Rahnam Investments Pty Ltd v Esplin & Anor [2004] NSWSC 529 | Case summary

Heidtman said that it had instructions "not to settle any further lots without full deposit moneys being available". There was also reference to the possibility of appointment of a receiver and to instructions "to report this most serious matter to the Professional Conduct Committee of the Law Society, who we feel confident will be very interested". 38 The "direction" dated 20 November 2003 given by Zolstat to Esplins and referred to in the exchange of correspondence just mentioned was as follows: " Re: 280-282 Bronte Road, Waverley We instruct you to account for the sale proceeds (including deposit monies) to the first mortgagee, Perpetual Nominees Limited, and once its mortgage is discharged to the second mortgagee, Rahnam Investments Pty Limited after payment of your firm's costs and expenses and also agents' commissions, and other amounts necessary to effect the settlements." 39 Mr Esplin gave evidence of a wider authority previously given by Mr Oayda on behalf of Zolstat. That authority was oral and was to the effect that Esplins could progressively recoup from moneys held in their trust account for Zolstat all outstanding costs and disbursements owing by all Mr Oayda's companies. 40 The letter of 4 December 2003 from Heidtman to Esplins was copied by Heidtman to ADF who in turn wrote to Esplins (on 4 December 2003) as follows: "We refer to the letter of today's date to yourselves from Heidtman & Co and are instructed to place the following on record: 1. Our client associates itself with the contentions advanced on behalf of the First Mortgagee in that letter and calls upon you to pay forthwith to Perpetual Nominees Limited the amount demanded (save that, on our understanding of the agreement in that regard, it seems to us that you should be retaining the sum of $15,000.00 in trust for the rectification works). 2. According to our records the deposits paid on Apartment 16 and Apartment 4 were $53,000.00 and $38,500.00 respectively. Please clarify why the amounts referred to in your Trust account are less than that." 41 Esplins wrote to Heidtman on 10 December 2003 acknowledging Heidtman's letter of 4 December 2003 and continuing: "In paragraph 4 of your letter you state 'a general retaining lien only allows a solicitor to hold money and such money can only be released with the appropriate authority'. The appropriate authority is our client. Perpetual Nominees Limited had discharged its Mortgage when the monies came into our client's control. No undertaking had been given by our firm to hand the monies to Perpetual Nominees Limited, indeed we had specifically refused to give an undertaking. With its mortgage discharged we cannot see that the direction from our client to our firm dated 20 November 2003 in anyway gives Perpetual Nominees Limited a legal claim over the monies, irrespective of how you like to argue the interpretation of that direction. We believe we have acted appropriately and in accordance with the law. We are instructed to fully cooperate with your current demand that 'the full proceeds of sale including the deposit' be paid to your client in respect of future sales and this will be the arrangement for future settlements (subject to payment of our costs and disbursements in respect of that sale and any prior rescinded sale). We will advise you as and when appointments are made for settlements." 42 ADF wrote to Esplins on 11 December 2003 as follows: "We refer to our most recent fax regarding the deposits which you currently hold in your trust account and would appreciate a response as a matter of urgency. Please also furnish us with a copy of your response to the fax from Heidtman & Co in that regard; when we last spoke to them they had not yet received any such response but we assume that you would have responded by now." 43 Esplins replied to ADF on 15 December 2003 as follows: "We refer to your letters of 4 December 2003 and 11 December 2003. Enclosed herewith is a copy of our letter dated 10 December 2003 to Messrs Heidtman & Co responding to their letter of 4 December 2003. We advise that the deposits are no longer held in our trust account and the deposits have been applied in payment of our costs and disbursements in accordance with the Trust Account Statement, a copy of which was forwarded to Messrs Heidtman & Co with our letter of 2 December 2003. For your information we enclose a copy of our letter dated 2 December 2003 together with the Trust Account Statement." 44 The next relevant link in the chain of correspondence is a letter from ADF to Heidtman dated 12 December 2003 referring to a settlement scheduled for that day (apparently the settlement of the sale of apartment 15): "Two things. First, have you had a reply from Esplins to your fax regarding their retention of the four deposits in their Trust Account? If so, could you let me have a copy. Secondly according to my calculations after the settlement today your payout figure (excluding interest which has been accruing on a reducing balance since the settlements commenced and also excluding any additional legal costs which you have incurred) should be under $100,000 so that your client should be paid out in full with part of the proceeds of the next settlement which appears to be that of Lots 9 and 27 on 19th December, 2003. It would be appreciated if you would let me have details of your client's payout figure as at close of business today as soon as possible next week. Your assistance will be greatly appreciated." 45 Correspondence in the normal course about subsequent settlements may be passed over until the settlement for apartment 9. The settlement sheet for that settlement showed the balance, after ordinary adjustments and deduction of Esplins costs and disbursements for the particular transaction as payable in part to Perpetual and as to the remainder to Rahnam. The amount payable to Perpetual was the residue of indebtedness secured by the first mortgage. It amounted to $97,648.43. The payment provided for in favour of Rahnam was $283,175. An adjusted settlement sheet incorporation these features was sent by Esplins to ADF on 16 December 2003. ADF conveyed their client's approval of it on the same day. Settlement took place and Esplins instructed the agent to account for the deposit to the purchaser (as to a small amount of accrued interest) and Rahnam (as to the balance). 46 It is clear from the evidence about the course of dealing that Esplins, on behalf of Zolstat, considered it necessary to obtain approval from both Heidtman, on behalf of Perpetual, and ADF, on behalf of Rahnam, to the manner of disposition of the balance of purchase moneys on completion. In every instance, Esplins informed the other two firms of the proposed method of application and sought their approval. In some instances, the approval was withheld until there had been changes to ensure that funds going otherwise than to Perpetual were reduced. 47 The course of conduct does not show any such consistent pattern with respect to deposits held in Esplins' trust account. In the case of the first sale (apartment 17), Heidtman expressly stated when conveying approval of the settlement sheet that they would require upon settlement, in addition to the cheque for the part of the balance of purchase moneys passing to Perpetual, an undertaking from Esplins to pay the deposit to Perpetual within 48 hours after settlement. In relation to the second settlement (apartment 11), Heidtman asked their client, Perpetual, whether it required an undertaking by Esplins to account to Perpetual for the deposit moneys. Presumably after receiving a positive response from Perpetual, Heidtman told Esplins that such an undertaking would be required. The undertaking was given by Esplins by way of the handwritten endorsement on the receipt they gave to Heidtman for the certificate of title and discharge of mortgage relating to apartment 11. In the case of apartment 7, the documentary evidence shows no more than that, after settlement, Esplins sent to Heidtman a cheque for the deposit "[i]n accordance with our client's instructions". 48 Thus, in the first case, the question of disposition of the deposit after settlement was raised by Heidtman who told Esplins that an undertaking to pay it to Perpetual would be required on settlement. In the second case, Heidtman asked their client whether a corresponding undertaking by Esplins would be required on settlement and, presumably after receiving an affirmative response, conveyed that requirement to Esplins who then complied. In the third case, there is merely an indication that Esplins paid the deposit to Perpetual, through Heidtman, on Zolstat's instructions. 49 The events in relation to the second case show that, at least as far as Heidtman were aware, there was no standing and continuing arrangement under which Zolstat was to pay to Perpetual (by means of appropriate instructions to Esplins) the deposit moneys held in Esplins' trust account immediately those moneys ceased to be held by Esplins as stakeholder and, as between vendor and purchaser, belonged to Zolstat. On the evidence, Heidtman, on behalf of Perpetual, acted before settlement in the first two cases to inform Esplins that the deposit moneys were to be paid to Perpetual after settlement. It is likely that the same thing happened in the third case, although I can make no finding that it did. Such conduct is consistent with Perpetual's having included the requirement for payment of deposit moneys in the package of stipulations which it insisted be met before it would release the particular apartment from its mortgage. 50 This last point is, I think, important. Perpetual's loan was, on the evidence, an on-demand loan. Perpetual could, at any time, have called up the whole of the outstanding moneys. That, it appears, was Perpetual's only clearcut contractual right. But, as a practical matter, it was in a position to dictate the terms upon which it would release each apartment from its mortgage as and when Zolstat required release in order to complete the sale of that apartment. Receipt by Perpetual of the agreed amount on each settlement and the giving of undertakings on settlement as to payment of the deposit moneys to Perpetual were attributable to the de facto ability of Perpetual to dictate the terms for release of apartments from its security. 51 Rahnam was in the same position. For Zolstat to complete the sale of a particular apartment, it required release of that apartment not only from Perpetual's mortgage but also from Rahnam's mortgage. The evidence shows that Esplins, on behalf of Zolstat, submitted the settlement sheets for the first three settlements to ADF, on behalf of Rahnam, for "your approval". There was thus an assumption by Esplins that settlement - and, more particularly, release of each apartment from Rahnam's mortgage - would be dependent upon Rahnam's approving the application of funds as proposed in the settlement sheets. Rahnam was not, however, consulted in any way in relation to the deposit moneys held in Esplins' trust account. None of the correspondence in evidence involving Rahnam's solicitors, ADF, refers at all to the disposition of such deposit moneys until after 2 December 2003 when Esplins took action to appropriate deposits to satisfy its costs and disbursements after those deposits had ceased to be subject to the stakeholder arrangements. 52 The documentary evidence shows that ADF questioned certain deductions proposed in settlement sheets submitted by Esplins and were concerned to know whether Heidtman had approved certain matters in such settlement sheets on behalf of Perpetual. ADF were also furnished by Esplins with a copy of Esplins' letter of 12 November 2003 to Heidtman in which Esplins asserted a lien in respect of documents of Zolstat. Esplins wrote to ADF direct on 13 November 2003 to explain the agreement reached with Heidtman on behalf of Perpetual to the effect that the costs and disbursements referable to the aborted sale of apartment 17 would be recouped after Perpetual's mortgage had been discharged (obviously a reference to the point at which Perpetual had been paid out in full). By letter of the same date, ADF conveyed agreement on that to Esplins. 53 So far as Esplins' actions in resorting to the deposits are concerned, the reaction of ADF, on behalf of Rahnam, was to say in the letter of 4 December 2003 to Esplins that their client associated itself with the contentions advanced on behalf of Perpetual - essentially, that what Esplins had done was not in accord with the "direction" given to Esplins by Zolstat and that the moneys in the trust account "belong to someone else", being "Perpetual Nominees Limited and following which they belong to Rahnam Investments Pty Limited, not Esplins". ADF also said to Esplins that Rahnam "calls upon you to pay forthwith to Perpetual Nominees Limited the amount demanded". Rahnam thus appears quite clearly to have endorsed a claim by Perpetual to ownership of the relevant moneys, as distinct from asserting any entitlement of its own. 54 Having contended in early December 2003 that the moneys taken by Esplins from its trust account were moneys belonging to Perpetual, Rahnam now seeks to say that they are moneys belonging to Rahnam. 55 Rahnam's argument, as I understand it, is that all moneys in Esplins' trust account representing deposits for the sale of apartments in the development the subject of the two mortgages were the subject of a species of specific purpose trust (of the kind most often associated with Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567). This is based upon the 20 November 2003 direction given by Zolstat to Esplins that those monies were to be accounted to the first and second mortgagees in turn, after payment of Esplin's costs and expenses and other amounts necessary to affect the settlements (see paragraph [38]). Rahnam says that where a party is given money with specific directions as to its application, such as was the case here, that party has a fiduciary duty to apply those funds as directed. Reliance was placed on the opinion of Lord Millett in Twinsectra Ltd v Yardley [2002] 2 AC 164. At 186 he said: "It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract. As North J explained in Gibert v Gonard (1884) 54 LJ Ch 439, 440: 'It is very well known law that if one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given. He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose.' The duty is not contractual but fiduciary." 56 Rahnam contends that Eslpins was in breach of this fiduciary duty by deducting from the deposit monies amounts above and beyond those permitted by the direction before passing the monies to Perpetual. Rahnam argues that this action was unconscionable, and gives rise to a constructive trust of the kind generally discussed in Guimelli v Guimelli (1998) 196 CLR 101. 57 It uncontroversial that a fiduciary duty arises in the circumstances described by Rahnam. As noted by Lord Millett at 192: "I do not think that subtle distinctions should be made between 'true' Quistclose trusts and trusts which are merely analogous to them. It depends on how widely or narrowly you choose to define the Quistclose trust. There is clearly a wide range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other's money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out. The arrangement between the purchaser's solicitor and the purchaser's mortgagee is an example of just such an arrangement. All such arrangements should if possible be susceptible to the same analysis." 58 But such duty is owed only to the person who paid the money with directions as to its application. Rahnam was not a party to the 20 November 2003 direction. Nor did Rahnam pay money to Esplins on terms as to its disposition. Rahnam cannot be the beneficiary of any fiduciary duty of Esplins arising from the receipt of the deposit moneys into their trust account. 59 Furthermore Rahnam cannot assert a beneficial interest under any trust. The question of the identity of the beneficiary under a Quistclose trust while the specific purpose for which it was formed is still capable of being fulfilled was discussed by Lord Millett at length in Twinsectra at pages 186 and following. In the final analysis, he saw that kind of trust as a resulting trust: "As Sherlock Holmes reminded Dr Watson, when you have eliminated the impossible, whatever remains, however improbable, must be the truth. I would reject all the alternative analyses, which I find unconvincing for the reasons I have endeavoured to explain, and hold the Quistclose trust to be an entirely orthodox example of the kind of default trust known as a resulting trust. The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and insofar as he does not it is held on a resulting trust for the lender from the outset. Contrary to the opinion of the Court of Appeal, it is the borrower who has a very limited use of the money, being obliged to apply it for the stated purpose or return it. He has no beneficial interest in the money, which remains throughout in the lender subject only to the borrower's power or duty to apply the money in accordance with the lender's instructions. When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money. Whether the borrower is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the borrower's mandate while it is still capable of being carried out, must depend on the circumstances of the particular case." 60 Rahnam has no beneficial interest that can be asserted against Esplins. There being no duty owed to or beneficial interest enforceable by Rahnam, it is unnecessary to consider whether Esplins was in fact in breach of the 20 November 2003 direction. 61 Similarly the assertions made by Rahnam that a constructive trust arises fails for lack of 'proximity', for want of a better term, between the parties. Rahnam seeks to bring its claim under the general rubric of "unconscionability". But to say, in isolation, that particular conduct is "unconscionable" leads nowhere. As the High Court has emphasised most recently in Australian Broadcasting Commission v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 and Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 77 ALJR 926, "unconscionability" is a characteristic of action or inaction which may preclude assertion of or reliance on legal rights in circumstances where equity has the capacity, in any event, to intervene. It is not itself a cause of action or an independent basis for intervention. In the present case, the capacity of equity upon which Rahnam seeks to rely is the capacity to find or impose a constructive trust under Guimelli v Guimelli principles as an instrument for redressing unconscionability. For reasons I have given, Rahnam's attempt in that direction fails. 62 Unless it had paid off both Perpetual and Rahnam in full, Zolstat could not have sold even one apartment without appropriate concurrence of both those companies. It obtained concurrence in relation to each sale. Rahnam did not see fit to impose any condition as to the application of the deposit moneys. After the stakeholder obligations had ended, those moneys belonged to Zolstat, so that Esplins were obliged to deal with them as Zolstat required. Where Perpetual, as a condition of releasing the particular apartment from its mortgage, required that the deposit, when free, be paid to it, Zolstat came under a liability to pay to Perpetual accordingly. But where no such requirement was imposed in relation to a particular deposit, Zolstat could deal with it as it wished, including by paying its own or others' fees due to Esplins. As far as the particular deposits are concerned (those in respect of apartments 6, 16, 4 and 1), Rahnam made no attempt to ensure that Zolstat applied them in any way. It asserted no ability to control the application of the moneys. The series of dealings did not establish a discernable pattern that could found Rahnam's reliance on how subsequent deposits would be dealt with and thus no right of Rahnam has been shown that Esplins invaded by applying the deposits as they did. 63 Rahnam's claims must be dismissed. 64 Having dealt with the parties' controversy, I should refer to some rulings I made on evidence and mention my reasons for them. Rahnam sought to read an affidavit of Mr Neville Moses on the basis that Mr Moses is, in terms of s.79 of the Evidence Act 1995, qualified by specialised knowledge based on training, study or experience to express opinions on matters of conveyancing practice. I accepted that Mr Moses is so qualified. I nevertheless ruled most of Mr Moses' affidavit inadmissible and, in the end, Rahnam did not seek to rely on any part of it. My main reason for rejecting the material in Mr Moses' affidavit was that it did not go to the expertise Mr Moses professes and which I am satisfied he possesses, namely, expertise in the practice of conveyancers. 65 Mr Moses purported to express opinions about what he understood to be "the standard practice of competent and prudent conveyancers in transactions such as this". He then referred to the need for a vendor to give a clear title to the purchaser on settlement and said: "Obviously in order to do this it is necessary to pay out from the proceeds of the sale the amount required by the mortgagees or other persons holding charges over the property, to pay them out." 66 From there, Mr Moses proceeded to describe what is "usually the case" between property developer borrowers and financiers so far as progressive release of lots in a subdivision is concerned. He discussed the kinds of agreements that may be made between such parties. He referred to things "mortgagees are often happy with" and what they "might decide", as well as what they are "entitled to" on sales of lots. 67 There were three problems with Mr Moses' affidavit. First, Mr Moses said, in relation to the relevant issues between property developers and lenders, that they are for agreement between mortgagor and mortgagee. That is obviously so and immediately takes matters outside the province of conveyancing practice. Some assistance might possibly have been derived from evidence about the practices of lenders and borrowers (assuming there to be such a thing) but evidence of that kind could not be given by a person whose field of expertise is the practice of conveyancers. 68 Second, Mr Moses said that he had acted on many occasions where mortgages were being progressively discharged out of the proceeds of the sale of a number of related properties but that he could not recall having acted in a situation such as the present where the debts of registered mortgages left no surplus for the vendor/developer. He thus expressed, in effect, an inability to comment on the practice of conveyancers in the kind of situation before the court in this case. 69 Third, Mr Moses' affidavit expressed opinions on matters of law relevant to the resolution of the issues in the case. Evidence is not required and will not be received on such matters. 70 The claims in the summons are dismissed with costs. **********

Rahnam Investments Pty Ltd v Esplin & Anor

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