Raulfs v Fishy Bite & Ors

LEGISLATION CITED : Property (Relationships) Act 1984 (NSW) Real Property Act 1900 (NSW)

Boscawen v Bajwa [1995] 4 All ER 769; [1996] 1 WLR 328 Butler v Rice [1910] 2 Ch 277 In re Diplock [1948] Ch 465 CASES CITED : Chetwynd v Allen [1899] 1 Ch 353 Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] AC 221 Westpac Banking Corporation v Adelaide Bank Limited [2005] NSWSC 517; (2005) 12 BPR 22,919; (2006) NSW ConvR 56-133 Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 In re Fuller's Contract [1933] Ch 652

TEXTS CITED : Jacobs' Law of Trusts in Australia, 7th ed (2006)

Deborah Raulfs PARTIES : v Fishy Bite Pty Ltd & 2 Ors

COUNSEL : Plaintiff: P O'Loughlin 3rd Defendant: R Harper SC with Ms K Dawson

SOLICITORS : Plaintiff: McLaughlin & Riordan Solicitors 3rd Defendant: n/a

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4896/08 Deborah Raulfs v Fishy Bite Pty Ltd & 2 Ors JUDGMENT

1 HIS HONOUR: This is an application for an order extending a caveat. The notice of motion also sought an injunction to restrain the third defendant from selling or otherwise dealing with a property known as 9 Pacific Street, Clovelly ("the Clovelly property"). The argument focused upon the application for an extension of the caveat. These reasons will dispose of both of the orders sought. 2 The caveat has been extended until today in order to deal with this application. In the caveat the plaintiff claims an interest as constructive trustee by reason of the following facts: " By reason of monies contributed by the Caveator as capital to a Partnership between her and Fishy Bite Pty Limited being applied without her Consent to reduce or discharge monies secured by registered mortgage number AB186568X for the benefit of the registered proprietor. "

3 The respondent to the application is the third defendant in the proceedings. She is now the sole registered proprietor of the Clovelly property. 4 On 30 September 2008, the third defendant entered into a contract for the sale of the property. Completion is due on 11 November 2008. 5 The plaintiff and the first defendant, Fishy Bite Pty Limited, entered into a partnership agreement on 27 July 2006.

6 The business of the partnership was the conduct of a fish and chip shop in Bronte. The partnership agreement acknowledged that the plaintiff had contributed $400,000 to the capital of the partnership. The moneys were paid by the plaintiff on 27 July 2006 to Fishy Bite. They were banked to its account. It appears that no separate partnership account was opened. 7 The second defendant is the sole director and shareholder of Fishy Bite. As at 27 July 2006, he and the third defendant were de facto partners, although their relationship had either broken down or was on the point of doing so. At that time, the second and third defendants owned the Clovelly property as joint tenants. The property was mortgaged to Suncorp Metway Limited. The second and third defendants were the mortgagors. According to the third defendant, the mortgage secured two loans: one for $500,000 and one for $190,000. 8 On 26 October 2006, a cheque for $400,000 was withdrawn from Fishy Bite's account. On 27 October 2006, $502,093.18 was paid into an account in the names of the second and third defendants with Suncorp Metway. The payment reduced the debit balance of that account to zero. 9 There was no evidence that the third defendant was then aware of the discharge of the debt to Suncorp Metway. The necessary inference from the evidence on this application is that the payment was organised by the second defendant. There is a strong prima facie case that the payment of $502,093.18 included the amount of $400,000 withdrawn by Fishy Bite the preceding day. 10 There is a prima facie case that this was a misapplication of partnership funds. There is a prima facie case that Fishy Bite was in breach of its fiduciary duty to the plaintiff in paying $400,000 towards the discharge of a debt owed, it would seem, by the second and third defendants to Suncorp Metway. There is a prima facie case that the second defendant knowingly assisted that breach. 11 There is no evidence that the third defendant knowingly assisted that breach unless, as was argued, the second defendant acted as her agent in causing the payment to be made to discharge the loan, and that his knowledge should be imputed to her. 12 The third defendant deposed that it was not until the latter half of 2007, when each of the second and third defendants began to discuss arrangements as to splitting assets following the breakdown of their relationship, that she became aware that the $500,000 loan had been paid off. According to the third defendant, she was told simply by the second defendant that the money had come from the second defendant's business deals and he refused to provide further information. 13 On 14 September 2007, the third defendant and second defendant entered into a termination agreement pursuant to Pt 4 of the Property (Relationships) Act 1984 (NSW). As part of that agreement, the second defendant agreed to transfer his interest in the Clovelly property to the third defendant. That transfer was executed on 17 December 2007 and was registered on 11 January 2008. Thus, from that day the third defendant has been the sole registered proprietor of the Clovelly property. On the same day the existing Suncorp Metway mortgage was discharged. A new mortgage was given by the third defendant to Suncorp Metway. 14 The third defendant deposed that from the proceeds of sale of the Clovelly property, she intends to reduce various mortgages to reduce her debt to a level where she can meet the repayments. She proposes to purchase another similar property in the same vicinity in which she and her children can reside. 15 It is unnecessary to go into the details of her family situation, but there are very strong reasons for her and her family continuing to be able to live in the same area. The second defendant and her business partner are directors of a company called Malabar Headlands Pty Limited. It is the owner of a property in Bay Parade, Malabar. 16 The third defendant argues that the plaintiff has not demonstrated that there is a serious question to be tried, that she has a caveatable interest in the Clovelly property. 17 If I were to decide to the contrary, the third defendant's position is that the balance of convenience does not favour the extension of the caveat. In relation to the balance of convenience, Malabar Headlands has agreed that it will charge the property owned by it in Bay Parade to secure any proprietary interest which the court might find in these proceedings the plaintiff has in the Clovelly property. 18 Malabar Headlands has also agreed after settlement of the sale of the Clovelly property to reduce the mortgage debt over the Malabar property to no more than $945,000. On the valuation evidence this would provide security for an amount up to $400,000 at least. Malabar Headlands is prepared to acknowledge that the plaintiff is entitled to lodge a caveat against the Malabar property in respect of the undertaking it proffers, and has agreed not to dispose of, charge or otherwise encumber that property without the plaintiff's consent or further order of the court. 19 If there is a serious question to be tried that the plaintiff has a caveatable interest in the Clovelly property, then the balance of convenience clearly favours the proposal advanced by the third defendant, that is to say the existing caveat should not be extended but the plaintiff would be entitled to lodge a caveat over the Malabar property as agreed, in respect of which Malabar Headlands has agreed to give the charge. 20 The offer from Malabar Headlands is not made unconditionally. It is first necessary for the plaintiff to establish that there is a serious question to be tried that she has an equitable interest in the Clovelly property. 21 On the present materials, I think it is very difficult to say that the second defendant was acting as the third defendant's agent in reducing the debt they both owed to Suncorp Metway to zero. In causing the payment to be made, the second defendant was reducing his own debt as well as that of the third defendant. Whilst further investigation might show that he was acting as her agent, I am not persuaded that the evidence on the present application establishes that was so. 22 However, it seems to me that there is, nonetheless, a serious question to be tried that the plaintiff has such an interest. It is true, as Mr Harper SC and Ms Dawson for the third defendant have submitted, that no such interest appears from the statement of claim. However, I think the present application should be dealt with from what appears from the evidence, notwithstanding that potential causes of action have not been clearly pleaded. I therefore do not pause to enquire whether the underlying facts have been sufficiently alleged in the statement of claim. 23 There is a prima facie case that the $400,000 was partnership property and that it, together with other moneys, was used to reduce the second and third defendants' debt to zero. The payment, when made on 27 October 2006 did not, so far as the evidence goes, mean that there were no moneys at all secured by Suncorp Metway's mortgage. Nor was the mortgage then discharged. 24 Prima facie, the second and third defendants were volunteers. If it can be said that the third defendant received money which was partnership property, then, in the absence of a claim that she acquired legal title to the property for value, it seems to me to be at least arguable that she held the money, along with the second defendant, on trust for the partners. 25 The moneys were paid into an account with Suncorp Metway in the names of the second and third defendants. It seems to me that it is seriously arguable that she should be treated as having received the moneys used to reduce the Suncorp Metway mortgage debt and that she did so as a volunteer. On the reasoning of Millett LJ in Boscawen v Bajwa [1995] 4 All ER 769; [1996] 1 WLR 328, it is arguable that she would be entitled to an appropriate remedy by way of subrogation to the position of mortgagee in respect of the moneys used to reduce the mortgage debt. His Lordship said (at 334-335): " Tracing properly so-called ... is neither a claim nor a remedy but a process. Moreover, it is not confined to the case where the plaintiff seeks a proprietary remedy; it is equally necessary where he seeks a personal remedy against the knowing recipient or knowing assistant. It is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received (and, if necessary, which they still retain) can properly be regarded as representing his property. He needs to do this because his claim is based on the retention by him of a beneficial interest in the property which the defendant handled or received. Unless he can prove this he cannot (in the traditional language of equity) raise an equity against the defendant or (in the modern language of restitution) show that the defendant's unjust enrichment was at his expense.

In such a case, the defendant will either challenge the plaintiff's claim that the property in question represents his property (ie he will challenge the validity of the tracing exercise), or he will raise a priority dispute (eg by claiming to be a bona fide purchaser without notice). If all else fails, he will raise the defence of innocent change of position. This was not a defence which was recognised in England before 1991 but it was widely accepted throughout the common law world. In Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 the House of Lords acknowledged it to be part of English law also. The introduction of this defence not only provides the court with a means of doing justice in future, but allows a re-examination of many decisions of the past in which the absence of the defence may have led judges to distort basic principles in order to avoid injustice to the defendant.

If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant, and overcomes any defences which are put forward on the defendant's behalf, he is entitled to a remedy. The remedy will be fashioned to the circumstances. The plaintiff will generally be entitled to a personal remedy; if he seeks a proprietary remedy he must usually prove that the property to which he lays claim is still in the ownership of the defendant. If he succeeds in doing this, the court will treat the defendant as holding the property on a constructive trust for the plaintiff and will order the defendant to transfer it in specie to the plaintiff. But this is only one of the proprietary remedies which are available to a court of equity. If the plaintiff's money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant's land has been enhanced by the use of the plaintiff's money. And if the plaintiff's money has been used to discharge a mortgage on the defendant's land, then the court may achieve a similar result by treating the land as subject to a charge by way of subrogation in favour of the plaintiff. " 26 The learned authors of Jacobs' Law of Trusts in Australia, 7th ed (2006), state at [2711] that if a volunteer uses trust moneys to redeem a mortgage, the claimant cannot, by recourse to principles of subrogation applied in Butler v Rice [1910] 2 Ch 277, stand in the shoes of the mortgagee, as to do so would be to extend the claimant rights in respect of the whole of the mortgaged property, which would not be equitable.

27 I assume the authority relied upon for that proposition is In re Diplock [1948] Ch 465 at 549-550. However, that was queried in Boscawen v Bajwa at 340-341, and I think that it is certainly arguable whether the proposition stated in so absolute terms is necessarily correct. 28 It was submitted that there could be no subrogation at the time the payment was made because the mortgage debt was not then discharged in its entirety, and the mortgage itself was not discharged until 2008. Whilst a claimant cannot be subrogated to a mortgagee's rights in competition with the mortgagee itself, there are cases in which claimants, relying on the principles in Butler v Rice or analogous principles, have been subrogated to the rights of a mortgagee where the mortgage debt was only partially discharged (see Chetwynd v Allen [1899] 1 Ch 353 and Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] AC 221, discussed in Westpac Banking Corporation v Adelaide Bank Limited [2005] NSWSC 517; (2005) 12 BPR 22,919; (2006) NSW ConvR 56-133 at [47]-[49]). 29 In Banque Financiere de la Cite v Parc (Battersea) Ltd, Lord Hoffman (with whom Lord Griffiths and Lord Clyde agreed) and Lord Hutton considered there was no conceptual problem in the lender in that case being subrogated to the rights of the first mortgagee, where the mortgage had been discharged and the lender was not seeking priority against the first mortgagee (at 235-236; 243-245). 30 Of course it is not an objection to subrogation that the mortgage has been discharged. If, as I consider is arguable, the plaintiff was entitled to maintain such a claim in October 2006, the claim would probably be characterised as a right in personam and would not be defeated by s 42 of the Real Property Act 1900 (NSW). It would arise because the third defendant, although I assume innocent of any notice that the moneys had been applied in breach of the first defendant's fiduciary duty, was nonetheless a volunteer and the moneys were used to reduce her mortgage debt. 31 That being so, it seems to me to be arguable that the subsequent transfer by the second defendant of his interest to the third defendant does not preclude the plaintiff from maintaining her claim. In that respect it may be noted that as a joint tenant in 2006, the third defendant was entitled to a share in the whole of the property, and that the transfer by the second defendant of his interest as joint tenant operates strictly as a release. 32 Under the partnership agreement, the plaintiff was entitled to a 35 percent interest in the partnership. It was submitted for the third defendant that the plaintiff's interest could be no more than a claim to 35 percent of the sum of $400,000 and, therefore, if it were necessary to substitute the caveat, it should only secure the moneys up to the amount of $140,000. 33 There is no particular prejudice to the third defendant if the charge to be given by Malabar Headlands is to an amount up to $400,000. That is because the charge will only secure the amount in respect of which the plaintiff establishes she has a proprietary interest in the Clovelly property. That is to say, if the third defendant's submission about this is correct, then the charge will only secure an amount up to $140,000. 34 Accordingly, I would only accede to this submission if it were clear that the submission is correct. I would not attempt to decide that question as if it were a final hearing. There are some difficulties with the submission. The nature of the partner's interest in partnership property was described in Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321. The High Court said (at 327-328): " The partner's share in the partnership is not a title to specific property but a right to his proportion of the surplus after the realization of assets and the payment of debts and liabilities. However, it has always been accepted that a partner has an interest in every asset of the partnership and this interest has been universally described as a 'beneficial interest' notwithstanding its peculiar character. " 35 Their Honours cited In re Fuller's Contract [1933] Ch 652 where Luxmoore J said (at 656): "... the partners have the beneficial interest in the partnership assets, which are held together as an undivided whole, but they respectively have undivided interests in them.. "

36 In my view, it is seriously arguable that the plaintiff has an interest, along with Fishy Bite, in the sum of $400,000, and that that amount is to be accounted for to the partnership. 37 On the taking of partnership accounts, the plaintiff may be found to be entitled to more than 35 per cent of the surplus of partnership assets over liabilities, depending on the extent to which there have been drawings, and other matters which would arise on the taking of accounts. 38 For these reasons, I consider that there is serious question to be tried that the plaintiff has a caveatable interest in the Clovelly property. 39 However, for the reasons which go to the balance of convenience, that caveat should not be extended. Instead, pursuant to the undertaking of Malabar Headlands, the plaintiff will be entitled to lodge a caveat in respect of the Malabar property. 40 It also follows from these reasons that the claim for an injunction to restrain the third defendant from dealing with the Clovelly property should be refused. No submissions were advanced in respect of the claim for an injunction and it will be dismissed for the same reasons. 41 For these reasons, I order that the plaintiff's notice of motion filed on 17 October 2008 be dismissed. I will hear the parties on costs.

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