Toppi & Anor v Lavin

Judgment 1HIS HONOUR: The question in this case is whether a co-surety who pays more than her share of a guaranteed debt is subrogated to the creditor's security over assets of her co-surety to enforce her right of contribution notwithstanding that the security has been released. The creditor took guarantees from the plaintiffs and the defendant and held mortgages over property of each of them that secured their liabilities under their guarantees. The creditor sued them both, but settled its claim against the defendant. The creditor released its security over the defendant's property on receiving a substantial payment from the defendant, albeit for a sum less than the defendant's share of the guaranteed liability. Some months later the plaintiffs paid out the balance of the guaranteed debt. When the plaintiffs paid off the creditor, it no longer held security over the defendant's assets. It had provided a discharge of mortgage. That discharge had been registered. The question is whether the release of the security is an answer to the plaintiffs' claim to be subrogated to the creditor's security over the defendant's property. I have concluded that it is. 2The substantive relief sought in the summons is a declaration that: "the Caveators, in equity, an estate or interest in the land the subject of Caveat AI13666 and AI13667to the extent of the mortgages formerly held by the National Australia Bank Ltd over the property described in the Caveat pursuant to the provisions of s. 3 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW) to the extent that they have been determined entitled to recover from the registered proprietor notwithstanding the discharge by the National Australia Bank Limited of its mortgages pursuant to the deed entered into between the Bank and the registered proprietor dated 8 September 2010. [sic]" 3The relevant facts were not in dispute. The defendant is the registered proprietor of land in certificate of title folio identifier 9/SP63792 and 14/SP63601. On 29 October 2008 the plaintiffs (Ms Toppi and Mr Cunningham), the defendant (Ms Lavin), and two companies (Luxe Productions Pty Ltd and Dolores Lavin Management Pty Ltd), executed a guarantee in favour of the National Australia Bank in respect of obligations of Luxe Studios Pty Ltd (the customer) to the bank. The guarantors undertook to pay on demand $7,768,000, being an amount which the customer then owed the National Australia Bank plus interest, bank fees, costs and other expenses owed by the customer to the bank. Clause 7 of the guarantee provided: "7. You remain liable under the Guarantee even if other things change NAB may, for example, without your knowledge or consent: ... release the customer, any co-guarantor or any security; or ... and you remain liable for all amounts that the customer may owe NAB but the total amount that can be claimed from you is the Guarantee Limit (see clause 14.2 of the Guarantee)." 4On 6 October 2006 the defendant gave the bank a mortgage over property in folio identifier 9/SP63792. On 19 December 2007 she gave the bank a mortgage over the property in folio identifier 14/SP63601. It was common ground that the liability incurred by the defendant to the bank under the guarantee was secured by those mortgages. 5On 14 June 2010 the bank brought proceedings against the defendant, the plaintiffs, the other two guarantors and the principal debtor. It sought judgment against each of those parties for a sum of in excess of $7,899,621 plus interest. The bank also sought judgment for possession of the land in folio identifier 9/SP63792 and 14/SP63601, being the defendant's land that had been mortgaged to the bank. It also sought possession of another property of which it claimed the plaintiffs were the registered proprietors and which the bank claimed was the subject of a mortgage given by them on 19 June 2003. 6The proceedings between the bank, the defendant and one of the guarantors, Dolores Lavin Management Pty Ltd, were settled by a deed of release and settlement made on 8 September 2010. Pursuant to that deed the defendant agreed to pay by 7 December 2010 all amounts outstanding under three specified facilities provided by the bank to the defendant and what was called "the Guarantee Settlement Sum". That was defined to mean "the amount of $1,350,000 plus plain simple interest at the Court Rate from 8 December 2010 to be paid by DL (the defendant) and DLM (Dolores Lavin Management Pty Ltd) in respect of their Guarantee Indebtedness". The "Guarantee Indebtedness" was defined to mean all moneys outstanding at any time under the guarantee and indemnity provided by "DL, DLM, Neil Cunningham, Paola Toppi [the plaintiffs] and Luxe Productions Pty Ltd on or about 29 October 2008 to NAB in respect of the obligations of Luxe Studios Pty Ltd, the balance outstanding under which as at 7 September 2010 is $3,850,000 (approximately)". 7Clause 8(b) and (c) of the deed of release and settlement provided: "8. RELEASE ... (b) Provided no Event of Default occurs and subject to NAB's receipt of the Settlement Sum, NAB covenants not to make any Claim against DL and DLM in respect of the Guarantee, the Darlinghurst Mortgage and the Potts Point Mortgage as security for the Guarantee or any matter arising out of or referred to in the Proceedings, and file Consent Judgment D in the Proceedings. (c) Nothing in this deed, compromises, prejudices or affects NAB's rights against Neil Cunningham, Paola Toppi, Luxe Productions Pty Ltd (ACN 118 164 355) and/or Luxe Studios Pty Ltd (ACN 116 330 253) whatsoever, including without limitation in respect of the Guarantee, Guarantee Indebtedness, any mortgage and charge security provided by those parties in respect of the Guarantee Indebtedness and the Proceedings, all of which rights are expressly reserved by NAB." 8It was common ground that the defendant paid the amount she owed the bank pursuant to the deed of release and settlement. On 29 November 2010 the bank executed discharges of the two mortgages given to it by the defendant. Those discharges of mortgage have been registered. A mortgage in favour of Westpac Banking Corporation has been registered on both titles. I was told that the mortgages to Westpac secured amounts provided by Westpac that were used to pay the National Australia Bank. Each discharge of mortgage provided that the bank: "... received full satisfaction and discharge of the above Mortgage so far as it affects the land above described but so that nothing herein contained or implied shall affect the liability (if any) of the Mortgagor or any other person for any moneys secured by the above Mortgage or remaining owing or for which the Mortgagor or such person may be or become liable or prejudice or affect the rights, remedies or powers of the Mortgagee under or in respect of the above Mortgage as to the other lands comprised therein or any other security instrument or document of any kind." 9Because of the covenant not to sue in cl 8(b) of the deed of release and settlement, the acknowledgment that it had received full satisfaction of the mortgage so far as it affected the land and the provision of the instrument of discharge mortgage in registrable form for the purposes of its being registered, the bank could not contend that the mortgage remained on foot and secured any sum owed to it. The plaintiffs did not contend that the security had not been released. They submitted that the release did not affect their right to have recourse to the security in aid of their entitlement to contribution. 10The plaintiff did not know about the discharge of the mortgages when the discharge was effected. 11On or about 18 May 2011 the plaintiffs paid out the balance of the moneys owed by them to the National Australia Bank, including a sum of approximately $2,696,394 in respect of the guaranteed debt. 12The plaintiffs brought proceedings for contribution against the defendant (Paola Toppi v Dolores Lavin [2013] NSWSC 1361). On 18 September 2013 Rein J gave judgment for the plaintiffs against the defendant and Dolores Lavin Management Pty Ltd in the amount of $726,308.50 and also ordered those defendants pay interest on the judgment in the amount of $144,708.06. 13On or about 12 September 2013 the plaintiffs lodged caveats in respect of the titles to the two properties claiming to be subrogated to the securities granted by the defendant to the National Australia Bank, notwithstanding the discharge of those mortgages. They claimed an interest as equitable mortgagee of the land. They do not assert priority over Westpac's registered mortgage. 14Section 3 of the Law Reform (Miscellaneous Provisions) Act 1965 provides: "3 Surety discharging liability to be entitled to securities (see Act No 43 1902, s 8A) (1) A person who, being surety for the debt or duty of another, or being liable with another for a debt or duty, pays that debt, or performs that duty, is entitled: (a) to have assigned to that person, or to a trustee for that person, every judgment, specialty or other security held by the creditor in respect of that debt or duty, whether or not that judgment, specialty or other security is taken at law to have been satisfied by the payment of the debt or the performance of the duty, and (b) to stand in the place of the creditor and to use all the remedies, and, if necessary, and on a proper indemnity, to use the name of the creditor in any proceedings to obtain from the principal debtor or any co-surety, co-contractor or co-debtor (as the case requires) indemnity for the advances made and loss sustained by the person who paid the debt or performed the duty. (2) The payment of the debt or the performance of the duty by a surety is not a defence to any such proceedings referred to in subsection (1). (3) A co-surety, co-contractor or co-debtor is not entitled under this section to recover from another co-surety, co-contractor or co-debtor more than the proportion to which, as between those parties themselves, that person is justly liable." 15In Bofinger v Kingway Group Limited [2009] HCA 44; (2009) 239 CLR 269 the High Court (Gummow, Hayne, Heydon, Kiefel and Bell JJ) said (at [37]): "[37] The appellants sought to support their case by reliance upon the provisions now made by s 3 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW) respecting the entitlement of sureties to assignment of securities. Section 3 is the descendant in New South Wales of s 5 of the Mercantile Law Amendment Act 1856 (UK) (19 & 20 Vict c 97). The provisions confer upon sureties statutory rights and remedies which furnish a summary mode of carrying into effect those otherwise available in courts of equity (Embling v McEwan (1872) 3 VR (L) 52 at 53-54; Hardy v Johnston (1880) 6 VLR (L) 190 at 193). The second mortgagee correctly submitted that if, as it contended, the appellants lacked an equity supporting subrogation, s 3 would not supply that deficiency." 16In D & J Fowler (Aust) Ltd v Bank of New South Wales [1982] 2 NSWLR 879 Helsham CJ in Eq said of s 8A of the Usury, Bills of Lading & Memoranda Act 1902 (the predecessor to s 3 of the Law Reform (Miscellaneous Provisions) Act) (at 885) that: "... the section first of all gives the person who has paid the debt a right to have assigned to him any other security held by the creditor in respect of the debt. This is regardless of whether that other security is deemed by law to have been satisfied by the payment of the debt. So the section artificially keeps alive, if necessary, the security and lets the person who has paid the debt in effect get his hands on it." 17In McColl's Wholesale Pty Limited v State Bank of New South Wales [1984] 3 NSWLR 365 the principle was stated by Powell J (as his Honour then was) (at 378) as follows: "... a surety who pays the debt is entitled to have assigned to him every judgment, specialty or other security which is held by the creditor in respect of the debt whether or not at law it is deemed to have been satisfied by payment; and he is entitled to stand in the place of the creditor and use all his remedies in order to obtain indemnification from the principal debtor or contribution from any co-surety for advances made and losses sustained by him. In fact after payment of the debt the Act [viz. now s 3 of the Law Reform (Miscellaneous Provisions) Act 1965] operates as an implied assignment of the securities and places the surety in the position previously occupied by the creditor albeit for the purpose of enforcing the surety's right to an indemnity."(citation of authority omitted). 18Mr Golledge, who appeared for the defendant, submitted that it was only those securities that were alive at the time the person paid the debt that are deemed to have been kept alive notwithstanding the surety's payment that discharges the debt. They are kept alive notwithstanding that by reason of the payment the security is taken to have been satisfied. 19Mr Golledge submitted that the plaintiffs' right under s 3 on discharging the creditor's debt by paying more than their proportionate share of the liability was to an assignment only of any security then held by the creditor in respect of that debt. He submitted that because the security had been discharged months before the plaintiffs paid the debt for which they were a surety and that security had been discharged, the plaintiffs were not entitled to the benefit of that security. Subsection 3(1) provides that the surety paying the debt is entitled to an assignment of the creditor's security whether or not the security is taken to have been satisfied by the payment of the debt. The section does not preserve for the benefit of the surety who pays the debt a security which has been discharged by reason of an earlier payment. The National Australia Bank's mortgages over the property of the defendant were discharged by reason of the payment made by the defendant to the bank and the bank's agreement to discharge the security on receipt of the defendant's payment. Mr Golledge submitted that there was no security "held by the creditor" which the plaintiffs were entitled to have assigned to them. 20Mr Golledge submitted that s 3(1)(b) was consistent with this construction. He submitted that under s 3(1)(b) the right of the surety who pays the debt of another is to stand in the place of the creditor and use all the remedies of the creditor that are then available to obtain an indemnity for the loss sustained up to the proportion for which the co-surety is liable. Because the bank did not have a remedy against the defendant at the time the plaintiffs paid the balance of the debt of the principal debtor, s (3)(1)(b) did not afford the plaintiff any remedy. 21Mr Golledge submitted that this construction of s 3 accorded with the principles on which a co-surety who pays the guaranteed debt is entitled to be subrogated to the creditor's securities taken from the principal debtor or a co-surety. The surety's right was to be subrogated only to the securities then held by the creditor. If the creditor had previously released a security, then the surety's liability to the creditor might be discharged or be reduced to the extent the surety was prejudiced by the release of the security, but the surety was not subrogated to the creditor's security over property of the co-surety that had been discharged. 22I agree with these submissions. For the reasons below they are soundly based on the principles on which a surety's liability to the creditor may be discharged or reduced by the creditor's releasing a security. In concluding that the surety is not entitled to be subrogated to a mortgage given by a co-surety that has been released prior to the surety's paying off the guaranteed debt, I am not to be taken to be saying that the timing of events is critical. 23During the course of oral submissions I was referred to various statements of general principle to the effect that a co-surety who pays the guaranteed debt is entitled to be subrogated to the rights of the creditor to enforce a security then held over a property of a co-surety to enforce the right of the surety who had paid the guaranteed debt to contribution from the co-surety (State Bank of NSW v Geeport Developments Pty Ltd (1991) 5 BPR 11,947 at 11,953; D & J Fowler (Australia) Ltd v Bank of New South Wales at 885; Yusen Daly Smith International Pty Ltd v Smith [1999] NSWSC 450 at [17]). In McColl's Wholesale Pty Ltd v State Bank of New South Wales Powell J (at 379) referred to subrogation as a right designed to "enable the surety to enforce his right to an indemnity by resort to the securities formerly held by the creditor". 24In none of these cases was it necessary to consider the present question as to whether subrogation could only be had to a security that was still held by the creditor over a property of a co-guarantor when the guarantor paid off the guaranteed debt. 25In some cases equity will treat a security that has been discharged as nonetheless having been kept alive for the benefit of the party that has paid off the secured debt (Ghana Commercial Bank v Chandiram [1960] AC 732). If the plaintiff is correct in saying that the mortgages over the defendant's property are to be taken to have been kept alive for the benefit of the plaintiff, the question would be whether the plaintiffs are thereby asserting a personal equity against the defendant that is an exception to the principles of indefeasibility. For the reasons which follow it is unnecessary to decide that question. 26In Cochrane v Cochrane (1985) 3 NSWLR 403 Kearney J held that a co-mortgagor who paid off the mortgage debt was not entitled to be subrogated to the mortgage that was discharged on the principles in Ghana Commercial Bank v Chandiram in the absence of a very clear and express reservation of such a right. Kearney J held that there was no occasion for equity to intervene by way of permitting the co-mortgagor who paid off the mortgage debt to be subrogated to the mortgagee's rights because of the co-mortgagor's entitlement to contribution. 27The plaintiffs would say that this does not address the right of a co-guarantor who pays off the guaranteed debt to be subrogated to the securities taken by a creditor from a co-guarantor. 28The answer to the present question lies in the principles concerning the rights of a surety to be discharged from liability or to have his or her liability reduced, if his or her position is prejudiced by a creditor's releasing a security from a co-guarantor. 29In Williams v Frayne (1937) 58 CLR 710 Dixon J said (at 738): "If the guarantee is given upon a condition, whether express or implied from the circumstances, that a specific security shall be obtained completed, protected, maintained, or preserved, any failure in the performance of the condition, operates to discharge the surety, and the discharge is complete. But otherwise the surety can complain only if the creditor sacrifices or impairs a security, or by his neglect or default allows it to be lost or diminished, and in that case the surety is entitled in equity to be credited with the deficiency in reduction of his liability." 30In The Bank of Victoria v Smith (1894) 20 VLR 450 Holroyd J said (at 452): "When the guarantor is called upon to pay and pays the debt for which he has become surety, he is to get the securities then existing; but, if any security has been abandoned by the creditor without his consent, the value of it, so far as the liability of the surety is concerned, should have been deducted from the debt at the time of the abandonment:" 31These principles were restated in Buckeridge v Mercantile Credits Limited (1981) 147 CLR 654 at 671, 675, where it was also held that a surety could bargain away his entitlement to be discharged if the creditor released a security which was a condition of the guarantee, and could bargain away the right to have his liability reduced by reason of such a release of a security. Prima facie, the plaintiffs in this case bargained away that entitlement as against the National Australia Bank by clause 7 of the guarantee. 32In the absence of a contractual term to the contrary, a guarantor is entitled to be discharged or have his or her liability reduced pro tanto if a creditor releases the security taken from a co-guarantor. This principle must proceed on the basis that such a release is effective to impair the surety's rights against a co-surety. If a guarantor who paid off the guaranteed debt could be subrogated to the security taken by the creditor from a co-guarantor, notwithstanding its earlier release, then there would be no occasion for the guarantor's liability to the creditor to be reduced or discharged by reason of the creditor's having released the security. The authorities that establish that, in the absence of a contrary provision in the contract of guarantee, a guarantor may be discharged, or his or her liability may be reduced, by the creditor's releasing a security taken from a co-guarantor, necessarily assume that the release is effective, not only as between the creditor and the co-guarantor who gave the security, but as between the guarantors. If a co-guarantor had a right of subrogation asserted by the plaintiffs in this case, notwithstanding the release of the security, there would be no reason for the co-surety to be discharged or his or her liability to be reduced by reason of the release. The fact that in this case there is a contractual term that prima facie would preclude the plaintiffs from claiming that their liability to the National Australia Bank was reduced by the release of the security over the defendant's properties does not change the analysis. 33For these reasons, I conclude that the plaintiffs are not entitled to be subrogated to the discharged mortgages given by the defendant to the National Australia Bank. The question whether such a right of subrogation could be asserted as an exception to indefeasibility does not arise. 34I order that the plaintiffs' summons be dismissed. I order that within two business days the plaintiffs remove caveats AI13666 and AI13667. Prima facie the plaintiff should pay the defendant's costs of the proceedings. I will hear the parties on costs. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 January 2014