638R in relation to the Blackburn North Property;
iii. payments in relation to rates, taxes, outgoings, maintenance, repairs, insurance, improvements and renovations to the Blackburn North Property and Templestowe Property.
(the Equity Payments)
ab. say further that the Respondents have expended personal time and effort in undertaking significant repairs, improvements and renovations in relation to the Templestowe Property and Blackburn North Property (the Personal Effort).
Particulars
Templestowe Property:
- Painting inside including all bedrooms, lounge & dining room and replacing carpet in all bedrooms, stairs and upstairs retreat. Installing air conditioning in lounge & dining area.
- Completely renovated back yard & pool area, including re concreting & painting pool, installing new pool equipment & solar heating, ripping up pavers and re-paving around pool, building deck, new shed for pool equipment and new fence area around pool and spa and along back of property. Ripping out old retaining wall and replacing.
Blackburn North Property
Fully renovated including, re-stumping, painting whole house both inside & out, replacing kitchen, bathroom & toilet; new carpet in bedrooms; ripping up carpet & polishing boards in hallway & lounge room.
Further particulars of will be provided prior to trial.
[Errors and formatting in original]
269 The McNivens filed further and better particulars on 25 August 2020 and 23 September 2020 concerning the equity payments claim and personal efforts claim. Annexures A to C of the further and better particulars dated 23 September 2020 concern the repayments made in relation to each of the St George Mortgage sub-accounts, whereas Annexure D relates to the expenses incurred by the McNivens in relation the Properties by way of rates, taxes, outgoings, maintenance, repairs and capital improvements. The McNivens also filed further and better particulars on 2 November 2020, which set out details of their personal efforts claim in Schedule A (for the Templestowe Property) and Schedule B (for the Blackburn North Property).
270 In the agreed list of issues, filed on 25 November 2020, the parties raised the following (presently relevant) issues to decide:
E. EQUITABLE ACCOUNTING OR SIMILAR PROCESS
11. Whether there should be an equitable accounting or similar process.
12. What principles would apply in an equitable accounting or similar process.
13. Whether the former bankrupts are entitled to credit in respect of principal repayments, and if so what amount(s) and over what period(s).
14. Whether the former bankrupts are entitled to credit in respect of interest repayments, and if so what amount(s) and over what period(s).
15. Whether the former bankrupts are entitled to credit in respect of personal effort claims, and if so what amount(s) and over what period(s).
16. Whether the former bankrupts are entitled to credit in respect of expense payments, and if so what amount(s) and over what period(s).
17. Whether the trustees are entitled to credit in respect of the Blackburn rent, and if so what amount(s) and over what period(s).
18. Whether the trustees are entitled to credit in respect of notional rent on the Templestowe property, and if so what amount(s) and over what period(s).
271 At my request, the parties subsequently provided an agreed list of issues in relation to the equitable accounting claim, which I use as the structure of the analysis which follows.
LIST OF ACCOUNTING ISSUES
This list of accounting issues is intended to be read as expanding upon issues set out in the agreed list of issues filed 25 November 2020 and particularly issues 8 and 12 to 18 therein.
1. Are the respondents entitled to an interest in the properties or any part of the proceeds of sale of the properties, by reason of:
(a) "the Equity Payments" (as defined in paragraph 4 of the amended defence);
(b) "the Personal Effort" (as defined in paragraph 4 of the amended defence),
during the following periods:
(c) prior to bankruptcy;
(d) during bankruptcy;
(e) after discharge from bankruptcy;
(f) after the time when the respondents became aware that the trustees were seeking to realise the properties; and
(g) after the commencement of this proceeding?
2. Under what principle(s) do the respondents have any entitlement as set out in question 1?
3. In calculating the entitlements under question 1, do the respondents need to give credit to the applicants for:
(a) their use of the Templestowe property in the period since late 2010 (ie notional rent);
(b) the net rent that they received in respect of the Blackburn property since late 2010 after deduction of all expenses?
4. In respect of:
(a) Equity Payments in relation to maintenance, repairs, improvements and renovations of the properties; and
(b) Personal Effort,
is the rule that the respondents are entitled to the:
(c) Cost or alternatively the value of the improvements;
(d) amount by which those improvements have enhanced the value of the properties as at the relevant date(s); or
(e) the lesser of (c) or (d) (ie minimum equity)?
5. At what point in time are the values of the Equity Payments or Personal Effort referred to in question 4 to be determined:
(a) the date of the relevant "Equity Payments" and "Personal Efforts"; or
(b) the date at which the trustees get possession of the properties.
6. Put another way, in answering questions 4 and 5, to the extent that the respondents are entitled to any value for the Equity Payments or Personal Effort referred to in 4, is it the case that:
(a) the respondents are entitled to credit for the actual cost or value of such contributions when they were made; or
(b) an adjustment should be made to the amounts in (a) in respect of depreciation on the maintenance, repairs, improvements and renovations as at the date at which the applicants gain possession of the properties; or
(c) the respondents are only entitled to a credit for the value by which such contributions are reflected in the actual value of the properties as at the date at which the applicants gain possession of the properties, if such an order be made?
7. Alternatively, are the respondents entitled to the benefit of any of the capital growth of the properties in any of the periods set out in question 1 (d) to (g) above, considering:
(a) the answers to question 1 above;
(b) the fact that on the trustees' case, the properties have been vested in the trustees since the date of the respondents' bankruptcies pursuant to section 58 of the Bankruptcy Act 1966; and
(c) the abandonment by Anylock of its claim to an interest in the properties, after the respondents' bankruptcies were discharged.
272 It is of assistance in understanding the unjust enrichment claims to commence with a summary of the relevant evidence contained in the Fourth Joint Expert Report of the expert accountants, Mr Gary Fettes and Mr Mark Lipson, dated 29 September 2021. There were various earlier iterations of joint expert reports, though the substance of the expert evidence is summarised in the Fourth Joint Expert Report.