Any further drawing on the account by the Bryants would be an implied revocation of the request to close the account.
46 Nor could the defendant be compelled to honour the request in the Irrevocable Authority that the customer not be contacted further with regard to the matter, and that any enquiry should be directed to the plaintiff. In any event, the mortgage was to remain on foot until it was "actually released" by the defendant. There is no question that the further drawings on the account are secured by the defendant's mortgage.
47 It is conceptually not possible for the plaintiff to be subrogated to the rights of the defendant under the defendant's mortgage in competition with the defendant itself. Who would determine to which debt a repayment by the mortgagor would be applied? Who would determine whether the mortgagee's power of sale should be exercised, or to which debt the proceeds of sale of the mortgaged property would be applied?
48 Chetwynd v Allen [1899] 1 Ch 353 demonstrates that a person claiming to be subrogated to the rights of the first mortgagee, but who has not fully discharged the mortgagor's liability to the first mortgagee, takes subject to the first mortgagee's rights. There, the lender M advanced £1,200 to pay off an existing mortgage held by T over a property owned by the plaintiff. M made the advance on the basis of certain misleading representations and non-disclosures by the plaintiff's husband. M was told that he would receive a transfer of T's mortgage. £1,000 of the advance was applied in reduction of T's mortgage. T's mortgage was secured over two properties. Romer J held that the charge on both properties to the extent of £1,000 was kept alive in equity in favour of M, so far as that could be done without prejudicing T or the plaintiff, with whom M did not deal. T was not prejudiced as the balance of his mortgage debt had priority over M's charge. The plaintiff was not prejudiced so long as no extra costs were thrown on the mortgaged properties by reason of the original mortgage debt being divided between T and M.
49 A similar issue arose in Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] AC 221 where a lender intended that its advance would have priority over debts owed to other companies in the debtor's group. The advance was applied to reduce, but not discharge, a first mortgage. The question was of priority between the lender and another company in the group, (not the first mortgagee), which had a secured debt. The lender claimed it was subrogated to the rights of the first mortgagee. The other secured creditor said that subrogation was impossible as the first mortgage was not fully discharged. Lord Hoffmann, with whom Lord Griffiths and Lord Clyde agreed, and Lord Hutton, considered that there was no conceptual problem about the lender being subrogated to the rights of the first mortgagee, whose mortgage had been since discharged. However, this was because the lender was not seeking priority against the first mortgagee. (At 235-236, 243-245).
50 While I accept that the plaintiff is to be taken to have intended to keep the mortgage in the defendant's favour alive for its own benefit save insofar as it was replaced by the mortgage to the plaintiff (Ghana Commercial Bank v Chandiram [1960] AC 732 at 745; Butler v Rice [1910] 2 Ch 277), the plaintiff cannot take priority over the defendant by subrogation to the defendant's rights. If the plaintiff is to have priority, it must be on the basis that subsequent advances made by the defendant after notice of the plaintiff's mortgage cannot be tacked to the defendant's security.
51 Although the Bryants' account was put into credit for a time, the subsequent advances made by the defendant when the Bryants made further drawings on their account, were secured by the defendant's first registered mortgage. There was not a fresh charge on the making of the further advances. (Sibbles v Highfern Pty Ltd (1987) 164 CLR 214.)
The Rule in Hopkinson v Rolt
52 The defendant submitted on a number of grounds that the rule in Hopkinson v Rolt was inapplicable, or that its requirements were not satisfied. First, it submitted that the rule did not apply where the first mortgagee was obliged to make further advances. It contended that it was obliged to permit the further advances after receipt of the plaintiff's letter of 30 June 2003. Secondly, it submitted that the rule only applies in relation to advances which exceed what was initially secured by the first mortgage, so that the additional advances do not adversely affect the value of the second mortgagee's security. Thirdly, it submitted that the rule was inapplicable because at least part of the drawings made by the Bryants after 30 June 2003 were made to effect improvements and thereby enhance the value of the security. Fourthly, it submitted that if the rule applies, the first mortgagee is only precluded from tacking subsequent advances if it would be equitable fraud for it to assert priority over the second mortgagee. That requires that it have actual notice of an advance under the second mortgage. It submitted that it did not have such actual notice. It did not have notice which affected its conscience such that it would be equitable fraud for it to assert its priority over the plaintiff. Fifthly, it submitted that the rule is founded on notions of what is fair and just as between mortgagees. It submitted that it was not fair and just that the plaintiff obtain priority by EDS giving notice of an advance to a clerk in Domain's offices, when EDS was on notice that the customer's account with the defendant would not be closed until Domain's own procedures for closing the account were completed. A fortiori, it was not fair and just that the plaintiff obtain priority where EDS acted in breach of the plaintiff's own guidelines and when it knew, or ought to have known, of the risk that the advance could effectively be unsecured. I will deal with each of these submissions in turn.
53 As to the first submission, I accept that the rule in Hopkinson v Rolt does not apply if the first mortgagee has no choice about making a further advance. (Chase Corporation (Aust) Pty Ltd v North Sydney Brick & Tile Co. Ltd (1994) 35 NSWLR 1 at 16-17; Wilson v Holland (1915) 21 ALR 35 at 36-37; In the matter of Dehy Fodders (Australia) Pty Limited; Winter v Bank of Adelaide (1973) 4 SASR 538 at 550-551). However, there was no obligation on the part of the defendant to permit further drawings on the account after the receipt of the plaintiff's letter of 30 June 2003 and the accompanying Irrevocable Authority. Although the loan contract permitted the Bryants to borrow up to the credit limit, the defendant could close the account at any time, or suspend access to it, or bring the loan contract to an end. Further, as explained in West v Williams [1899] 1 Ch 132 at 143-4, 146, a first mortgagee who has covenanted to make further advances on first mortgage security is released from that covenant where the mortgagor obtains a further advance on second mortgage, as the mortgagor is no longer able to proffer the security promised for the further advance.
54 In support of the second submission, the defendant relied principally upon the decision of the Full Court of the Supreme Court of South Australia in Commonwealth Bank of Australia v Grubic (27 August 1993, unreported on this point; BC9300359). There the Commonwealth Bank provided its customer with a commercial bill facility secured by first mortgage. The facility was for the sum of $645,000. The customer drew a bill of exchange for that sum which was accepted by the bank. The bank discounted the bill and paid the proceeds to the customer. On subsequent intervals of approximately three months, further bills were accepted and discounted by the bank. Debelle J, with whom Cox and Duggan JJ agreed, held that there was in substance one advance of $645,000 and that each rollover did not constitute a fresh advance. His Honour said (at BC9300359 at 65):
"The rule in Hopkinson v Rolt was grounded on principles of justice and fair dealing as between the mortgagor and mortgagees and as between the competing mortgagees: The rule was designed to achieve two objects. The first was to leave the mortgagor in a position to raise further monies on his property, which he could be prevented from doing if the first mortgagee was free to diminish the security of the second mortgagee by making further advances. The second, … was to prevent the first mortgagee with notice of the second from diminishing the value of the security for the second mortgage by making advances of money in addition to that initially secured by the first mortgage. As between competing mortgagees, the purpose was to ensure that the first mortgagee did not by additional advances adversely affect the value of the second mortgagee's security. ….." (Citation of authorities omitted).
55 Later his Honour said (at BC9300359 at 68):
"… In each of these decisions, the first mortgagee had made a loan to the mortgagor in addition to the original advance which had the effect of increasing the total amount borrowed by the mortgagor. In each case the court was concerned to ensure that, if any amount was lent by the first mortgagee with notice of the second mortgage which thereby increased the total sum lent to the mortgagor, the first mortgagee should not thereby be advantaged to the detriment of the second mortgagee."
56 The defendant submitted that the value of the plaintiff's mortgage has not diminished. When it was executed on 10 June 2003, it ranked behind the defendant's mortgage which secured up to approximately $233,000. It still secures no more than that amount. Considered as a second ranking security, the value of the plaintiff's mortgage has not been diminished.
57 However, the rule in Hopkinson v Rolt applies to moneys advanced by a bank under a current or overdraft account. Where a bank receives notice of an advance on second mortgage, it will lose priority in respect of subsequent advances even though moneys are paid to the credit of the account and are appropriated against the current indebtedness. (Deeley v Lloyds Bank Limited [1912] AC 756. As Lord Shaw said (at 783):
" After notice to the bank of a second mortgage by the customer, the debit is struck at the date of notice, and in the ordinary case, that is to say, where an account is merely continued without alteration, or where no specific appropriation of fresh payments is made, such payments are credited to the earliest items on the debit side of the account, and continue so to be credited until the balance secured under the first mortgage is extinguished."
58 As was said in Mercantile Credits Limited v ANZ Banking Group (1988) 48 SASR 407 at 410:
" The rule in Hopkinson v Rolt does not operate to defeat that security or any part of it. It merely fixes the amount for which the security has priority over subsequent securities at the date upon which the mortgagee has notice of those subsequent securities ."
59 If the defendant had sufficient notice of the plaintiff's mortgage, it obtained that notice when the account was in credit. The defendant would lose priority in respect of the subsequent drawings on the account. The drawings are analogous to drawings on an overdraft account. They are not analogous to the rolling over of bills of exchange considered in Commonwealth Bank of Australia v Grubic. For these reasons I do not accept the second submission.
60 In relation to the third submission, the evidence does not establish that the drawings made by the Bryants were spent on improvements or renovations to the property which increased, or may have increased, its value. The evidence on this subject was sparse. The Bryants themselves were not called by either party. Mrs Bryant told Ms Veness on 30 October 2003 that they had withdrawn $70,000 of funds to renovate their house. However, the evidence does not establish that any of the moneys which were withdrawn were applied for that purpose. The cheque for $70,000 drawn on 18 July 2003 was made payable to East Coast Concreting. This appears to have been the Bryants' own business. None of the other drawings had any apparent relationship to the making of improvements to the property. It is therefore unnecessary to consider whether the rule in Hopkinson v Rolt would cease to apply, merely if it were shown that the subsequent advance was applied towards the improvement of the secured property. Such a finding would go beyond what was decided in Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293 at 303.
61 The fourth and fifth submissions raise the critical issues. In Central Mortgage Registry of Australia Ltd v Donemore Pty Ltd [1984] 2 NSWLR 128, Kearney J analysed the authorities up to that time which considered the underlying basis for the rule in Hopkinson v Rolt. His Honour concluded that the underlying basis for the rule was that it would be inequitable, that is, it would constitute equitable fraud on the part of a first mortgagee, for it to claim priority in respect of further advances made with notice of an intervening equity. After referring to the Irish case of Re O'Byrne's Estate (1885) 15 LR(IR) 373, and the Canadian decision of Pierce v Canada Permanent Loan & Savings Co (1894) 25 OR 671, his Honour concluded that as the rule was based on the doctrine of equitable fraud, actual notice of the second mortgage was required.
62 In Sibbles & Anor v Highfern Pty Ltd (1987) 164 CLR 214 at 221, Mason CJ, Dawson, Toohey and Gaudron JJ described the rule in Hopkinson v Rolt as being that the prior mortgagee could not tack, if at the time of the further advances he had notice, actual or constructive, of the subsequent mortgage. (My emphasis).
63 This statement was obiter. Central Mortgage Registry of Australia Ltd v Donemore Pty Ltd, and the cases which it applied, were not referred to.
64 It was submitted for the plaintiff that obiter or not, I ought to follow what was said in Sibbles v Highfern Pty Ltd that constructive notice of the subsequent mortgage was sufficient to preclude the prior mortgagee from tacking the further advance.
65 In Hopkinson v Rolt itself Lord Chelmsford, who adhered to his judgment in the Court below, said (at 9 HLC 553, 11 E.R. 845) that:
" If he (the first mortgagee) chooses to run the risk of advancing his money with the knowledge, or the means of knowledge , of his position, what reason can there be for allowing him any priority? " (My emphasis).
66 However, Hopkinson v Rolt was not a case of constructive notice. Lord Campbell LC said that the first mortgagee was not prejudiced by being reduced to the rank of puisne encumbrancer, where, knowing his true position, he chooses voluntarily to make further advances to the mortgagor. As his Lordship stated the rule in terms of the first mortgagee knowing of the existence of the second mortgage, actual notice would be required.
67 In Bradford Banking Co Ltd v Henry Briggs & Son Co Ltd (1886) 12 App Cas 29, Lord Blackburn said (at 36):
" The first mortgagee is entitled to act on the supposition that the pledgor who was owner of the whole property when he executed the first mortgage continued so, and that there has been no such second mortgage or pledge until he has notice of something to show him that there has been such a second mortgage, but as soon as he is aware that the property on which he is entitled to rely has ceased so far to belong to the debtor, he cannot make a new advance in priority to that of which he has notice. " (Emphasis added).
68 Evidently his Lordship contemplated that the notice should be such as to make the first mortgagee aware that the debtor has given further security over the mortgaged property.
69 In West v Williams, Lord Lindley MR described the basis of the rule (at 143) as being that:
" When a man mortgages his property he is still free to deal with his equity of redemption in it, or, in other words, with the property itself subject to the mortgage. If he creates a second mortgage he cannot afterwards honestly suppress it, and create another mortgage subject only to the first. Nor can anyone who knows of the second mortgage obtain from the mortgagor a greater right to overwrite it than the mortgagor himself has. " (My emphasis).
70 This passage was cited with approval by Lord Shaw in Deeley v Lloyds Bank Ltd [1912] AC at 782. Again, the reference to the first mortgagee being postponed where he has knowledge of the rights created by the mortgagor in the second mortgagee, indicates that the first mortgagee must have actual notice of the second mortgage. However, Deeley v Lloyds Bank Ltd shows that it is not necessary that the first mortgage have knowledge, in the sense of actual awareness, of the second mortgage at the time of the subsequent advance. There the bank manager had received actual notice of the second mortgage but, according to the findings, had forgotten about it when he allowed further drawings on the overdraft account.
71 In R & I Bank of Western Australia Ltd v Cash Resources Australia Pty Ltd (1993) 11 WAR 536 Anderson J noted that the statement in Sibbles v Highfern Pty Ltd at 221 that a prior mortgagee cannot tack, if at the time of the further advances he has notice, actual or constructive, of the subsequent mortgage, was not strictly necessary for the decision and that no authority was cited for the dicta that constructive notice would be sufficient to attract the equities in this kind of case. His Honour said that as the rule is bottomed on it being equitable fraud for the first mortgagee to insist on his priority for the subsequent advance, the notice of the second mortgagee's interest which is sufficient to attract the rule must be such as would affect the first mortgagee's conscience. His Honour said (at 547) that as a general rule only actual notice would be sufficient to do that and actual knowledge must generally be proved. His Honour instanced as an exception to the requirement for actual knowledge, a case where a first mortgagee deliberately set out to prevent receipt of actual notice of the later encumbrance.
72 In Nia v Phuong (1993) 6 BPR 13,141; (1993) NSW Conv R 55-671, Young J (as his Honour then was) said (at 13,144):
" However, another way of analysing the same situation is to say that except in extraordinary circumstances, it is only inequitable for a first mortgagee to lose priority for further advances if at the time when he took his first mortgage he had notice, actual or constructive, of the existence of a second mortgagee; see Falconbridge on Mortgages 4th ed at 161. Thus if, at the time when a mortgagee loaned his or her money he or she was aware that the mortgagor was borrowing on second mortgage to make up the balance of the purchase price, such awareness would constitute notice which would prevent a first mortgagee from obtaining priority for subsequent advances ."
73 It is unnecessary to consider whether constructive notice of a second mortgage at the time of the first mortgage, as distinct from at the time of the subsequent advance, would be sufficient to attract the operation of the rule. I do not consider that his Honour should be taken as disagreeing with anything decided by Kearney J in Central Mortgage Registry of Australia Ltd v Donemore Pty Ltd.
74 I was referred to Oversea-Chinese Banking Corporation v Malaysian Kuwaiti Investment Co SDN BHD [2003] VSC 495 on the question of notice sufficient to attract the operation of the rule. There the first mortgagee had actual notice that the mortgagor had sold part of the land being developed, but contended that it did not have actual notice of the purchaser's equitable interest in the land at the time it made the subsequent advance because it had been told by the mortgagor that the contracts were not proceeding. It failed on the facts. Redlich J concluded that if the first mortgagee had been told that the contracts of sale were not proceeding, it would be unnecessary to categorise the nature of the notice which the bank continued to hold about the purchaser's interests. Having had actual notice, it would be against conscience for the first mortgagee to rely upon an unverified claim by the mortgagor that such an interest had ceased to exist, and that that would be sufficient to attract the operation of the rule. (At [183]).
75 Although the authorities do not all speak with one voice, their effect is that before equity will regard it as fraudulent for a first mortgagee to insist on its priority for subsequent advances, it is necessary that it have had actual notice of an intervening equitable interest. It is apparent from Deeley v Lloyds Bank Limited [1912] AC (at 768), that it is not necessary to show that at the time of the subsequent advance, the first mortgagee has knowledge, in the sense of an actual awareness, of the second mortgagee's interest. Although it is sufficient for the second mortgagee to show notice, and not knowledge, it must show that actual notice of its having made an advance on second mortgage was given to the person or persons who represent the mind of the first mortgagee. Thus, in R & I Bank of Western Australia Ltd v Cash Resources Australia Pty Ltd, the first mortgagee received a certificate of currency from the insurer of the mortgaged property which noted the existence of a second mortgage. The document was dealt with at a clerical level and not by employees who were concerned with the making of loans, or the taking of securities. Anderson J held (at 546) that:
" I do not consider it would be a proper application of the doctrine of constructive notice to impute knowledge to the defendant of the fact that the plaintiff was mortgagee of the subject property by reason of the receipt in the defendant's insurance records of the insurance certificate."