THE DOCTRINE OF MARSHALLING
61 In the correspondence between the parties, there was some mention of marshalling. The primary Judge set out the relevant correspondence in his reasons, but did not otherwise refer to the subject. It was not mentioned on appeal. However, as far as I can see, that doctrine is the only possible basis for Naxatu's claim concerning the proceeds of sale of the Bridgecorp properties and other Perpetual properties. Out of an abundance of caution I shall say something about it, particularly in view of the decision of McPherson J in Westpac Banking Corporation v Daydream Island Pty Ltd [1985] 2 Qd R 330 at 332. His Honour there held that in taking accounts as between first and second mortgagees, the doctrine will be applied despite the absence of any special claim or direction, equitable doctrines being applied "without the need for express exhortations in that behalf". See also Fisher & Lightwood's Law of Mortgage (2nd Aust ed, LexisNexis Butterworths, 2005), at 30.16.
62 Neither the theoretical basis for the doctrine of marshalling, nor its precise ambit of operation is clear. See Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed, LexisNexis Butterworths, 2002), especially at 11-05 to 11-030 and 11-70 to 11-95. At paras 11-005 and 11-015, the authors describe the doctrine as follows:
11-005 Suppose A (called "the double claimant") has the right to satisfy a claim for $1000 against X from funds (1) and (2), valued each at $1000, while B (called "the single claimant") has the right to satisfy his claim of $500 from fund (1) only. In such a case, A may select the security he wishes to enforce. If he chooses to go against fund (1) and satisfies his claim in full, then he will have prejudiced B by exhausting the only fund subject to his security. In such a case B will be left with his covenant in debt from X, along with the general body of unsecured creditors. As A will have satisfied his claim, fund (2) will be released from the security and be available to the general creditors; but this will be of little use to B where there is an insufficiency of assets for general creditors, as, for example, in an administration of X's estate in bankruptcy. Thus B will recover only part of his claim as an unsecured creditor, whereas if A had elected to proceed against fund (2) he could have satisfied himself in full, and so left fund (1) available to B who would have been paid in full. The precise position will vary with the respective amounts of the secured claims of A and B and funds (1) and (2), so that, for example, if fund (2) is too small for the double claimant he could be expected to make up the balance from fund (1), and thus perhaps not leave sufficient for full satisfaction of B's claim.
…
11-015 But suppose, in the example given, after A had satisfied his double claim from fund (1), and fund (2) was not fully released to general creditors, equity permitted the single claimant B to have the benefit of the double claimant's security. There would be no prejudice to A whose claim has been satisfied, but there would be less available to general creditors and (in the event of any surplus) ultimately to X as debtor. This is the essence of the doctrine of marshalling. It does not interfere with the exercise by A of his security rights, as double claimant, but, by a species of subrogation, places B in the place of A so far as necessary to permit B to recoup himself from fund (2), otherwise closed to him, to the extent that fund (1) would have satisfied his claim but for its depletion by A. So, if A satisfied his claim for $1000 by exhausting fund (1), B will be able to satisfy his claim for $500 from fund (2). On the taking of accounts between mortgagor and first and second mortgagee, since equity regards as done that which ought to be done, the accounts will be taken on the footing that the first mortgagee has marshalled the securities as equity requires: Westpac Banking Corp v Daydream Island Pty Ltd … per McPherson J.
63 In Miles v Official Receiver in Bankruptcy (1963) 109 CLR 501, the High Court (Dixon CJ, Menzies and Windeyer JJ) considered the doctrine, particularly at pp 510-511 where their Honours said:
The equitable principle [of marshalling] is stated by Lord Eldon … in these words:- "If a party has two funds … a person having an interest in one only has a right in equity to compel the former to resort to the other, if that is necessary for the satisfaction of both . … The principle in some degree is, that it shall not depend upon the will of one creditor to disappoint another. In Jenkins v Brahe and Gair … a'Beckett J, after observing that the Court would not control the choice of a creditor, said:-"that it appears to be settled law that the jurisdiction of the court is not ousted by the act of the mortgagee" (that is, in resorting to one fund rather than the other) "when the court can obtain control of the assets which the mortgagee could have applied to the discharge of his debt and out of which other creditors can be satisfied. 'If the mortgagee having a double fund has exercised his option in such a way as to disappoint a creditor by taking the only fund to which he could resort, such exercise of option will not have the effect of disappointing the creditor with one fund only, who will therefore be entitled to stand pro tanto in the place of the former'.
64 The Australian case most frequently cited in connection with marshalling is the decision of Neasey J in Commonwealth Trading Bank v Colonial Mutual Life Assurance Society Ltd [1970] Tas S R 120. The facts appear in the headnote. I shall, to some extent, paraphrase it. A debtor borrowed from Colonial Mutual, giving a first mortgage over land and assigning to it, one of its own life policies. Subsequently the debtor borrowed from the Bank, giving it a second mortgage over the same land. When the debtor defaulted, Colonial Mutual sold the land for more than the amount owing, recouped its debt from the proceeds, reassigned the policy to the debtor, accepted a surrender and paid him the surrender value. It paid the balance of the proceeds of the sale of the land to the Bank. The amount was insufficient to discharge the Bank's debt. The Bank claimed that Colonial Mutual, knowing of the second mortgage, and that the proceeds of sale might be insufficient to discharge it, should not have given up its charge over the policy. Those facts seem essentially similar to the facts of the present case. Colonial Mutual's action in giving up the policy was equivalent to Permanent's action in agreeing to make the proceeds of sale of the Bridgecorp properties available to meet the indebtedness of Bridgecorp ahead of some of its own debt, and Perpetual's action in subsequently honouring that agreement. The thrust of the Bank's argument appears at 121-122 where Neasey J said:
The argument submitted for the Bank, if I understand it correctly, is simply this: that upon the sale of the land taking place, [Colonial Mutual], knowing of the existence of a second mortgage, and knowing of a possibility that the balance of the proceeds of sale of the land after satisfying [Colonial Mutual's] debt might be insufficient to pay off the Bank in full, became a trustee for the Bank in respect of the policy, in which the Bank now had an equitable interest. It was argued that [Colonial Mutual] as such trustee should have taken one of two courses - it should have conveyed to the mortgagor the legal interest in the policy, reserving thereout the Bank's equitable interest in it; or it should have declined to reassign the policy on the ground that the effect of the assignment would be to destroy the Bank's equitable interest therein.
There is no direct authority for the Bank's contention, because counsel were unable out of the very many cases on marshalling to be found in the books to cite one case in which a prior encumbrancer was held liable to a subsequent encumbrancer for damages for breach of trust where the subsequent encumbrancer had not sought the court's intervention before the reconveyance of the security upon which he relied for marshalling.
65 At 126 his Honour continued:
Marshalling of assets is unquestionably a matter of a court of equity adopting remedial rules in the administration of estates for the purpose of doing equal justice between all legatees, descendants and creditors as far as possible; and there the assets are normally within the control of the court. It would seem to follow that the same applies in relation to marshalling of securities … .
66 At 128 his Honour said:
It seems therefore that the operation of the marshalling principle depends upon the assets being subject in some way to the control of the court, which reinforces the view that the doctrine depends not upon the creation of any equitable right of property in the fund over which the claimant has otherwise no security, but upon the grant by the court of an equitable remedy in certain circumstances, and I so hold.
67 At 130, his Honour observed:
But in any event I think there is difficulty in any concept of enforcing an equity to marshal against the first mortgagee, because it is basic to the principle that he has been paid off. The equity to marshals is 'enforced' against the person who is disadvantaged and dispossessed by its operation. The Court does not interfere with the first mortgagee's choice as to which security he will realize. That is not to say that he will not be bound by a marshalling order of the Court, if for example he is in possession of the fund upon which the rule is to operate. Of course he would be bound, insofar as his participation was necessary for carrying out the rule.
68 At [11-030] the authors of Meagher, Gummow & Lehane say:
The position in Australia appears to be that marshalling must be understood as a doctrine effectuated only by the exercise of a remedy akin to subrogation to securities otherwise still on foot at the time concerned, although there are implications in some decisions which suggest the matter may be taken further in some circumstances.
69 The authors then set out the facts of Colonial Mutual and continue:
The Supreme Court of Tasmania held that the [Bank] had no claim to call [Colonial Mutual] to account upon the basis that it should not have, by its acts, extinguished any access of the [Bank] to the policy by a process of marshalling. But this is not the end of the matter, for it still appears uncertain as to whether as between the [Bank] and the debtor the insurance policy had to be treated as discharged. There is much to be said for the proposition that as between them the surrender was to be treated as ineffective, so as to keep alive the recourse by subrogation in the name of [Colonial Mutual]. The principles as to subrogation with vendor's lien appear to operate in this way, and it does not conflict with the decision in the instant case as to the liability of [Colonial Mutual] to the [Bank].
70 The authors then speculate as to the position if, Colonial Mutual having satisfied its own indebtedness, the Bank moved to restrain surrender of the policy whilst it was still on foot. The authors observe that:
The actual decision in the case shows that at that stage the equity of the [Bank] to marshal was in jeopardy of destruction or, perhaps, that there was a threat to act such as to prevent it arising. There may therefore have been sufficient to support an injunction quia timet.
71 At [11-070]-[11-095] the authors discuss the decision in Webb v Smith (1885) 30 Ch D 192, a case which was referred to by Neasey J in Colonial Mutual. In that case Brett MR observed that the doctrine of marshalling applied only if "the funds are in Court and when the Court can exercise a jurisdiction over them". At [11-085] the authors suggest that this concept of "control" might be best understood by reference to the judgment in Lawrance v Goldsworthy (1857) 3 Jur NS 1049. The authors describe the facts of the case as follows:
In that case B held a first mortgage from G over an insurance policy on his life and over household effects to secure ₤187 owing by B, while the plaintiff held the second mortgage over the effects, but not the policy, to secure ₤300. Upon default B exercised his security over the effects (but not the policy) and realized ₤263 which exceed the indebtedness of G to him. However B then sold the policy to the defendant in circumstances indicating a fraudulent exercise of the power of sale. The debtor G was then made bankrupt and died in Peru. This made the moneys payable under the policy. The plaintiff then instituted a suit to which all interested parties, including the insurance company which still held the policy moneys, were joined, and in which he sought, inter alia: (a) to set aside the sale of the policy of the defendant; and (b)a declaration that he, as second mortgagee of the effects, was entitled to have the policy proceeds first applied in payment of any moneys to have dued to B as first mortgagee and double claimant and then to stand in the place of B against the proceeds of the policy up to an amount equal to the proceeds of the effect; that is, if the effects had realized less than the debt of the plaintiff, then he could not have recovered any greater sum from the insurance moneys.
72 Sir John Stuart VC held that if a third party, having control of the fund in dispute, was a party to the suit, then there was, in the relevant sense, a fund in court, the third party being bound by any order concerning the fund. The authors observe that the same approach was taken by Neasey J and seem generally to approve it. All of this suggests that any claim pursuant to the doctrine of marshalling must be against a particular fund.
73 Three other Australian cases support the view that the doctrine of marshalling imposes no duty upon the first mortgagee. In Bank of New South Wales v City Mutual Life Assurance Society Ltd [1969] VR 556, (to which Neasey J referred), Gillard J discussed the doctrine. The facts of the case appear at 551-557 as follows:
Mr Steed had two assurance policies on his life with the City Mutual Life Assurance Society Limited. In or about 1963 that society advanced him a loan taking as a security, first, a registered instrument of mortgage under the Transfer of Land Act 1958 over certain real property owned by him, and secondly, an assignment of the above policies. Mr Steed also gave a second mortgage over the real estate to the Bank of New South Wales early in 1964 to secure a payment for advances made by the bank to him. Default having been made on the first mortgage, the society under its power of sale sold the land for $16,010.35 thereby enabling it to satisfy the indebtedness to itself both on the mortgage and in relation to premiums payable under the policy. This left a balance of $858.26 which the society paid to the bank as second mortgagee, who at the material time was owed the sum of $8,031.00 by Steed.
In consequence of the receipt by the society of the proceeds of the sale of land the two policies, the surrender value of which at the material time amounted in all to about $5,204.00, have now been freed by the society from all encumbrances to it. The bank, accordingly, seeks in this action to invoke the equitable principle of marshalling securities whereby the proceeds of the policies would become available to pay its indebtedness secured by the second mortgage.
74 After reference to the judgment of Cotton LJ in Webb v Smith, Gillard J said at 557:
It should be added that from this statement it may be suggested that the doctrine of equity requires the first mortgagee to act in favour of the second mortgagee and accordingly that the second mortgagee's equity is against the first mortgagee. However, in Flint v Howard (1893) 2 Ch 54 at p 73, Kay LJ pointed out the true position when he said: The right of a subsequent mortgagee of one of the estates to marshal - that is, to throw the prior charge on both estates upon that which is not mortgaged to him - is an equity which is not enforced against third parties, that is, against anyone except the mortgagor and his legal representatives claiming as volunteers under him. It is not enforced against the mortgagee or purchaser of the other estate … .
….
This dictum suggests that the doctrine of marshalling is closely aligned to the doctrine of subrogation. Both appear to have the same broad equitable principle as its foundation … .
75 In Mir Bros Projects Pty Ltd v Lyons (1977) 2 NSWLR 192, Waddell J referred to the then current edition of Meagher, Gummow and Lehane and to the decision of Gillard J, observing at 196:
In the case of the doctrine of marshalling it is, in my opinion, as is submitted for the defendants, well established that the doctrine does not prevent an early mortgagee satisfying his charge against whichever fund or security he thinks fit. …. This is the view established in Meagher Gummow and Lehane above … . It is established by a number of authorities cited for the defendants … . Meagher Gummow and Lehane draw attention to the remarks of Cotton LJ in Webb v Smith, where he spoke as if the double claimant, that is the first mortgagee of two properties, could be restrained by the single claimant, that is the second mortgagee of one of them, from first resorting to the joint fund, that is the fund the subject of charge, both to the double claimant and the single claimant. The whole of the passage in question does seem to bear this interpretation, because, at the end of it, reference is made to the application of the doctrine to funds in court, as if it were a separate head of jurisdiction. Contrary to what is said by Meagher Gummow and Lehane, I do not think that this dictum was quoted with approval by Gillard J in Bank of New South Wales v City Mutual Life Assurance Society Ltd. His Honour undoubtedly adopted this statement as an example of how the doctrine of marshalling may be applied as security. But he went on, in the following paragraph, to dismiss any implication from the statement that the doctrine of marshalling requires the first mortgagee to act in favour of the second mortgagee. The dictum of Cotton LJ was obiter, and is contrary to the great wave of authority and, in my opinion, should not be followed.
76 In Across Australia Finance Pty Ltd v Kalls [2008] NSWSC 783, 14 BPR [26,265], Bryson AJ considered the doctrine at [30]. After referring to the decisions in Mir and Chase Corporation (Australia) Pty Ltd v North Sydney Brick & Tile Co Ltd (1994) 35 NSWLR 1, his Honour observed at 30:
As the judgment of Cohen J showed, marshalling took an altogether different course as it developed in the United States of America in the 19th century and since, and there rests on the basis of an equity which the claimant can enforce against the prior mortgagee, conceivably extending to injunctions or other judicial remedies controlling the exercise by the prior mortgagee of his rights. If the law developed in this way, the will and motivations of the prior mortgagee, and the state of a prior mortgagee's knowledge of the interest of a claimant would be prominent considerations. The law in England and Australia developed in a completely different way; the prior mortgagee can exercise his rights as he sees fit and the claim for marshalling does not depend on impugning the prior mortgagee's decision or conduct. In my opinion it is not correct in principle to treat the will or election of a prior mortgagee as a significant part of the ground for a claim for marshalling.
77 The textbooks seem generally to support this approach. See Sykes (The Law of Securities, 5th ed) at 182-183; Fisher & Lightwood (2nd Aust ed) at 30.10 and 30.14; the 13th UK edition of the same work at 45.8 and 45.11; the Laws of Australia (LawBook Co.) at 15.3.640; and Halsbury's Laws of Australia (LexisNexis) at 295-8476, and 295-8490.
78 However the authors of Meagher, Gummow & Lehane suggest a "middle ground" as follows:
There is the middle ground of attaching to the double claimant a personal liability of a fiduciary character to account to a single claimant for loss occasioned by release of the first charge or a proprietary interest in moneys received by the double claimant upon exercise of that charge, without conceding any proprietary interest in the property against the parties.
79 The suggestion has attracted some support. In Sarge Pty Ltd v Cazihaven Homes Pty Ltd (1994) 34 NSWLR 658 at 665 Young J said:
… Thus the probabilities are the doctrine rests on a principle of conscience and if this is so, then there is usually no proprietary right involved until the court makes a decree. There is, in my view, no proprietary right with respect to the land over which the claim for marshalling is held until the court makes an order and in that respect I agree with the result of Neasey J's decision [in Colonial Mutual]. However, I feel that the middle ground suggested by Meagher, Gummow & Lehane is probably closer to the true juristic nature of the right and that despite its apparent thoroughness, the judgment of Neasey J may not have considered all the ramifications that arise out of this complex subject matter.
80 However this observation played no part in his Honour's resolution of the case.
81 In Chase Corporation at 20-21, Cohen J said:
There is an attraction in the suggestion of the middle ground as proposed in Meagher, Gummow & Lehane, but it would seem that if it is to apply, it could only be in circumstances where it would be regarded as inequitable or unconscionable to release the security, that is, with full knowledge of the right being asserted by the other mortgagee. If the double claimant has a right to realise either of the securities, it will have a duty to the mortgagor, in the absence of other claims having been made, to release what is no longer encumbered. This might be otherwise if it has knowledge that another creditor is claiming a right against that property by subrogation. This is in some way similar to a creditor releasing a security given by a debtor after payment of the debt by the surety, and before any claim of subrogation in respect of that security has been made by the surety. The principles relating to guarantors are based upon contract as is also the relationship of mortgagor and mortgagee. I do not see that an equitable principle of marshalling would cast upon the double claimant a duty not to give a discharge to a mortgagor if there has been no notice of a claim by the second mortgagee.
His Honour disposed of the case on other grounds.
82 In Oamington Pty Ltd (Receiver & Manager Appointed) v Commissioner of Land Tax (1997) 98 ATC at 5051 Hamilton J referred to the relevant passage in Meagher, Gummow & Lehane and to Sarge and Chase without deciding the point. In Daydream Island (supra) McPherson J appears to have made an order against a first mortgagee. However his Honour observed that "at the trial there has been very little dispute about the plaintiff's right to relief or even about the form that it should take".
83 It is clear that once a first mortgagee's debt has been paid, a second mortgagee is entitled to recoup any unpaid part of its debt from other assets which are mortgaged to the first mortgagee, but not to the second mortgagee, or from surplus proceeds of sale of such assets. The first mortgagee will generally be a necessary party to proceedings to enforce the second mortgagee's rights, given the well-established view that the doctrine of marshalling is based upon the second mortgagee's right of subrogation to the first mortgagee's security. There also seems to be no reason why proceedings could not be maintained by the second mortgagee against the first mortgagee to recover a fund in the latter's possession, but to which it made no claim. The mortgagor would probably also be a necessary party to such proceedings. The real dispute would generally be between the second mortgagee and the mortgagor. The matters in doubt are:
whether a second mortgagee can compel the first mortgagee to realize available assets in a way which is more favourable to the second mortgagee than would be any available alternative; and
whether a second mortgagee can, in any circumstances, seek an appropriate remedy against a first mortgagee which has acted in a way which is less favourable to the second mortgagee than would be another alternative.
84 The courts have traditionally declined to impugn a first mortgagee's choice as to the order of realization of securities. To adopt a different approach would probably have quite significant commercial consequences. Perhaps it is simply too late to create a fiduciary relationship between first and second mortgagees in respect of properties over which the second mortgagee has no security interest. It may be significant that the authors of Meagher, Gummow & Lehane first suggested the "middle ground" in their first edition, published in 1975. Colonial Mutual, Mir, City Mutual Life and Across Australia all suggest that the second mortgagee cannot claim relief against the first mortgagee. The principal textbooks, including Meagher, Gummow & Lehane, itself, support that view. The authors of that work merely assert a possible future development in the law. Despite the passing of almost forty years, that possibility has not yet eventuated. Indeed, the most recent decision, Across Australia, takes a step in the other direction. Had Naxatu raised the question, this Court may have had to resolve it. However it was not raised, and we have no way of knowing how Naxatu would have put its case. In my view, on the current state of the law, the doctrine of marshalling is of no assistance to Naxatu.