Mortgages - "All moneys" mortgage - Whether damages awarded to plaintiff secured by mortgage - Priority - Tacking - Rule in Hopkinson v Rolt - What constitutes notice of subsequent encumbrance - Whether constructive notice sufficient - Turns on own facts

Advance Bank (Merger with St George Bank) Act 1998 (WA)

1 NEWNES J: This application involves a question of priority as between the plaintiff as mortgagee under a registered mortgage and the second defendant as the holder of a subsequent unregistered mortgage. The first defendant did not seek to be heard on the application.

2 The relevant facts were not in dispute. The first defendant is the registered proprietor of land situated at 24 Peckham Street, Beckenham in Western Australia (the "land").

3 The first defendant granted to Advance Bank Australia Ltd ("Advance Bank") a mortgage (the "plaintiff's mortgage") over the land. The plaintiff's mortgage is dated 21 April 1997 and was registered on 2 May 1997. On 1 April 1998, the plaintiff became the mortgagor under the plaintiff's mortgage, in place of Advance Bank, pursuant to the Advance Bank (Merger with St George Bank) Act 1998 (WA) (the "Act").

4 On or about 1 November 1999, the plaintiff received from the first defendant an invoice in the name of Scotsdale Enterprises Pty Ltd ("Scotsdale Enterprises"), trading as Midland Truck Sales, for the supply to Kelmscott Truck Sales (WA) Pty Ltd ("Kelmscott Truck Sales") of a trailer for the sum of $108,000. Scotsdale Enterprises was a company controlled by the first defendant, and of which he was the sole director.

5 Acting on the invoice, the plaintiff entered into a hire purchase agreement with Kelmscott Truck Sales on 4 November 1999 and the plaintiff paid the sum of $108,000 to Scotsdale Enterprises.

6 In March 2001, Kelmscott Truck Sales ceased making payments under the hire purchase agreement. It subsequently turned out that the trailer referred to in the invoice had never existed.

7 On 22 May 2001, the second defendant lodged a caveat over the land to protect an unregistered mortgage of the land granted to it by the first defendant (the "second defendant's mortgage"). The second defendant's mortgage is dated 22 May 2001. Since 5 February 2007 the first defendant has been the sole director of the second defendant. The sole shareholder is Mr John Miller, an accountant.

8 The plaintiff subsequently commenced proceedings against the first defendant, Scotsdale Enterprises and Kelmscott Truck Sales in the District Court of Queensland. The plaintiff obtained default judgment for damages to be assessed against Kelmscott Truck Sales. It applied for summary judgment against the first defendant and Scotsdale Enterprises, claiming, among other things, that Scotsdale Enterprises was liable in damages for breach of s 52 of the Trade Practices Act 1974 (Cth) in respect of the invoice and that the first defendant was liable under s 75B of that Act as a person involved in the contravention.

9 On 27 June 2003, the plaintiff obtained summary judgment against the first defendant and Scotsdale Enterprises for damages to be assessed. Those damages were subsequently assessed and, on 7 November 2003, the plaintiff obtained final judgment in the sum of $107,513.39, interest of $30,872.49 and costs on an indemnity basis.

10 On 11 October 2004, the plaintiff caused a writ of fi fa to be issued out of this Court in the sum of $138,385.88 and to be lodged against the title to the land. On 9 February 2005, a succeeding writ of fi fa was lodged against the title. On 18 September 2006, a Property (Seizure and Sale) Order in the same amount was lodged against the title.

11 In the present proceedings the plaintiff seeks, among other things, declarations that the judgment sum is an amount secured under the plaintiff's mortgage and that, in respect of that sum, the plaintiff's mortgage ranks in priority ahead of the second defendant's mortgage.

12 It was submitted on behalf of the plaintiff that the plaintiff's mortgage secured any money owing by the first defendant to the plaintiff. It was, by virtue of cl 1.3, what is commonly referred to as an "all moneys" mortgage and in its terms plainly applied to the amount for which the plaintiff had obtained judgment against the first defendant in the District Court of Queensland.

13 Counsel submitted that, in respect of that amount, the plaintiff plainly had priority over the second defendant's mortgage. The rule in Hopkinson v Rolt [1861] EngR 641; (1861) 9 HL Cas 514 - that a mortgagee to whom property is mortgaged for advances already made cannot, after receiving notice of a second mortgage, take priority over the second mortgagee for further advances under the first mortgage - had no application. In the first place, the amount owing to the plaintiff under the judgment was not a further advance by the plaintiff to the first defendant, but an amount which had become due and owing by virtue of that judgment. Secondly, at the time the debt arose the plaintiff did not have notice of the second defendant's mortgage. The lodging of the caveat by the second defendant did not constitute notice to the plaintiff for the purposes of the rule in Hopkinson v Rolt.

14 It was further submitted that a contention by the second defendant that the rights of the plaintiff under the plaintiff's mortgage had merged in the judgment was not sustainable in light of the express provision of the plaintiff's mortgage that no such merger took effect.

15 It was submitted on behalf of the second defendant that the moneys owing pursuant to the judgment of the District Court were not covered by the plaintiff's mortgage. The plaintiff's mortgage was originally granted to Advance Bank and it was only subsequently that the plaintiff became entitled to it. It was never contemplated that the plaintiff's mortgage would cover a money debt payable by the first defendant to the plaintiff. The plaintiff's mortgage was never intended to go that far.

16 It was submitted, in the alternative, that the plaintiff had at least constructive notice of the second defendant's mortgage by reason of the lodgment of the caveat. It was submitted that it is not necessary that a first mortgagee have actual notice of a subsequent mortgage, but it is sufficient if the notice is constructive. Counsel cited Sibbles v Highfern Pty Ltd [1987] HCA 66; (1987) 164 CLR 214 at 221, Nia v Phuong (1993) NSW ConvR 55-671 at 59,835 and Oversea-Chinese Banking Corp Ltd v Malaysian Kuwaiti Investment Co [2003] VSC 495 at [176].

17 It was further submitted in the second defendant's written outline of submissions that the plaintiff's rights in respect of the judgment debt had merged in the judgment, albeit that submission appeared to be based on the misunderstanding that the plaintiff's claim to priority was somehow based on the writs of fi fa it had caused to be lodged rather than on the plaintiff's mortgage. The submission was not pressed in oral argument.

18 The first question is whether the amount of the judgment debt is an amount owing under the plaintiff's mortgage.

19 By cl 1.2.1 of the plaintiff's mortgage, the first defendant mortgaged the land to Advance Bank to secure payment to Advance Bank of the amount owing under the mortgage. The "amount owing" is defined in cl 36 of the plaintiff's mortgage to mean:

"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 ..." [italics in the original]

20 Clause 36 defines an "agreement covered by this mortgage" to mean:

"an agreement or other arrangement (including a deed) under which one or more of you incurs or owes obligations to us or under which we have rights against you, including any such agreement or arrangement which all of you acknowledge in writing to be an agreement covered by this mortgage; and each variation of it."

" 'including' ... when introducing an example does not limit the meaning of the words to which the example relates to that example or examples of a similar kind."

22 In my view, the judgment debt is an amount owing under the plaintiff's mortgage.

23 The principles to be applied in construing such a clause were considered in Donnelly v Commonwealth Bank of Australia Ltd (1996) 140 ALR 46. In that case, Ms Murphy and her husband had executed a mortgage over a property owned by them in favour of the Commonwealth Bank of Australia. At the time, Ms Murphy was employed by the Bank. The mortgage document contained an "all moneys" clause to the effect that the mortgagor would pay to the Bank all moneys then or thereafter to become owing or payable to the Bank by the mortgagor. Ms Murphy subsequently stole a substantial amount of money from the Bank. The question was whether the mortgage included the moneys owing to the Bank as a result of Ms Murphy's criminal activity. Hill J held that it did. Having reviewed a number of authorities, Hill J set out the principles which he considered were accepted law in New South Wales. They were, so far as relevant:

"(1) There is no principle of law that an all moneys clause should be read down merely because it is to be found in a document prepared by a bank. In particular there is no contra proferentem rule to be adopted.

(2) A bank mortgage is traditionally drawn to cover a multitude of possible situations and intended to secure the bank as effectively as possible. The question is whether the situation falls within the contemplation of the clause as written.

(3) Particularly, notions of fairness, justice or reasonableness are matters relevant to questions which might arise under statute or in equity where unconscionability is suggested. They are not notions as such relevant to the question of construction.

(4) An all moneys clause is to be construed having regard to the context in which the mortgage came to be executed and by reference to the commercial purpose it was intended to serve. But otherwise the intention of the parties is to be ascertained from the language which they have used."

24 His Honour went on (at 55) to say in relation to the particular case before him:

"The language of the mortgage is quite clear. It is drawn with great width and deliberately so, no doubt to ensure as far as is possible that any moneys owing to the bank are secured, howsoever the obligation may arise. It was no doubt not in contemplation by the bank, and probably not by Ms Murphy at the time of entering into the mortgage, that she would steal money and in the result come to be in a position where she was required to repay moneys to the bank. But that can hardly be the test. The real question is whether the language of the mortgage is wide enough to encompass liability to the bank arising as a result of theft or misappropriation. In my view, it is. The case is not one where the result of a literal application of the language of the mortgage would be to yield absurdity. Nor is the case one where the clause to be construed is itself ambiguous."

25 In Panebianco v Bendigo Bank Ltd [1999] VSC 50, Balmford J referred to with approval, and adopted, the principles set out by Hill J in Donnelly v Commonwealth Bank of Australia.

26 In my respectful view, the principles described by Hill J in Donnelly v Commonwealth Bank of Australia correctly state the relevant law in this State.

27 It is the case that the relevant provision of the plaintiff's mortgage is in very wide terms. In its literal language it plainly covers a debt of the kind owing by the first defendant to the plaintiff pursuant to the judgment of the Queensland District Court. On the material before me, there is no basis to read it down. The language of the plaintiff's mortgage is consistent with an intention that any money that in the future might become owing by the first defendant to the plaintiff, however that indebtedness might arise, should be secured by the mortgage. A literal application of the provision does not lead to an absurd result.

28 I do not accept the second defendant's contention that the position is somehow different because the plaintiff's mortgage was originally granted to Advance Bank and only subsequently came to be held by the plaintiff. It is clear from the provisions of the Act that, for all relevant purposes, as from 1 April 1998 the plaintiff has stood in precisely the same position in respect of the effect of the mortgage as Advance Bank had stood prior to that date. That clearly appears from s 6 of the Act which provides:

"On and after [1 April 1998], each translated instrument continues to have effect, according to its tenor, as if a reference in the instrument to [Advance Bank] were a reference to [the plaintiff]."

29 Section 3 of the Act provides that "translated instrument" means:

"an instrument subsisting immediately before 1 April 1998 to which Advance Bank was a party, that was given to, by, or in favour of, Advance Bank, that refers to Advance Bank, or under which money is, or may become, payable, or other property is, or may become, liable to be transferred, to or by Advance Bank."

30 I should also observe that all of the events which gave rise to the liability of the first defendant to the plaintiff, as found by the District Court of Queensland, occurred after 1 April 1998.

31 It is necessary then to turn to the second defendant's contention that, by reason of the rule in Hopkinson v Rolt, the plaintiff does not have priority in respect of the judgment debt as that debt became an amount owing to the plaintiff after the second defendant's mortgage and at a time when the plaintiff had constructive notice of that mortgage.

32 The principle in Hopkinson v Rolt was described by Lord Lindley in West v Williams [1899] 1 Ch 132 at 142 as follows:

"A first mortgagee, whose mortgage is taken to cover what is then due to him and also further advances, cannot claim the benefit of this security for further advances in priority to a second mortgagee of whose mortgage he had notice before the further advances were made."

33 The critical question in this case is the nature of the notice that the first mortgagee must have of the subsequent mortgage. The plaintiff contended that it must be actual notice. The second defendant argued that constructive notice - in this case, by reason of its caveat - was sufficient. As there was nothing to suggest that the caveat in fact came to the attention of the plaintiff, and nothing else to suggest that the plaintiff had any notice of the second defendant's mortgage, the second defendant's case necessarily relied upon constructive notice simply by reason of the lodgement of the caveat.

34 In Central Mortgage Registry of Australia Ltd v Donemore Pty Ltd [1984] 2 NSWLR 128, Kearney J considered the authorities to that time and concluded that the underlying basis for the rule in Hopkinson v Rolt was that it would be inequitable - that is, it would constitute actual equitable fraud - on the part of a first mortgagee to claim priority in respect of further advances made when it had notice of an intervening equity. As the rule was based on the doctrine of equitable fraud, the first mortgagee must have actual, not simply constructive, notice of a subsequent mortgage. His Honour held that the lodgement of a caveat by a subsequent mortgagee did not constitute adequate notice to affect the first mortgagee's entitlement to priority. See, too, Beachquest Pty Ltd v Interstate Mortgage and Investments Pty Ltd [2001] QSC 512 at [41].

35 The view that actual notice is required has not, however, received universal assent.

36 In 1987, in Sibbles v Highfern Pty Ltd (supra) at 221, Mason CJ, Dawson, Toohey and Gaudron JJ described the rule in Hopkinson v Rolt as being that a prior mortgagee could not tack if at the time of the further advances he had notice, actual or constructive, of the subsequent mortgage. Their Honours did not refer to any authorities for the proposition that constructive notice was sufficient and did not refer to Central Mortgage Registry or the cases there referred to. Nor did they explain what might constitute constructive notice in that context. Moreover, their Honours' statement was clearly obiter.

37 In R & I Bank of Western Australia Ltd v Cash Resources Australia Pty Ltd (1993) 11 WAR 536 at 547, Anderson J, having referred to the above dicta in Sibbles v Highfern Pty Ltd, said:

"Perhaps it is not truly a matter of categorising the notice as being actual or constructive. The basis of the rule in Hopkinson v Rolt is 'justice and fair dealing as between the mortgagor and the mortgagees, and as between the competing mortgagees' (Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293 at 300, per Holland J). The starting proposition is that the security of the first mortgage is not impaired or affected without notice of a second mortgage. The first mortgagee is entitled to act on the basis that his security continues in full effect until he has notice of something to the contrary. Knowing that a second mortgagee has acquired an interest in the property, it would be, in the language of equity, against conscience to allow the first mortgagee to make a further advance calculated to affect the rights of the second mortgagee. In the technical sense in which the word is used in equity, it would be a fraud on the second mortgagee. Therefore, any notice, to be operative, would have to sustain a charge of equitable fraud. The notice would have to be such as to affect the conscience. The general rule is that only actual notice will be sufficient to do that. Actual knowledge must generally be proved. However, there may be exceptions. There may be circumstances under which, although actual knowledge is not proved, the circumstances are so strongly against the first mortgagee that knowledge of a subsequent encumbrance should be imputed to him. One such circumstance may perhaps be where there has been deliberate conduct on the part of the first mortgagee designed to prevent receipt of actual notice of the later encumbrance."

38 On the facts of that case it was unnecessary for Anderson J to explore any further the extent to which something less than actual notice would suffice to invoke the rule.

39 A possibly somewhat wider approach was taken by Young J (as his Honour then was) in Nia v Phuong (supra), another case relied upon by the second defendant. In that case, Young J said (at 13,144):

"However, another way of analysing the same situation is to say that except in extraordinary circumstances, it is only inequitable for a first mortgagee to lose priority for further advances if at the time when he took his first mortgage he had notice, actual or constructive, of the existence of a second mortgagee: see Falconbridge on Mortgages 4th ed at 161. Thus if, at the time when a mortgagee loaned his or her money he or she was aware that the mortgagor was borrowing on second mortgage to make up the balance of the purchase price, such awareness would constitute notice which would prevent a first mortgagee from obtaining priority for subsequent advances."

40 But as the approach of Young J appears clearly to envisage actual knowledge of facts that would, at least, put a reasonable person on inquiry as to the existence of a subsequent security, it provides no support for the case sought to be advanced by the second defendant in this case.

41 In Oversea-Chinese Banking Corp Ltd v Malaysian Kuwaiti Investment Co (supra) - which was also relied upon by the second defendant - the first mortgagee had actual notice that the mortgagor had sold part of the land being developed but contended that it did not have actual notice of the purchaser's equitable interest in the land at the time it made a subsequent advance because it had been told by the mortgagor that the contracts of sale were not proceeding. Redlich J concluded (at [183]) that it was against conscience for a first mortgagee, who has been given actual notice of a subsequent interest, to rely upon an unverified claim by the mortgagor that such an interest had ceased to exist. Such knowledge as existed, whether it be characterised as actual or constructive, being such as to affect the conscience, was sufficient to attract the operation of the rule.

42 That case, too, is a long way removed from the facts of the present case, depending as it does on the earlier actual knowledge of the first mortgagee of a subsequent encumbrance.

43 A general description of the doctrine of constructive notice is given in Meagher Gummow and Lehane's Equity Doctrines and Remedies, 4th ed at [8-270], where the learned authors describe the doctrine as follows:

"A person is deemed to have constructive notice of all matters: (a) of which he would have received notice if he had made the investigations usually made in similar transactions; and (b) of which he would have received notice had he investigated a relevant fact which has come to his notice and into which a reasonable man ought to have inquired. It follows that all cases in which a person is said to have constructive notice of a fact or thing are cases in which he has failed to inquire, either sufficiently or at all. The criterion of whether a total failure to make inquiries will affect a person with constructive notice is whether he has neglected to do that which is usually done by men of business in similar circumstances, as a matter of prudence with a view to their own security. It covers not only the case where there has been a deliberate abstention from inquiry in order to avoid possible notice, but on the view expressed in Ashburner on Equity, 2nd ed, pp 61-2, all other cases where a reasonable man would inquire."

44 Once again, it does not seem to me that that, rather wider, approach advances the second defendant's case on the present facts, there being no evidence from which it might be concluded that the plaintiff ought to have made the investigations which would have revealed the existence of the second defendant's mortgage.

45 Assuming for present purposes that something less than actual notice is sufficient, I do not, therefore, consider it is necessary to decide whether, for the purposes of the rule in Hopkinson v Rolt, the degree of notice which will invoke the rule extends beyond that suggested by Anderson J in R & I Bank of Western Australia Ltd v Cash Resources Australia Pty Ltd to the more general description of the doctrine of constructive notice given in Meagher Gummow and Lehane, or to some point between those two. In the present case, there is nothing to suggest that the plaintiff had any actual notice of the second defendant's mortgage, or of the caveat, or that the circumstances were such that it should be deemed to have had knowledge of the second defendant's mortgage. There is also nothing to suggest that there was any conduct on the part of the plaintiff designed to prevent receipt of actual notice of the later encumbrance, nor was there anything to put the plaintiff on inquiry or to suggest that a reasonable person in the plaintiff's position would have made inquiry. There is nothing to suggest that the plaintiff had any reason to think that such a security might exist.

46 Accordingly, I do not consider that the second defendant has made out the contention that the rule in Hopkinson v Rolt applies. I do not, therefore, think it is necessary to consider the plaintiff's argument that the rule in Hopkinson v Rolt is limited to cases of further advances and has no application to the circumstances in which the indebtedness arose in this case.

47 In my view, there is no substance in the second defendant's alternative argument that the plaintiff does not have priority because its rights in respect of the first defendant's indebtedness in the sum of $138,385.88 merged with the judgment.

48 I consider that the plaintiff is entitled to declarations to the effect that the amount of the judgment sum payable by the first defendant to the plaintiff is an amount owing under the plaintiff's mortgage and that in respect of that amount the plaintiff's mortgage ranks in priority ahead of the second defendant's mortgage.

49 I will hear the parties on the precise form of orders and on costs.