Nearhaze v The Official Trustee

Mr Byrne created an informal equitable mortgage over the Adolphus Street house. He did so by his letter of 21 December 1996, which followed a series of events including his communications with Mr Couri in and after September 1996 recorded in his letters, his preparing the incomplete form of mortgage, executing it, obtaining Mrs Byrne's execution of it, and delivering it incomplete and undated to Mr Couri, probably late in December 1996 but possibly at some time in the previous few months. The date when the document was delivered cannot be clearly established and is not of high importance. The form of mortgage was not treated as of any importance by taking such measures as reading its contents so as to notice that it was incomplete, dating it, stamping it or lodging a caveat; some of those things occurred later when the possibility of conflict was observable. What makes the events effectual against Mr Byrne and his interest in the Adolphus Street house as an equitable mortgage is his agreement indicated in the second sentence of his letter of 21 December 1996, and the words of acknowledgment directed to Lasovase which mean, on a whole view of the letter, that Mr Byrne acknowledged that at 30 December 1996 Lasovase would have a mortgage securing $285,000. This acknowledgment was given for value in that Lasovase did incur a commercial bill liability for $285,000 on 30 December 1996 which was applied in various ways for the benefit of interests associated with Mr Byrne, including the payment of Nearhaze's overdraft. The document which created the equitable mortgage was the letter of 21 December 1996, understood with the facts of the following few days. 31 The form of mortgage did not create the equitable mortgage. The letter of 21 December 1996 was of course not signed by Mrs Byrne, and it does not purport to have been written on her behalf or to express any agreement of hers. It is not even clear that the letter of 21 December 1996 refers to the mortgage document which she signed. The letter of 21 December 1996 contrasts with earlier letters in which Mr Byrne purported to write about affairs of them both and to record arrangements to which she was a party. In his letter of 20 September 1996 he includes Mrs Byrne's initials in the address at the top right hand corner of that letter and in the subject-matter heading of the letter, "Loan: MF & CM Byrne". He did not however in signing the letter purport to do so as her agent, and the arrangements spoken of in that letter, although they refer to loan funds of up to $150,000 advanced to MF & CM Byrne from Nearhaze Pty Ltd & Lasovase Pty Ltd, included a second mortgage only in the context of documentation which was to take place at or after 31 March 1997. The transaction recorded in the letter of 21 December 1996 in which as at 30 December 1996 $285,000 would be secured to Lasovase is a completely different transaction to that recorded or contemplated in the letter of 20 September 1996. 32 I do not find that in agreeing in the letter of 21 December 1996 to the effect that there would be an unregistered second mortgage over the Adolphus Street house, and in carrying out that agreement over the next few weeks, Mr Byrne acted as agent for Mrs Byrne. He did not according to the terms of that letter purport to do so; she is not referred to in the letter. A finding that on 21 December 1996 he had her authority to create an equitable mortgage over the Adolphus Street house cannot be spun out of the fact that in September 1996 he had recorded an agreement which he attributed to her as well as to him to create a mortgage to secure a different debt for a different amount and only in the event that it was not repaid by 31 March 1997. Nor can a finding that he had authority late in December 1996 to agree on her behalf to grant a second mortgage to Lasovase be based on the circumstance that at some time between September and 21 December she executed a form of mortgage in favour of Nearhaze, in a form which was incomplete and ineffectual. There is no evidence that she ever created any authority for the blank spaces to be completed, and they never were completed. The fact that Mr Byrne had this incomplete document and was able to give to it Mr Couri does not rationally, support a finding that late in December he had authority to agree on her behalf to grant an equitable mortgage to Lasovase, which was not named in that document, for a further advance for which the role of borrower had never been attributed to her. The proposition that she was a party to an equitable mortgage is not assisted by incidental references, impliedly to her as one of the borrowers, such as Mr Byrne's referring in his affidavit to an obligation as "Our loan". These shreds of information do not form a basis for a finding on the probabilities that she gave him her authority to agree to create an equitable mortgage. 33 In my view Mr Byrne's agreement to give an equitable mortgage over the house is effectual against him and his interest in the house but not against Mrs Byrne and her interest in the house. In fact they were joint owners of the house and were not at the time owners of identifiable separate interests, but his purported dealing with the whole creates a need to identify his interest for the purpose of enforcement, and the only available basis is the basis of equality. It is now easy to give effect to that because their joint interest has been converted into a fund of money. Mr Byrne's interest and now the interest of his estate in bankruptcy should be treated as one-half of the moneys paid into court by the first mortgagee. 34 Although it could be that a right of subrogation exists, that right could have no effect on the outcome because Mr Byrne's interest in the property was charged for other reasons with the whole advance made by Lasovase, and nothing Mrs Byrne did created an effectual charge over her interest. If the form of mortgage had any effect, she would be a volunteer; there is no evidence against her that she gave it for value or that she was a party to any agreement for value for the mortgage to be given. The document itself is ineffectual, it could not be given effect unless it were rectified or notionally treated as rectified for the purpose of equitable remedies, and there can be no equitable remedies against a volunteer. Neither subrogation nor rectification is available against her, the incompleted form of document has no effect at law because it is incomplete and because it is unregistered, and its operation is not aided by any equitable remedy. In my opinion neither Nearhaze nor Lasovase has any charge against Mrs Byrne's interest in the property or in the funds in court. 35 On the other hand Mr Byrne's interest in the property was effectually charged with the whole advance made by Lasovase of $285,000. There was no written agreement for the amount of the charge to be increased for interest or bank charges or otherwise. The amount of the charge was reduced by payments totalling $65,000 and by recovery of $100,000 under the bank guarantee. The balance secured is $120,000 which exceeds Mr Byrne's half interest in the moneys in court. Accordingly Lasovase is entitled to recover all the money in court which represents Mr Byrne's interest, and neither of the plaintiffs is entitled to recover any part of Mrs Byrne's interest in the moneys in court. 36 Politi Pty Ltd the fourth defendant had a charge over the property and now has a charge over the moneys in court. Politi's compromise of its claim was embodied in a consent order in the following terms: "By consent of the plaintiffs and the second and fourth defendants, the Court orders that: 1. Of the funds in Court in matter no. 4813 of 1998, the sum of $45,000 be paid out to the fourth defendant, Politi Pty Limited. By consent of the plaintiffs and the fourth defendant, the Court orders that: 3. There be no liability for costs of the proceedings as between the plaintiffs and the fourth defendant. By consent of the second defendant and the fourth defendant, the Court orders that: 4. There be no payment out to the second defendant from the funds in Court in matter no. 4813 of 1998 except upon 7 days prior notice to the fourth defendant. The Court notes the agreement of the plaintiffs and the fourth defendant that: 5. The fourth defendant's claim to a security interest in the funds paid into Court by the Australia and New Zealand Banking Group Limited in no. 4813 of 1998 shall have priority over the plaintiffs' claims to the extent of the $45,000 referred to in order 1 and otherwise the plaintiffs' claims, if or to the extent made out against the first and second defendants shall have priority over the fourth defendant'' claim. The Court notes the agreement of the second defendant and the fourth defendant that: 6. The second defendant concedes that, as at 10 August 1999, no principal lent by the fourth defendant under the loan agreement dated 13 November, 1997 (exhibit 1) has been repaid. 7. The second defendant concedes that the fourth defendant is entitled to payment out of the fund paid into Court in no. 4813 of 1998 in respect of: (a) balance of unpaid principal (over and above the $45,000 to be paid pursuant to order 1) under the loan agreement; and

(b) interest thereon to the date of payment; in priority to any claim of the second defendant for payment out of that fund." 37 The effect of the consent orders is that Politi Pty Ltd has a prior claim to the plaintiffs to payment out of court of $45,000, and has that claim against the whole of the funds in court. Politi has a further claim which is only to be addressed after the plaintiff's rights to the fund have been satisfied. 38 The amount paid into court is $201,005.82. This amount will have been increased by interest. The claim of Politi to $45,000 falls on the whole fund, which is thus reduced to $156,005.82. $78,002.91 should be treated as Mr Byrne's share of the fund and is payable to Lasovase subject to further consideration of interest and costs. The remaining $78,002.91 is Mrs Byrne's share and remains subject to the claim of Politi Pty Ltd referred to in paras 6 and 7 of the Consent Order. ********

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