Liberty Funding Pty Limited v Steele-Smith

Supreme Court of NSW|2004-11-17|Before: Palmer J

CITATION : Liberty Funding Pty Limited v Steele-Smith [2004] NSWSC 1100 HEARING DATE(S) : 16 November, 2004 JUDGMENT DATE : 17 November 2004 JURISDICTION: Equity Division JUDGMENT OF : Palmer J DECISION : Declarations as sought by Plaintiff; otherwise Summons dismissed.

CATCHWORDS : MORTGAGES - DISCHARGE - Whether mortgagee's costs of defending suit to set aside mortgage were a contingent liability of the mortgagor secured by the mortgage - whether mortgagor obliged to provide security for contingent liability in order to obtain discharge. Bank of New South Wales v O'Connor (1899) 14 App Cas 273 Estoril Investments Pty Ltd v Westpac Banking Corporation (1993) 6 BPR 13,146 CASES CITED : Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27 Perpetual Trustees Australia Ltd v Barker [2004] SASC 58 Project Research Pty Ltd v Permanent Trustee of Australia Ltd (1990) 5 BPR 11,225 Rudd & Son Ltd, Re (1986) 2 BCC 98,955 PARTIES : Liberty Funding Pty Limited - Plaintiff Doreen Steele-Smith - Defendant FILE NUMBER(S) : SC 6151/04 COUNSEL : R.C. Beasley - Plaintiff Trevor Steele (representing Defendant under Power of Attorney) - Defendant SOLICITORS : Dibbs Barker Gosling - Plaintiff Trevor Steele (representing Defendant under Power of Attorney) - Defendant

1 The Plaintiff ("Liberty") is the mortgagee of a property owned by the Defendant ("Mrs Steele-Smith") known as 9 Seaspray Close, Caves Beach in New South Wales, under a Registered Mortgage dated 8 July 2002. 2 In proceedings number 4778/04 commenced on 30 August 2004 Mrs Steele-Smith seeks orders setting aside the mortgage on the ground that Liberty, by its agent or employee, procured the grant of the mortgage by taking unconscientious advantage of her inability, through infirmity and age, to protect her own interests. In those proceedings Mrs Steele-Smith is represented by her son, Mr T. Steele, who acts under a Power of Attorney. Mr Steele has appeared in person in those proceedings and in the present proceedings. 3 Proceedings 4778/04 have not yet come to trial, although it is hoped that they may be set down for hearing early next year. When the proceedings were before me yesterday morning for directions the parties raised an ancillary but pressing problem. 4 Mrs Steele-Smith is, as Mr Steele concedes, in default in paying the interest due under the mortgage for the months of September and October 2004. By Notice dated 12 October 2004 Liberty informed Mrs Steele-Smith that unless she remedied the default within a specified period it would exercise its rights under the mortgage. 5 Mrs Steele-Smith then decided to sell the property. She has entered into a contract for sale at a price of $520,000. Settlement of the sale was to take place on 9 November 2004. However, a dispute arose between Liberty and Mrs Steele-Smith as to the terms upon which Mrs Steele-Smith is entitled to have a discharge of the mortgage delivered upon settlement of the sale. 6 There is no dispute as to the amount of principal and interest outstanding under the mortgage. However, by letter dated 3 November 2004 Liberty's solicitors asserted that the mortgage secured not only the principal and interest but also Liberty's costs and expenses incurred in defending proceedings 4778/04. Accordingly, they required the balance of the proceeds of sale to be paid into Court until proceedings 4778/04 are finally determined. 7 Mrs Steele-Smith has a solicitor acting for her on the sale of her property, but not in the litigation with Liberty. On 5 November, Mrs Steele-Smith's solicitor replied to Liberty's solicitors, saying that the conveyance and the litigation were entirely separate matters and that Liberty's costs of the litigation were its own responsibility. The requirement for payment of the balance of the proceeds of sale into Court was rejected. An appointment for settlement of the contract for sale was made for 15 November 2004. 8 By letter dated 10 November 2004 to Mrs Steele-Smith's solicitor, Liberty's solicitors advised that the pay-out figure for principal and interest for settlement on 15 November would be $322,179.96 so that there would be a surplus of $197,820.04, less the costs of sale. They advised that to date Liberty had incurred approximately $24,000 in legal fees and disbursements in defending proceedings 4778/04 and that it was continuing to incur fees and disbursements. They suggested that orders by consent be made whereby the surplus of proceeds of sale from the contract be paid into the trust account of Mrs Steele-Smith's solicitor to await determination of proceedings 4778/04. 9 By letter dated 10 November, Mrs Steele-Smith's solicitors rejected the proposal for consent orders. 10 The purchaser under the contract for sale has now served a notice to complete requiring settlement on 1 December 2004. This was the state of affairs when proceedings 4778/04 came before me yesterday for directions. 11 Both parties were anxious to have a determination of the issue in dispute as urgently as possible. Both parties are anxious that the contract for sale not be lost. Mr Beasley, who appears for Liberty, said that he would be ready to argue the matter later that day. Mr Steele firmly assured me that he also would be ready to argue the matter that day. Accordingly, I directed Liberty to prepare a Summons setting out the relief it sought and said that I would hear the case at 2:00pm. 12 When the matter was called on later that day, I granted Liberty leave to file its Summons in Court, returnable instanter, and dispensed with service on Mrs Steele-Smith. The Summons seeks the following relief: "1. A declaration that, subject to other order by the court, the 'reasonable expenses' referred to in clause 20 of the memorandum of mortgage number 5040194 include:

a) the reasonable expenses incurred by Liberty Funding Pty Limited to date in proceedings number 4778 of 2004 filed in the Equity Division of the Supreme Court of New South Wales ('the Proceedings'); and

b) the further reasonable expenses to be incurred by Liberty Funding Pty Limited in the Proceedings.

An order that upon settlement of the sale of the defendant's property known as 9 Seaspray Close, Caves Beach NSW ('the Property'), the balance of the sale proceeds (or such amount of those proceeds as the court orders) after payment of the principal and interest owing to Liberty Funding Pty Limited be paid into court, or into a trust account as agreed between the plaintiff and the defendant.

A declaration that unless the balance of the proceeds of sale of the Property (following payment of all principal and interest owed by the defendant to the plaintiff) are paid into Court, or into a trust account as agreed between the plaintiff and the defendant, the plaintiff is not obliged to provide the defendant with a discharge of its mortgage over the Property." 13 Mr Beasley tendered an affidavit annexing the correspondence between Liberty's solicitors and Mrs Steele-Smith's solicitor, the mortgage and the registered memorandum of terms, and the loan agreement between Liberty and Mrs Steele-Smith evidencing the loan secured by the mortgage. As I have said, Mr Steele conceded that there had been default under the mortgage in the payment of interest for the months of September and October 2004. No other evidence was adduced. There is really no dispute as to the facts in these proceedings; the only questions are questions of law. 14 Mr Steele submitted merely that the conveyance of his mother's property had nothing to do with the mortgage and Liberty's rights thereunder. He was not really able to assist further with legal argument. 15 Mr Beasley relies upon two provisions of the mortgage. Clause 20 of the registered memorandum provides: "When we ask, you must pay us the reasonable expenses we reasonably incur in enforcing this mortgage after you are in default (including in preserving and maintaining the property - such as by paying insurance, rates and taxes for the property). This applies to expenses we incur before or after taking action under clause 19."

The definition in the Memorandum of "amount owing" is: "… at any time, all money which one or more of you owe us, or will or may owe us in the future, including under this mortgage or an agreement covered by this mortgage …" 16 Mr Beasley says that the legal costs which Liberty has incurred and will continue to incur in defending proceedings 4778/04 are enforcement expenses as defined in Clause 20. Accordingly, he says that they are monies which Mrs Steele-Smith will or may owe Liberty in the future under the mortgage if and when Liberty is successful in defending proceedings 4778/04, so that they are within the definition of "amount owing" . 17 In support of his submission that Liberty's costs of defending a suit to set aside the mortgage are enforcement costs as defined in Clause 20, Mr Beasley relies on a decision of the Full Court of the South Australian Court in Perpetual Trustees Australia Ltd v Barker [2004] SASC 58. 18 In that case, the mortgagee took steps to enforce a power of sale upon the mortgagor's default. The mortgagor then applied to the Court for relief against the exercise of the power of sale pursuant to s.55A(3) of the Law of Property Act 1936 (SA). That application was unsuccessful and the mortgagor was ordered to pay the mortgagee's costs. The question was whether the costs should be taxed on the party/party basis or, as the mortgagee contended, upon a full indemnity basis. 19 The mortgagee relied on a provision in the mortgage which required the mortgagor to pay to the mortgagee on a full indemnity basis "all reasonable enforcement expenses the mortgagee reasonably incurs or expends in exercising its rights under the mortgage" . The judge at first instance held that "enforcement expenses" did not include the expenses of the mortgagee in defending an application by the mortgagor for relief under s.55A(3). The Full Court unanimously upheld an appeal. 20 At paragraphs 32-33, Duggan J said: "I respectfully disagree with the view expressed by the judge at first instance that an application by a mortgagor under the section is independent of any steps taken by the mortgagee to enforce its rights. The application is a direct response to steps taken to enforce the mortgagee's rights and it determines whether or not they are able to be exercised. The application permitted by s 55A(3) is not collateral to the enforcement procedures, but a part of procedures which regulate the enforcement of rights against the mortgagor.

In my view, there is no basis for confining the words in cl 7.2 of the mortgage 'all reasonable enforcement expenses the Mortgagee reasonably incurs or expends in exercising its rights under the Mortgage' to expenses incurred in actions or procedures initiated by the mortgagee in contradistinction to responses by the mortgagee to actions or procedures instituted by the mortgagor to prevent the enforcement of rights by the mortgagee." 21 Although the words of Clause 20 of the Memorandum in the present case are a little different from the words in Barker , I think that their substance is the same. With respect, I agree with the reasoning of Duggan J in the passage quoted above. In my opinion, enforcement of a mortgagee's rights, as contemplated in Clause 20 of the Memorandum, is not confined to the taking of steps to exercise a power of sale or other right conferred by the mortgage: it encompasses whatever is necessary to protect and preserve the mortgagee's rights when their validity is challenged or their exercise is sought to be prevented or impeded. 22 However, there is a qualification in Clause 20: the enforcement expenses recoverable and secured under the mortgage are only those incurred after the mortgagor is in default . In the present case, this qualification probably makes little, if any, difference to the amount secured because proceedings 4778/04 were commenced on 30 August 2004 and Mrs Steele-Smith went into default in the payment of interest for the following month. 23 It follows that if Liberty's defence in proceedings 4778/04 succeeds so that the mortgage is not set aside, the mortgage will secure Liberty's reasonable costs of the defence. This is so because the definition in the mortgage of "amount owing" includes money which Mrs Steele-Smith may owe Liberty pursuant to the terms of the mortgage and the reasonable costs of Liberty's defence of proceedings 4778/04 is money which may become owing under Clause 20. By Clause 1.4 of the mortgage Mrs Steele-Smith is only entitled to a discharge of the mortgage "when there is no amount owing" . 24 Mrs Steele-Smith's possible liability for Liberty's costs of defending proceedings 4778/04 is clearly a contingent liability: see Estoril Investments Pty Ltd v Westpac Banking Corporation (1993) 6 BPR 13,146 at 13,159 per Young J (as his Honour then was). It is now well established that if at the time a mortgagor seeks redemption of the mortgage there is a contingent liability outstanding which is secured by the mortgage the mortgagor is not entitled to a discharge until the contingent liability is secured: Re Rudd & Son Ltd (1986) 2 BCC 98,955 ; Estoril at 13,158 . 25 The usual way in which a mortgagor can obtain a discharge where a contingent liability remains secured under the mortgage is to pay into Court the amount of the contingent liability or a reasonable estimation thereof if the amount cannot be fixed with certainty. So, for example, where a mortgagor threatens proceedings for the taking of an account, the mortgagee is entitled to retain the security to recover the anticipated reasonable costs of such proceedings and the mortgagor may obtain a discharge either by providing alternative security for such costs or by paying into Court an amount equal to the probable reasonable costs of the proceedings: see Project Research Pty Ltd v Permanent Trustee of Australia Ltd (1990) 5 BPR 11,225 at 11,229 per Hodgson J (as his Honour then was); Bank of New South Wales v O'Connor (1899) 14 App Cas 273; Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27 at para.63 (per Hodgson JA). 26 Formerly the mortgagor could obtain discharge of the mortgage by payment into Court only in a redemption suit. But, as Young CJ has pointed out in Estoril at 13,157 , in more recent times disputes as to redemption of mortgages are often worked out in declaratory proceedings. 27 In the present case, Liberty has sought a declaration that its reasonable costs of defending proceedings 4778/04 are secured by the mortgage. In my opinion, it is entitled to a declaration in those terms, provided that it is made clear however that such costs are confined to its defence and do not extend to the costs of its Cross Claim against the agent who procured the mortgage. I do not think that a claim by Liberty to secure an indemnity from its agent should the agent have been found to have procured the mortgage in circumstances entitling Mrs Steele-Smith to set it aside are properly costs incurred by Liberty in enforcing the mortgage against Mrs Steele-Smith, within the contemplation of Clause 20 of the mortgage. 28 However, Liberty has also sought an order for payment of the balance of the proceeds of sale into Court or into a trust account. It has sought a declaration that unless the balance of proceeds of sale is so dealt with, Mrs Steele-Smith is not entitled to a discharge of the mortgage. I do not think that it is entitled to that order and declaration for two reasons. 29 First, I do not think that it is usually open to a mortgagee to compel, by order of the Court, a mortgagor to avail himself or herself of a means of redemption which the court of equity affords the mortgagor. If a discharge of the mortgage is sought, the mortgagee's rights are limited to those conferred by the mortgage. If the mortgagor does not tender the amount due under the mortgage, the mortgagee is not obliged to give a discharge. If a contingent liability is still secured when the mortgagor seeks to redeem, the Court will, at the instance of the mortgagor, order a discharge on condition that the mortgagor provides alternative security or pays the requisite amount into Court. 30 Second, if Mrs Steele-Smith were to seek an order for discharge of Liberty's mortgage on condition that she pay into Court an amount to cover Liberty's reasonable costs of defending proceedings 4778/04, I would not order that the whole of the balance of proceeds of sale of the property be paid in, as Liberty requires. 31 As I have noted, the balance of the proceeds of sale will be approximately $197,000, less the costs of sale. According to the evidence tendered by Liberty, the costs and disbursements which it has incurred in defending proceedings 4778/04 to date amount to approximately $33,500. Having regard to the scope of the evidence foreshadowed in proceedings 4778/04 and the parties' agreement that the trial should conclude within a day, I would allow a generous margin of a further $30,000 approximately to cover Liberty's further costs of the proceedings, including any appeals. As preparations for trial between Liberty and Mrs Steele-Smith presently stand, I would, therefore, consider the sum of $65,000 as sufficient to cover the contingent liability secured under the mortgage in respect of Liberty's costs of defending proceedings 4778/04. 32 Accordingly, if Mrs Steele-Smith were to seek an order compelling Liberty to discharge the mortgage upon tender of the principal and interest outstanding as at settlement of the contract for sale of the property, then, subject to any further submissions as to the appropriate amount, I would make such an order upon condition that Mrs Steele-Smith paid into Court out of the settlement proceeds the sum of $65,000 to abide the determination of proceedings 4778/04. 33 Mrs Steele-Smith has not sought a redemption order, which is not surprising seeing that she is not legally represented in these proceedings. I have, however, indicated what I see as the proper outcome of the dispute between the parties in the hope that they may now be able to work out a satisfactory solution for themselves. 34 The orders which I will make are as follows. There will be a declaration in terms of paragraph 1 of the Plaintiff's Summons, limited to the reasonable costs of Liberty in defending the claims made by the plaintiffs in proceedings 4778/04. The Summons will otherwise be dismissed. The Plaintiff should bring in Short Minutes of Order reflecting these reasons. I will hear the parties as to costs. ~ oOo ~

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