Marcel Esber v Kimberley Securities Limited

Real Property Act 1900 (NSW) Duties Act 1997 (NSW) LEGISLATION CITED : Transfer of Land Act 1954 (Vic) Property Law Act 1974 - 1976 Conveyancing Act 1919 (NSW)

Re S & D International Pty Ltd (in liq) [2009] VSC 225 Ex parte Australian Co-operative Development Society Limited (In liquidation) [1978] Qd.R. 395 Avco Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679 Fraser v Australian Securities & Investment Commission, In the Matter of Lanepoint Enterprises Pty Ltd [2007] FCAFC 85 Chan v Cresdon Pty Ltd (1989) 168 CLR 242 Barry v Heider (1914) 19 CLR 197 Australian Alliance Assurance Co Ltd v Attorney General (Qld) [1916] St R Qd 135 CASES CITED : Director of Public Prosecutions v Turner [1974] AC 357 Re Murrell; Ex parte Official Trustee in Bankruptcy (1984) 57 ALR 85 Keech v Sandford (1926) Sel Cas t King 61 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 Boardman v Phipps [1967] 2 AC 46 Maguire v Makaronis (1996) 188 CLR 449 Adams v Bank of New South Wales [1984] 1 NSWLR 285 Bofinger v Kingsway Group Limited [2009] HCA 44 Charles v Jones (1887) 35 Ch D 544

C Croft & J Johannsson, The Mortgagee's Power of Sale, 2nd ed (2004) TEXTS CITED : Peter Butt, Land Law, 5th ed (2006) at [18174] CCH, New South Wales Conveyancing Law and Practice, vol 2 R Meagher, D Heydon, M Leeming, Meagher, Gummow and Lehane's Equity Doctrines and Remedies, 4th ed (2002)

Marcel Esber - First Plaintiff Joseph Esber - Second Plaintiff PARTIES : Casanda Pty Limited - Third Plaintiff Kimberley Securities Limited - First Defendant Residential Housing Corporation Pty Ltd - Second Defendant

COUNSEL : T.G.R. Parker SC with S. Fendekian [Plaintiffs] J.A. Levingston with L. Innes [Second Defendants]

SOLICITORS : Sachs Gerace Lawyers [Plaintiffs] Bolzan & Dimitri [Second Defendants]

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50110/2006 MARCEL ESBER & ORS -V- KIMBERLEY SECURITIES LIMITED & ANOR JUDGMENT

1 HIS HONOUR: Section 57(2) of the Real Property Act 1900 (NSW) ("the Act") authorises a registered mortgagee, chargee or covenant chargee of Torrens Title land, on default by the mortgagor, charger or covenant charger and subject to certain pre-conditions, to exercise a power to sell the land. 2 Section 58(1) of the Act provides that: Where a mortgagee, chargee or covenant chargee is authorised by section 57 (2) to exercise the powers conferred by this section, the mortgagee, chargee or covenant chargee may sell the land mortgaged or charged, or any part thereof, and all the estate and interest therein of the mortgagor, charger or covenant charger, and either altogether or in lots by public auction or by private contract, or both such modes of sale, and subject to such conditions as the mortgagee, chargee or covenant chargee may think fit, and to buy in and resell the same without being liable for any loss occasioned thereby, and to make and execute all such instruments as shall be necessary for effecting the sale thereof, all which sales, contracts, matters, and things hereby authorised shall be as valid and effectual as if the mortgagor, charger or covenant charger had made, done, or executed the same, and the receipt or receipts in writing of the mortgagee, chargee or covenant chargee shall be a sufficient discharge to the purchaser of such land, estate, or interest, or of any portion thereof, for so much of the purchaser's purchase money as may be thereby expressed to be received. 3 Section 58(3) of the Act provides that: The purchase money to arise from the sale of any such land, estate, or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee; thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be . (emphasis added) 4 Knox Street Apartments Pty Ltd ("Knox"), a company associated with the plaintiffs, developed a property at Knox Street, Chippendale in a joint venture with Kimberley Securities Pty Ltd ("Kimberley"). The joint venture was completed. Kimberley has since been wound up in insolvency. 5 The first plaintiff owned certain land comprising folio identifier 8/SP56179 and the third plaintiff owned certain land comprising folio identifier 7/SP56179 (which are strata units in a development in Hutchinson Street, Surry Hills). I shall, where convenient, refer to the first plaintiff and the third plaintiff collectively as "the Esbers" and I shall refer to both lots collectively as "the land". 6 In 1998 the Esbers mortgaged the land by first registered mortgages in favour of Permanent Trustee Australia ("the first mortgagee"), securing certain obligations of Knox to the first mortgagee. 7 In 1999 the Esbers mortgaged the land by second registered mortgages in favour of the second defendant, Residential Housing Corporation Pty Ltd, securing certain obligations of Knox to the second defendant. 8 Finally, on or about 7 December 2000 and with the consent of the second defendant, the Esbers mortgaged the land by third unregistered mortgages ("the third mortgages") to Kimberley to secure monies payable by Knox to Kimberley and guaranteed by the Esbers. 9 In about November 2001 (after Knox had defaulted) the first mortgagee, exercising its power of sale under the Act, sold the land. 10 The proceeds of sale were more than sufficient to pay the expenses of the sale and to discharge the debt owed to the first mortgagee. It paid over the balance remaining in its hands to the second defendant. The amount paid to the second defendant was more than sufficient to discharge its debt and it held a balance of $416,780.81 ("the disputed amount"). 11 The Esbers asserted to the second defendant that Knox (and accordingly they as guarantors) owed no money to Kimberley and that no money was owed under the third mortgages. They called on the second defendant to pay the disputed amount to them. 12 Kimberley asserted to the second defendant that a $2 M fee payable under the joint venture arrangement as well as other monies were owing to it under the third mortgages. It called on the second defendant to pay the disputed amount to it. 13 Initially, the second defendant took the stance that it was not in a position to release any funds until the issue was resolved. In a letter dated 13 February 2002 to the Esbers' solicitors, the second defendant's solicitors said that the second defendant would not place itself in a position of risk from any dispute arising between Kimberley and the Esbers. 14 On 13 February 2002 the second defendant's own solicitors gave it advice that at that stage it should not release any funds to any party until the matter was resolved. 15 On 15 February 2002, in a letter to Kimberley's solicitors, the second defendant's solicitors said, amongst others, that the second defendant did not wish to become involved in the dispute and would consider what further approaches Kimberley's solicitors may suggest as to how the funds could be held by someone other than the second defendant until the dispute was resolved. 16 Affidavit evidence was given by Mr James Christie, a director of the second defendant, that after receiving Kimberley's demand he telephoned Mr Nati Stoliar, a director of Kimberley, who insisted that the excess funds were paid to Kimberley and told Mr Christie that if need be Kimberley would commence court proceedings to enforce its rights, whereupon Mr Christie gave instructions for the disputed amount to be paid to Kimberley. Apart from this, the evidence did not reveal what caused the second defendant, in the face of the conflicting demands on it, to change its stance. 17 On 28 February 2002 the second defendant and Kimberley entered into a Deed of Indemnity and Release under which, against an indemnity from Kimberley, the second defendant paid over the disputed amount to Kimberley. 18 The Esbers first pursued Kimberley in these proceedings for the disputed amount. After a trial in which the second defendant did not take any active part, McDougall J held that as at 28 February 2002 (when the second defendant paid over the disputed amount to Kimberley) no money secured by the third mortgages was due from the Esbers to Kimberley. 19 Because of Kimberley's insolvency the Esbers have not recovered from it and there is no suggestion that they ever will. The second defendant's indemnity from Kimberley is apparently worthless. 20 The third mortgages were never registered. 21 The Esbers (for whom Mr T G R Parker SC and Ms S Fendekian of counsel appeared) contend that s 58(3) of the Act required the second defendant to pay the disputed amount to them. They say that in paying Kimberley the second defendant acted contrary to s 58(3) because the payment was not "in payment of subsequent mortgages". This is, they say, because:

a the reference to "subsequent mortgages" in s 58(3) of the Act means only subsequent registered mortgages; and b the payment to Kimberley was not "in payment of" a mortgage because nothing was then owed by the Esbers to Kimberley.

22 The Esbers claim that as a consequence of the second defendant's conduct they suffered loss. They claim equitable compensation equivalent to the disputed amount plus the costs they expended in their unsuccessful pursuit of Kimberley. 23 The second defendant (for whom Mr J Levingston of counsel appeared) did not put or seek to establish that at the time it paid the disputed amount to Kimberley, Kimberley was owed any money under the third mortgages. Its sole response to the Esbers' complaint is that it acted in accordance with s 58(3) of the Act because, it puts, the term "subsequent mortgages" in the section includes unregistered or equitable mortgages and that the payment to Kimberley was in payment of the third mortgages even if no monies were then actually due under them by the Esbers. It accepts that it is liable to pay equitable compensation if what it did was not in compliance with s 58(3). 24 The second defendant also accepts that if the Esbers are otherwise entitled to succeed, the equitable compensation to which they are entitled includes the costs of its unsuccessful pursuit of Kimberley. There is, however, an issue between the parties as to what should properly be included in those costs. The Esbers chose to have a separate hearing against Kimberley before finally pursuing the second defendant. Cleary there was some benefit in doing so because they established (and it is now not disputed) in that hearing that nothing was owed by them to Kimberley. But the second defendant says that costs would have been saved if the Esbers had chosen to have one hearing against both. The parties are agreed the exercise of quantifying the costs should be referred to a referee for investigation and report. 25 At the commencement of the hearing, the Esbers objected to the admission into evidence, and use in the proceedings, of the third mortgages because they each affected a dutiable transaction under the Duties Act 1997 (NSW) and had not been stamped. Section 304 of that Act provides that such an instrument may not be used for any purpose and may not be presented in evidence. The section also provides that such an instrument may be admitted if (where the person who produces the instrument is not liable to pay the duty) the name and address of the person so liable is forwarded, together with the instrument, to the Chief Commissioner in accordance with arrangements approved by the Court. I admitted the third mortgages into evidence. During the course of argument, the second defendant foreshadowed that although the obligation to stamp the third mortgages was on the Esbers, it would procure their stamping. I am satisfied, and there is no dispute, they have since been stamped. The total duty paid was apparently $60.50. 26 The first issue is whether, as a matter of construction, the term "subsequent mortgages" in s 58(3) of the Act means only mortgages registered under the Act. 27 Support for the Esbers' construction is to be found in C Croft & J Johannsson, The Mortgagee's Power of Sale, 2nd ed (2004), at [13.4]. The learned authors refer to ss 56(1) and (2) of the Act which are in the following terms: (1) Whenever any land or estate or interest in land under the provisions of this Act is intended to be charged with, or made security for, the payment of a debt, the proprietor shall execute a mortgage in the approved form.

(2) Whenever any such land, estate, or interest is intended to be charged with or made security for the payment of an annuity, rent-charge, or sum of money other than a debt, the proprietor shall execute a charge in the approved form. 28 The authors submit that these provisions indicate that mortgages or encumbrances as used in the Act mean only mortgages, encumbrances or charges registered under the Act.

29 However, in Re S & D International Pty Ltd (in liq) [2009] VSC 225 Robson J held, after reviewing authorities, that the words "subsequent mortgages and charges" in s 77(3) of the Transfer of Land Act 1954 (Vic) ("TLA"), which is the Victorian equivalent to s 58(3) of the Act, include unregistered mortgages and charges. 30 Some additional support is lent to Robson J's conclusion by the learned authors in Peter Butt, Land Law, 5th ed (2006) at [18174] and CCH, New South Wales Conveyancing Law and Practice, vol 2 at [35-440]. 31 I am however, not convinced that His Honour's conclusion is correct. 32 The particular decisions cited by His Honour as founding his conclusion were Ex parte Australian Co-operative Development Society Limited (In liquidation) [1978] Qd.R. 395, Avco Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679, and Fraser v Australian Securities & Investment Commission, In the Matter of Lanepoint Enterprises Pty Ltd [2007] FCAFC 85. 33 Each of these decisions differs from the present case in that each involved a contest between a registered and an unregistered (or equitable) interest with respect to an existing fund created by the exercise of a power of sale. 34 Australian Co-operative Development Society concerned the operation of s 88(1) of the Property Law Act 1974 - 1976, which is equivalent to s 112(4) of the Conveyancing Act 1919 (NSW). Unlike the Act, both those enactments apply to and concern mortgages of property including, but extending beyond, real property. They therefore extend to interests not susceptible to registration. 35 In Avco Financial Services v Commonwealth Bank of Australia Young J did not decide the question. His Honour held, obiter, as follows: Accordingly, although I lean to the view that one should read the word 'mortgage' in s 58(3) as including an equitable mortgage, because I do not consider that the equitable charge in this case is a charge within the meaning of the Real Property Act, the statutory trust in that former subsection does not avail the plaintiff. 36 In referring to Fraser v ASIC Robson J said at [157] and [158] the following: Finkelstein J of the Federal Court of Australia held, in addition to other reasons, that the order was inconsistent with the receiver's obligations under s 109 of the Transfer of Land Act (WA) which provided that the proceeds were to be applied, first, in payment of the costs and expenses of the sale; second in payment of the money due on the mortgage; third in payment of the money due on subsequent mortgages and charges; and finally, in payment of the surplus to the mortgagor. It is contended by S&D that Finkelstein J thereby recognised that subsequent mortgages and charges included the equitable interest under Perpetual's second debenture. Finkelstein J said: Perpetual is a claimant because of the common law rule that once a receiver has paid the amount due to his principal he must account for the surplus to second and subsequent mortgagees before any funds are paid to the mortgagor: Re Thomson's Mortgage Trusts [1920] 1 Ch 508; Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222, 228. It could also rely on s 109 of the Transfer of Land Act. 37 It does not appear to me that Fraser v ASIC dealt with the issue at hand. 38 The learned authors Land Law and New South Wales Conveyancing Law and Practice do not cite any authorities beyond those cited by Robson J. 39 In my opinion s 58(3) of the Act refers only to registered (legal) interests and creates a statutory priority between such interests only. But that does not mean that equitable interests are left out of account. Where there are in fact subsisting equitable interests in the proceeds of sale, a court of equity will recognise and enforce them and the legal priorities identified in s 58(3) will be disturbed accordingly. Where surplus proceeds are in the hands of a mortgagee (or for that matter the mortgagor), a court of equity will give the equitable owners access to the fund. Absent the intervention of equitable interests, the statutory priorities apply. 40 Section 41 of the Act provides as follows: No dealing, until registered in the manner provided by this Act, shall be effectual to pass any estate or interest in any land under the provisions of this Act, or to render such land liable as security for the payment of money, but upon the registration of any dealing in the manner provided by this Act, the estate or interest specified in such dealing shall pass, or as the case may be the land shall become liable as security in manner and subject to the covenants, conditions, and contingencies set forth and specified in such dealing, or by this Act declared to be implied in instruments of a like nature. 41 As was pointed out by the High Court in Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 257, referring to a passage in Barry v Heider (1914) 19 CLR 197 at 216 which dealt with s 41: …though the unregistered instrument is itself ineffective to create a legal or equitable estate or interest in the land, before registration the section does not avoid contracts or render them inoperative. So an antecedent agreement will be effective, in accordance with the principles of equity, to bring into existence an equitable estate or interest in the land. But it is that antecedent agreement, evidenced by the unregistered instrument, not the instrument itself, which creates the equitable estate or interest. 42 In my view, a mortgage under the Act means one which is effective to create a legal estate or interest in the land by registration. An "equitable mortgage" does not qualify but the contract which it embodies will bring into existence an equitable estate or interest in the land in accordance with the principles of equity. 43 Additionally it may be observed that where the terms "mortgagee, chargee or covenant chargee" are first used in s 58(3) they clearly mean a mortgagee, chargee or covenant chargee referred to in s 58(1), which in turn refers to s 57(2) which comprehends only registered mortgagees, chargees or covenant chargees. If the latter reference in s 58(3) to "subsequent mortgages, charges or covenant charges" includes unregistered instruments it would mean that in one section the legislator intended the same terms to have different meanings. This would be contrary to the accepted cannon of statutory construction that a court is to give the words the construction that produces the greatest harmony and the least inconsistency; Australian Alliance Assurance Co Ltd v Attorney General (Qld) [1916] St R Qd 135 at 161; Director of Public Prosecutions v Turner [1974] AC 357. 44 The conclusion I have reached is consistent with the analysis of Smithers J (with which I respectfully agree) in Re Murrell; Ex parte Official Trustee in Bankruptcy (1984) 57 ALR 85. His Honour considered the operation of s 77(3) of the TLA which is in materially indistinguishable terms to s 58(3) of the Act. His Honour said, On their face the provisions of s 77(3) are mandatory. Nevertheless where there were in fact subsisting equities in the proceeds of sale which a Court of Equity would recognise and enforce it is difficult to contemplate that, while the surplus proceeds are in the hands of a mortgagee, a Court of Equity would not give the equitable owners access to it. 45 Nevertheless, and whilst I take a view different to that of Robson J, I do not consider that His Honour's view, supported as it is at least by obiter dicta and text writers, is so clearly wrong that I should not follow it. The resolution of the difference is best left to an appellate tribunal. 46 I accordingly do not accept the Esbers' submission that s 58(3) of the Act refers only to registered mortgages. 47 Anyway, the Esbers' construction would not on its own lead inexorably to the conclusion that they are entitled to succeed. This is because it is clear, even if "subsequent mortgages" in s 58(3) means only registered mortgages, the section does not extinguish the rights of equitable interest holders or affect their priorities. If Kimberley had had an equitable interest in the disputed amount it would have been entitled, as against and in priority to the Esbers, to receive it. 48 It follows that the second defendant's concession, that if as a matter of construction s 58(3) refers only to registered mortgages it is liable, was generously made. But given that I have decided not to depart from the conclusion reached by Robson J in Re S & D International and having regard to what is said below, the concession has no effect on the outcome. 49 On the assumption that subsequent mortgages under s 58(3) include equitable mortgages, I turn to the second issue which is whether the payment to Kimberley was "in payment of" a subsequent mortgage. However, if the position were to be governed not by s 58(3) but general principles of equity, the outcome would in the present case, as appears below, be no different. 50 The Esbers submitted that to be in payment of a mortgage a payment must discharge a debt secured by it. They put that the test is objective. 51 In response the second defendant put firstly that it was sufficient to make the payment to Kimberley "payment of" the third mortgages that Kimberley held the third mortgages and had asserted that the Esbers owed it money.

52 Secondly, the second defendant put that if it was required to distribute the surplus according to subsequent mortgagees according to their priority, it must follow that the first mortgagee was also required to do so and that it should not, in that case, have paid the disputed amount to the second defendant as it was more than what the second defendant was owed. This, it was put, was a breach of duty by the first mortgagee and accordingly the second defendant "is not liable". 53 Finally, the second defendant put that once Kimberley was paid, it held the entirety of the disputed amount in trust and from that moment the second defendant was no longer a trustee of it. It was put that Kimberley paid the disputed amount to itself in breach of its duty as a trustee for the Esbers and that the second defendant is not liable for Kimberley's breach of trust in failing to pay the disputed amount to the Esbers. 54 Each of these submissions is unsustainable for the reasons which follow. 55 The first is, in effect, a submission that payment of a mortgage is payment to someone claiming to be entitled rather than to someone who actually is. In my view a payment to someone who has no entitlement under a mortgage cannot be payment of it. In the language of equity, the submission (although not so articulated) was that an absence of knowledge on the part of the second defendant that Kimberley was not owed money or a belief that it was, was sufficient to assuage what otherwise would be a breach of fiduciary duty. So articulated the submission is likewise unsustainable because it is well established that dishonesty or bad faith on the part of the fiduciary is irrelevant to his liability for a primary breach. He may be liable although his integrity emerges from the proceedings unscathed; Keech v Sandford (1926) Sel Cas t King 61; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Boardman v Phipps [1967] 2 AC 46; Maguire v Makaronis (1996) 188 CLR 449; R Meagher, D Heydon, M Leeming, Meagher, Gummow and Lehane's Equity Doctrines and Remedies, 4th ed (2002) at [5-110]. 56 The second submission did not identify any juridical basis for why the second defendant was not in a fiduciary position in relation to the disputed amount, whether or not the first mortgagee incorrectly paid it to the second defendant. Clearly it was in a fiduciary position. It was a mortgagee who was paid more than it was entitled to retain and it had no beneficial interest in the excess (in this case the totality). It was in a position no different to a first mortgagee who exercises a power of sale where the purchase price received is more than the mortgage debt. I accordingly do not accept the second submission. 57 As to the final submission, the fact that Kimberley undoubtedly breached its obligations to the Esbers does not mean that the second defendant did not. Its debt having been paid, the second defendant held the disputed amount as trustee for the persons beneficially interested. In the present case that was the Esbers, not Kimberley. When faced with the competing claims, the second defendant's proper course and that which would have protected it, was to pay the disputed amount into court or to interplead. It chose instead to pay the money to Kimberley in return for an indemnity, when Kimberley was not entitled to receive any payment. It may have paid away the trust fund but its breach of duty was complete once it had done so.

58 In Adams v Bank of New South Wales [1984] 1 NSWLR 285 at 299 it was held that s 58 of the Act 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. 59 More recently in Bofinger v Kingsway Group Limited [2009] HCA 44 at [35] the High Court adopted and affirmed that the position in equity is as was described by Kay J in Charles v Jones (1887) 35 Ch D 544 at 549-550 as follows: where a mortgagee sells, and has a balance in his hands, he is a trustee of that balance for the persons beneficially interested, and that in such circumstances the mortgagee has a duty to set this money apart in such a way as to be fruitful for the benefit of the persons beneficially entitled to it, and accordingly is in a fiduciary relation to the persons entitled to the money. 60 In my view "payment of subsequent mortgages" means payment of money due or owing under such a mortgage or mortgages, that is, payment to someone beneficially entitled to the fund and for whose benefit the prior mortgagee holds it. It does not mean payment to whoever holds the next registered or equitable mortgage, irrespective of whether the holder is owed money. 61 Kimberley had no intervening equitable interest in the disputed amount let alone one which prevailed over the Esbers' legal entitlement under s 58(3) of the Act. The payment to Kimberley discharged nothing. 62 The real difficulty for the second defendant is that at the time it paid the disputed amount to Kimberley, Kimberley had no beneficial entitlement to it. 63 It follows that the second defendant acted neither in accordance with s 58(3), nor its equitable obligations and that as a consequence it must compensate the Esbers. 64 There will be judgment for the Esbers: a in the amount of $416,780.81; plus b interest to be calculated from 28 February 2002; plus c an amount to be determined as representing the costs properly and reasonably incurred by the Esbers in their unsuccessful pursuit of Kimberley; less d the amount of $60.50 for stamp duty paid by the second defendant which discharged the Esbers' obligation to pay that impost. 65 The parties are to bring in short minutes reflecting this outcome. The orders are to provide for there to be referred to a referee for inquiry and report under Uniform Civil Procedure Rules r 20.17 the assessment of the costs of the Esbers incurred in pursuing Kimberley. I will hear the parties on costs.

17/12/2009 - references to plaintiff/s corrected to read "the Esbers" - Paragraph(s) 18, 19, 47

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