MITCHELL v CRANE [2009] NSWSC 489 | Case summary

3844/08 WILLIAM PAUL MITCHELL, JULIA HOPE GILLARD & NICHOLAS MITCHELL COREN T/AS THOMAS MITCHELL SOLICITORS v KATHY LEANNE CRANE ALSO KNOWN AS SORRENSON & 3 ORS JUDGMENT 1 HIS HONOUR: This case is about competing equitable priorities between competing claims to real property which has been converted by interlocutory arrangements into a fund of money. 2 In August 2004 Mrs Crane who is the first defendant and Mr Crane who is the fourth defendant owned a house property in Oak Road Matcham, New South Wales. The property was subdivided and when it was sold it was sold in two lots. 3 Before 2004 the Cranes had housing finance from the Commonwealth Bank but they paid this out when they obtained a loan of $925,000 from the National Australia Bank. The borrowers in the loan were both Mr and Mrs Crane, however the registered proprietor was Mrs Crane solely. The Bank obtained a mortgage granted by her which was registered under the Torrens system, that is to say Mr Crane was a principal debtor and not a guarantor. 4 There were two guarantors and these are the second and third defendants, namely C and K Crane Investments Pty Limited and Re Rent Pty Limited. These companies are associated with Mr Crane in some way, he controls their affairs. They gave a Consumer Guarantee to the National Australia Bank in relation to the loan. This document is dated 26 August 2004, although the executions on it bear other dates. 5 Payments on account of the loan began on 6 December 2004 when the Investments company paid $800 into the home loan account out of the Investment company's business cheque account, also with National Australia Bank. In a similar way while the house was financed by the Commonwealth Bank, which was paid out when the refinancing took place, Investments had made payments on account of the loan by that Bank and had done so for some years. 6 Investments made many more payments of $800 approximately weekly through 2005 and the last payment of $800 was made on 10 March 2006. Then Investments made payments again approximately weekly of $1,365.89 from 17 March 2006 to 26 May 2006. The total paid according to a table annexed to Mr Crane's affidavit appears to be $67,824.79. Then the third defendant, Re Rent, made two payments, on 13 September 2006 and 5 February 2007 totalling $16,300 and Investments made a payment of $10,000 on 5 February 2007. So the total payments made by these two companies were $94,124.79. Exact computation is not vital for my disposition. What is clear is that the total that those two companies paid on account of the National Australia Bank loan was greater than the fund now in question. So that if they are entitled to it, they are entitled to all of it. 7 The times and amounts of these payments appear in Annexure A to Mr Crane's affidavit which is an analysis or summary of facts which appear from bank statements and other banking documents in Exhibits 3 and 4. Exhibits 3 and 4 are what counts, not the analysis, but in my understanding they agree. 8 The plaintiffs are the members of Thomas Mitchell Solicitors and that firm acted for Mrs Crane in litigation in the Family Court of Australia between Mr and Mrs Crane relating to their marriage and property. The firm became entitled to payment of fees which appear by memoranda of costs which they rendered to Mrs Crane from time to time under a costs agreement dated 8 November 2005. The costs agreement did not confer on them any charge or similar right over Mrs Crane's property. 9 The firm acted under that retainer and costs agreement from 26 October 2005 until 11 October 2007 and Miss Michelle McEntyre, solicitor, had conduct of the matter in their office. The plaintiffs terminated the retainer with effect on 11 October 2007 under provisions in the retainer agreement. They maintain and still maintain that they were entitled to costs and the total of their memoranda of fees rendered and unpaid is $85,523.34. The amount payable is at present under taxation in the Family Court of Australia but plainly they would be entitled to a significant sum. If their entitlement is taxed out above $75,279.68 they claim the whole fund. 10 After the retainer was terminated Mrs Crane acted for herself in the Family Court proceedings. The property disputes in those proceedings were concluded by an order of that Court of 20 March 2008. The orders accorded with a Minute of Consent Orders which the parties had signed. This Minute contained a declaration or statement that Mrs Crane held the property, Lot 112, in trust for the second and third defendants and for a company called CWC Hire Pty Limited, and went on to make provisions for her to sell the property and distribute the proceeds with elaborate arrangements about distribution of the proceeds, and other arrangements about property of the parties. 11 Of course the plaintiffs were not parties to the Family Court proceedings, nor were the second and third defendants, and their rights are not established by the terms of the order. The rights declared in the order exist only in the legal relationship between Mrs Crane and Mr Crane. On them, however, they have binding effect having regard to s 78 of the Family Law Act. According to that order however, Mrs Crane did not have an equitable interest, she was a trustee, and the rights of others to proceeds of the sale of the property would have exhausted its value. It is difficult to say what the interest of Mrs Crane is over which the plaintiffs have a charge. Without deciding this I will proceed on the basis that they have a charge over the fund remaining after sale, although it is not clear to me that they actually do. It is only over her interest in the property that their charge extends. 12 On 4 June 2007 Mrs Crane executed the deed charging "her interest in the property at 112 Oak Road, Matcham" with costs and disbursements owing to the plaintiffs and from time to time to become owing to them relating to the Family Court proceedings. She also charged the property with other costs and expenses of recovery, and acknowledged, as was plainly correct, that the deed created a caveatable interest as equitable mortgagees over her interest in the property. The plaintiffs lodged caveat AD220399 which was recorded on 26 June 2007. 13 The second, third and fourth defendants including Mr Crane lodged caveat AC306614F which was recorded on 15 May 2006. This claims an interest in Lot 112. The land in question was from the year 2000 onwards the subject of register folio 112/1009714. While the register was in that state the mortgage to the National Australia Bank was registered and the second and third defendants' caveat was recorded. Then the property was subdivided into two lots on 16 April 2007 when Deposited Plan DP1110312 was registered. The land then became the subject of register folios 1/1110312 and 2/1110312. It was in this state that the plaintiff's caveat was recorded. 14 The terms of the earlier caveat are open to criticism because Mr Crane is one of the claimants but he has no apparent claim to the estate referred to in the caveat, although he may have some other claim, and because the nature of the estate or interest in land referred to is said to be "borrowers or guarantors for home loans from National Australia Bank in the amount of $925,000", which does not reveal what the interest claimed is. 15 However the positions of the two competing parties do not depend on evaluation of the terms of their caveats or on the dates of their caveats. Competition turns on evaluation of the interests which they actually had. There is no basis for the view that the equitable priority of either of them is adversely affected by some misconduct or negligence or misunderstanding in the other parties' minds produced by the terms of a caveat. 16 Cross-examination was based in part on an attempt to show by the evidence of Miss McEntyre that she and hence her employers knew or ought to have known that the interest claim by the second and third defendants existed and had already arisen at the time when the plaintiffs took their Deed of Charge. She may well have known of that interest or known of facts from which it could have been discovered or inferred, but the competition of priorities does not in my view turn on actual or constructive knowledge or notice of the interests of these defendants. 17 Some submissions made to me have, in my understanding, attributed more significance than was justified to the existence and terms of the caveats and to the apparent vulnerability of the caveat lodged by the second and third defendants and Mr Crane to removal if the court had been asked to order its removal. 18 Caveats do not stand as provisional registration or have any similar operation. The function of caveats was explained in J and H Just (Holdings) Pty Limited v Bank of New South Wales (1971) 125 CLR 546. I particularly refer to the judgment of Barwick CJ and his expositions at paragraphs 12 and following of the significance of a caveat. There are further references in the judgment of Windeyer J. 19 Late in 2007 Lot 1 was sold. There is very little reference to this sale in the evidence, but Exhibit 5 includes a letter from National Australia Bank to Mrs Crane of 29 October 2007 confirming settlement of the sale of Lot 1. It is not clear whether the Bank sold it or Mrs Crane sold it and left the management of the sale to the Bank. However the Bank took all the proceeds. 20 The issue of the summons responded to a lapsing notice served by Mrs Crane on the plaintiffs on 7 July 2008; this notice would have brought about lapse of the plaintiffs' caveat. When they commenced their proceedings on 18 July 2008 the plaintiffs sought a declaration that they had a charge over the property, extension of their caveat and removal of the second and third defendant's caveat. 21 While the proceedings were pending arrangements were made under which the secured properties were sold. The debt to the Bank was repaid as were expenses relating to the sale and perhaps other charges, and the balance was held and is now held by solicitors who acted for Mrs Crane as vendor, pending the decision of the court about entitlements to it. Exhibit 5 shows that on 6 August 2008 the Bank wrote to Mrs Crane reporting settlement of the sale, receipt by the bank of $747,536.60 which closed the home loan account and payment of the balance in accordance with her instructions. 22 Also in Exhibit 5 is a statement of account, unfortunately lacking a date but obviously referring to the same business, by Messrs Hills Solicitors who acted for Mrs Crane on that sale, which shows that they then held $75,279.68 in trust "pending resolution of caveat matters" which I take it to be a reference to the interlocutory arrangements in this litigation. In my understanding the money remains there. There may well be some interest on the money held by Hills Solicitors. 23 In my opinion these interlocutory arrangements do not change the substantial rights of the parties. They convert them into rights against that fund. Completion of the second sale necessarily involved withdrawal of the caveats and discharge of the Bank's mortgage so that the sale could take place and the purchaser could get title, without which he could not have been expected to pay. The discharge of mortgage does not defeat the court's disposition of the fund produced by the sale under interlocutory arrangements. The rights to be determined are rights in the property before it was sold, and disposition of the fund follows that. The fund can only go one way. If the plaintiffs have priority it is likely even after taxation that they will be entitled to all or substantially all of it, and if the second and third defendants have priority they will take the whole of it. 24 Disposition of the proceedings follows decision on which of the claims has priority as an equitable claim. The only circumstance by which priority can be decided and the better equity can be identified is priority in point of time. Neither side has been shown to have conducted itself in any way which disentitles it to priority on the ordinary basis which is time related. There have been no deceptions and no conduct producing misunderstandings. As I said earlier, priority is not a question of construing or appraising caveats. 25 The plaintiff's claim has the strength that it is based on an express written charge created by a deed and given for value. The claim by the companies is based on rights of subrogation to the rights of the registered mortgagee claimed to arise out of the defendant companies having made payments in reduction of the debt of Mr and Mrs Crane to the bank. The defendants made all the payments on which they rely before the plaintiff's charge was created. 26 Rights of subrogation in favour of a surety or guarantor who paid a principal debt, including a mortgage debt, are well recognised in case law. Guarantors and sureties have rights of subrogation if they pay the debtor's obligation to the mortgagee, that is if they pay the whole of it. In my opinion there is no reason in principle why they do not have similar rights if they pay part of the debtor's obligation of the mortgagee. Entitlements of this kind are long established in equity. The law and the supporting authorities appear from passages in judgments in the Court of Appeal in Bofinger v Kingsway Group Pty Limited [2008] NSWCA 332. 27 Bofinger's case did not turn on the basic principle, but in the judgment of Giles JA at paragraphs 3 to 10 there are statements which establish, with references to authority including authority in the High Court of Australia, the existence of this entitlement. Indeed it has existed for centuries. It has been recognised in the High Court of Australia, see Australasian Conference Association Limited v Mainline Constructions Pty Limited (in liquidation) (1978) 141 CLR 335 and in particular the exposition of the underlying principle by Gibbs ACJ at page 348. 28 The exposition is a little subtle. In the words of Gibbs ACJ quoted by Giles JA at para 4 of Bofinger, the principle underlying the subrogation is "that it would be inequitable for a creditor, by choosing not to resort to remedies in his power, to cast the whole of the obligation on the surety." That is to say the equity is explained in terms of the obligations in conscience of the principal creditor, who is not to let the guarantor go without the benefit of the remedies available to the principal creditor while himself collecting the guarantor's money. There are further expositions and references to authority in the judgment of Handley AJA in the same case. 29 As well as the equitable basis of this remedy, the Law Reform (Miscellaneous Provisions) Act 1965 s 3, which may perhaps be a little narrower than the general equitable principles, states in very high terms the rights of a surety who being liable for another's debt or duty pays the debt or performs the duty. That person is entitled to have an assignment of every security and entitled to stand in the place of the creditor and use all the creditor's remedies. 30 I do not think it is necessary to dwell on or examine closely the meaning and effect of s 3; it may have the meaning which plaintiff's counsel claimed also for the equitable principle, that the entitlement avails only a surety who has paid the whole debt. 31 The judgments in Bofinger discuss circumstances which distinguish Bofinger from any ordinary case. These related to disturbance of priorities which otherwise would exist between a surety and the holder of a second or subsequent mortgage or charge. There are no corresponding difficulties on the facts of this case. The guarantors and Mr Crane who is associated with them did not create any security which might compete with the claim by subrogation to the rights of the first mortgagee. They did not create the charge in favour of the plaintiffs. 32 Bofinger's case is important and in some respects an innovation in that it extends to guarantors who are closely associated with borrowers who have granted security, and identifies the guarantors with the position of the borrower in incapacity to promote their own interests above the second or subsequent mortgagee whose interests the borrower created. That is to say, there appears to have been to some degree an extension of Otter v Vaux (1856) 2 K&J 650, 69 E.R. 943. That can have no application because Mr Crane did not create the charge in favour of the plaintiffs and did not give a guarantee to the plaintiffs, nor of course did the second and third defendants. 33 There is nothing in the principle underlying the entitlement in equity of the surety which would require the surety to get no protection unless the surety paid the entire debt. The reasons why the principal creditor has an obligation in conscience towards a surety are just as strong whether the surety has paid all the debt or only a small part of it. On each occasion when the second defendant made a weekly payment it acquired in my opinion an entitlement to that extent to subrogation to the remedies available under the first mortgage to National Australia Bank. As for the part so too for the whole; and so also for the two payments made by Re Rent Pty Limited. 34 If an entitlement under s 3 of the Law Reform (Miscellaneous Provisions) Act arose it too in my understanding would arise in respect of each payment at the time that it was made. However as the equitable principle applies it is not necessary that I should act on that basis. 35 The plaintiff's counsel contended that the second and third defendants are not in a position to have the benefit of the equitable principle, for several reasons. One was that he contended that they had not made their payments to the National Australia Bank in the character of guarantors or under the form or with the intention of conforming with guarantee obligations, but had done so by way of a loan to the Cranes, accounted for as such in their books. Counsel contended that the payment to the principal creditor must be made as guarantor and not in some other capacity. In my opinion the entries in the second and third defendants' own books of account recording the obligation to them which payment of the Cranes' debt imposed on the Cranes do not determine what their rights are. It is appropriate that their books should record an obligation by the Cranes to them. They had a right to indemnity and that right should have been accounted for. To call it a loan or put it in a loan account is not a complete statement of the basis of accountability, but for accounting purposes it is a clear enough indication. It may not have been an obligation under a loan but under some other common money count The plaintiffs are not to be advantaged by what these defendants choose to put in their books of account to record the obligation, in which, indeed, the plaintiffs are not involved. 36 In my view what matters is not the detail of the contractual arrangements between the surety and the principal debtor about how the debt is to be repaid. What matters is whether there was in fact an obligation of the surety to make the payment to the principal creditor. What is in issue is the right of the principal creditor to receive the payment under the guarantee, whether or not the surety intended to make the payment in that character. It would still be a payment under the guarantee if he had forgotten all about the guarantee and did it out of charity; he would still be a guarantor and would still be discharging his obligations as guarantor. 37 Counsel also contended that these defendants were not entitled to subrogation because, as he contended, the liability under the guarantee document had not matured or crystallised because the guarantee contains conditions precedent to the guarantor's obligation to pay. Counsel referred to cl 8.1 of the guarantee document Exhibit 12 and contended that liability is contingent on the bank making a demand for payment. There were no demands for the payments which were made week by week. 38 Counsel contended that the conditions in clause 8 must be satisfied for the principal to have any entitlement against the guarantor and hence there was no entitlement to subrogation. In my opinion the underlying principle does not support restriction of entitlement to cases where the guarantors do not do their duty until they are compelled to. The general provisions of the document in exhibit 12 make the liability of these defendants as guarantors altogether clear, clear before as well as after the machinery for enforcement is followed. No sound principle could require limitation of remedies only to sureties who are recalcitrant or await compulsion, or could require the Court to withhold remedies from those who recognise their obligations and pay from the beginning. 39 Counsel also contended that the rights of subrogation do not exist until such time as the principal debt has been wholly discharged. I discussed this subject earlier when I stated my opinion to the contrary effect. Counsel also contended that these defendants are disadvantaged by the circumstance that the mortgage has, in fact, now been discharged so that no further remedies are available under it. I do not accept this contention for the reason which I earlier discussed relating to applying to the fund arising from the sale of the property under an interlocutory arrangement the rights and remedies which were available against the property itself when the litigation commenced. 40 My conclusion then is that the second and third defendants are entitled by subrogation to the rights of the bank to recover out of the proceeds of sale a sum in excess of the fund now held. This decision does not carry with it a corollary that if they were not so entitled the plaintiffs would have been entitled to do that. As I indicated earlier I have not decided whether Mrs Crane had at the end any interest in the land to which the charge could apply. So far as the rights under my consideration show, the second and third defendants are entitled to the fund now held by Hills Solicitors and the plaintiffs are not. 41 The plaintiffs would not have been entitled to further extension of their caveat which should have been removed if not already removed. The plaintiffs are not entitled to the declaration claimed in paragraph 2 of the summons. 42 ORDER:

MITCHELL v CRANE

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