Keogh v Rush [2001] NSWCA 227

New South Wales Court of Appeal

CITATION : Keogh v Rush [2001] NSWCA 227 FILE NUMBER(S) : CA 40967/00 HEARING DATE(S) : 22 June 2001 JUDGMENT DATE : 13 July 2001

PARTIES : Raymond Ignatius Stewart Keogh (Appellant) Dennis Donald Rush (Respondent) JUDGMENT OF : Mason P at 1; Heydon JA at 2; Young CJ in Eq at 3

LOWER COURT JURISDICTION : Supreme Court LOWER COURT 1451/99 FILE NUMBER(S) : LOWER COURT Master Macready JUDICIAL OFFICER :

COUNSEL : P Hallen SC and R Winfield (Appellant) W Hodgekiss (Respondent) SOLICITORS : Thornton Laywers (Appellant) Symons & Company (Respondent) CATCHWORDS : Equity- Life tenant and remaindermen- Life tenant discharging mortgage- Remaindermen offering to reimburse capital plus applicable interest- Life tenant surviving 30 years after discharge of mortgage- Property increasing in value over those 30 years- Whether life tenant's estate entitled in equity to share of increase- Held "No". (D) Cuddon v Cuddon (1876) 4 Ch D 583 Giumelli v Giumelli (1999) 196 CLR 101 CASES CITED: Hogan v Hogan [1983] 1 WLR 1232 Muschinski v Dodds (1985) 160 CLR 583 Scholefield v Lockwood (1863) 4 De GJ & S 22; 46 ER 822 West v AGC Advances Ltd (1986) 5 NSWLR 610 DECISION : Appeal allowed.

THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

CA NO 40967 of 2000 ED NO 1451 of 1999 MASON P HEYDON JA YOUNG CJ in Eq FRIDAY 13 JULY 2001 KEOGH v RUSH JUDGMENT 1 MASON P: I agree with Young CJ in Eq. 2 HEYDON JA: I agree with Young CJ in Eq. 3 YOUNG CJ in Eq: This is an appeal from a decision of Master Macready to whom the whole proceedings had been referred for trial. 4 Before the Master, the plaintiff sought a declaration that the defendant held half the proceeds of the sale of 10 Crown Street, Henley ("the Henley Property") on trust for him. Alternatively the claim was for an equitable charge over part of such proceeds. 5 The defendant conceded the claim for an equitable charge. However, the matter proceeded before the learned Master, who held that there was a constructive trust over 45% of the proceeds in favour of the plaintiff. The defendant appealed. 6 The facts are fairly straight forward and not in dispute, though there are some gaps in the evidence doubtless caused by the lapse in time since the relevant events occurred. The facts as found by the Master are as follows. 7 In about 1948, Mr Brewer became a boarder with Mrs Tyson at Dover Heights. By 1950, they had formed a de facto relationship. In that year, Mr Brewer purchased the Henley Property for £1,800. The purchase price was paid as to £700 from Mr Brewer's own funds, £950 from a mortgage to MUIOOF and £150 borrowed from Mrs Tyson. 8 The Henley Property was bought in Mr Brewer's name alone. 9 Mr Brewer died on 24 August 1952. He had first made and published his last will on 9 March 1951. Probate of this will was granted to the defendant and present appellant on 24 August 1954. 10 After appointing the appellant as executor, the will provided: "I give devise and bequeath unto my defacto wife Eileen Tyson of 2 Crown Street Henley Gladesville for her absolute use and benefit all my real and personal estate wheresoever situated: for her life. After her death I direct that my estate be sold and the proceeds be equally divided between my grand nephew Kark van Rhoan of No 1 Culver Street Brighton-le-Sands and grand niece Susan Penny Flarming of the Carrageen Flats Wild Street Potts Point to do with as they wish. "I hereby clearly state that all the furniture in my home at 2 Crown Street Henley is the absolute property of Eileen Tyson having been brought from her flat at 66 Lancaster Road Dover Heights or having been purchased by her since. Further she holds a second mortgage for 150 pounds (One Hundred and fifty pounds) on my property. She having loaned this to me to enable me to purchase our home." 11 There was no evidence that any formal second mortgage document was ever generated in respect of Mrs Tyson's loan. 12 The Affidavit "D" filed for death duty purposes disclosed that the Henley Property was Mr Brewer's only substantial asset. It also disclosed that the amount then owing to MUIOOF was £852/5/7. The Henley Property was valued at £2,000. 13 There was no cash money available to pay the debts, funeral and testamentary expenses including death duty. The appellant took out a further mortgage for £135 from MUIOOF. He used the proceeds to pay the estate expenses. 14 Although, there was no evidence as to what actually occurred, there must have been some arrangement made between the appellant and Mrs Tyson to the effect that the latter would pay the monthly payments on the mortgages (which were in respect of both capital and interest) from the earnings of the boarding house she was carrying on in the Henley Property. Such an arrangement was beneficial to all parties. The property would remain intact, the life tenant could use them to generate income and the estate debts would be paid. 15 Mrs Tyson had fully repaid the capital and interest on the mortgages by 1965. It was agreed that the cost to her between 1952 and 1965 was $2,684. The parties also agreed that the appropriate amount of interest that should be allowed to Mrs Tyson on this sum was $11,235. In addition, a further sum of $1,388 was conceded, thus making a total of $15,307 that the appellant acknowledged that he would pay the respondent, whether through legal necessity or as an ex gratia payment. 16 Mrs Tyson also effected repairs and improvements, at least up to the early 1980s. 17 The respondent, Mr Rush originally went to board with Mrs Tyson shortly after Mr Brewer's death. He paid board to Mrs Tyson up until the time when she recognized that he was providing the services of a carer for her (he was a trained nurse) and she ceased accepting board. 18 Mrs Tyson died on 12 February 1998 aged 93 years. She appointed the respondent her executor and sole beneficiary. 19 Mrs Tyson paid the rates on the property until relatively recently when she purported to participate in a rate deferral scheme. This meant that, on her death, arrears of rates of $11,641.38 were charged against the Henley Property. 20 The Henley Property was sold and the proceeds invested pending the outcome of the present litigation. After payment of the rates and expenses, but with accrued interest, there was approximately $475,000 to be distributed to those entitled. 21 There was some evidence accepted by the Master that Mrs Tyson had said to her niece on a number of occasions that she would like to leave the property to the respondent and that she was peeved that she could not. It appears that Mrs Tyson had sought and obtained some legal advice as to her position. The significance of this is that while she may have expressed peevishness, she never asserted any equitable claim during her lifetime. 22 The learned Master held that Mrs Tyson was put in a difficult situation when Mr Brewer died. She either had to meet the mortgage personally or face the sale of the Henley Property which would deprive her of her income. She thus had little choice but to pay off the mortgages and take in boarders to survive. 23 The Master then concluded his reasons as follows: "One thus has a circumstance of a vulnerable Mrs Tyson who had little alternative. In these circumstances the executor, and through her, the remaindermen had everything to gain by allowing her to pay off the mortgage. "It would seem to me that in those circumstances it would be unconscionable for the remaindermen, through the executor, to insist on their legal rights to the full ownership of the property on the death of Mrs Tyson and thus deny even the remedy of a lien to secure repayment of the funds provided. I am mindful in coming to this conclusion of the evidence of Mrs Tyson's knowledge of her rights and the choice which she made. She was not misled by the remaindermen or Mr Keogh and the case is thus outside the realms of that part of equity which deal with mistaken expenditure on another's property. The executor, Mr Keogh, and through him the remaindermen, sat by and allowed Mrs Tyson to provide for them about 45% of the value of the property as at the date of death of Mr Brewer. "It is thus necessary to turn to a consideration of what is the appropriate remedy. I have already earlier in this judgment talked of the different remedies that may be available and the difference between them. There are a number of aspects which could be taken into account in deciding whether or not to grant a remedy which gives the plaintiff the opportunity to participate in the increased value of the property over the years. These are as follows:- (a) There is a clear connection between the payment of the amount off the mortgage and the ultimate retention of the property. Normally one does not now need to have had some right of ownership for there to be a remedy by way of constructive trust. (b) There are no third parties involved in this matter and such interests do not have to be considered. (c) There would be no personal remedy that the plaintiff's estate would have for the recovery of her funds. (d) There was a substantial delay in the sense that Mrs Tyson although she complained about it did nothing about the fact that she had paid off the mortgages by 1965. Such delay can only work to the benefit of the remaindermen as the facts have turned out in the present case. There is no suggestion of alteration of position or detriment as far as the remaindermen are concerned. The delay was all to their advantage. (e) The remaindermen will still have the benefit of the increases due to inflation on their 55% share which they would not have achieved if Mrs Tyson had not paid off the mortgages. "It seems as a result of these factors that Mrs Tyson's estate should have the remedy of a constructive trust which gives him a proportionate share of the property to which Mrs Tyson has contributed. On the figures Mrs Tyson contributed 45% of the value of the property as it was valued at the time she commenced her repayments of the mortgage. She has also, of course, paid the interest on that mortgage but the capital share is 45%." 24 At the hearing of the appeal, Mr P Hallen SC and Ms R Winfield for the appellant, put that the facts in this case showed no cause for equity to interfere at all. At least once the appellant conceded that the remaindermen accepted a charge over the property for the capital repaid by the life tenant plus interest as they had done, there was no unconscionability revealed at all. 25 On the other hand, Mr W Hodgekiss for the respondent, put that this was a classic case of what was termed "Outcome Unconscionability". 26 "Outcome Unconscionability" is a term which evidently has its origin in the judgment of McHugh JA in a case on the Contracts Review Act 1980, West v AGC Advances Ltd (1986) 5 NSWLR 610, 620 where he remarked that a contract may be unjust either because of the manner in which it was brought into being or because of the way it operates. This is hardly a good basis for the use of the term "Outcome Unconscionability" in this area of equity. However, the term is tentatively employed by Wright, in his "The Remedial Constructive Trust" (Butterworths, Sydney, 1998) [3.33] p 92. 27 The preferable manner of examining this class of case is to turn to the classic judgment of Deane J in Muschinski v Dodds (1985) 160 CLR 583, 615 where his Honour said that the remedial constructive trust "is available only when warranted by established equitable principles or by the legitimate processes of legal reasoning, by analogy, induction and deduction, from the starting point of a proper understanding of the conceptual foundation of such principles..." 28 There are some situations where if a person obtains a windfall profit, his or her conscience will be affected so that there must be some heed paid to the rights of others. However, this will not apply to all windfall profits. There must be something in the circumstances which will affect the conscience. Traditionally, three particular situations attract equity's attention, Accident, Relief against Forfeiture and the Failed Joint Venture scenario depicted in Muschinski's case at p 618. 29 There are many situations where a person obtains an unexpected (and perhaps morally undeserved) windfall where there is nothing against the conscience. One example that comes to mind is illustrated by Hogan v Hogan [1983] 1 WLR 1232 where a woman inherited a large estate because she was the beneficiary in a will made 30 years previously by a man with whom she was then cohabiting, who had never got round to making a new will in favour of subsequent de facto wives or ex nuptial children. 30 However, even before one can discuss a case as being a windfall case in which equity might interfere, one has got to examine the facts to see what are the rights and obligations of the parties under the general law. 31 Mr Brewer's will did not contain any provisions as to the mortgage. However, by s 145 of the Conveyancing Act, 1919 or otherwise, the Henley Property was charged with the mortgage to MUIOOF and probably also with the debt of £150 owing to Mrs Tyson. Under the general law, the capital of the mortgages (including the additional mortgage for £135) was to be borne by the remaindermen and the income by the life tenant. Mrs Tyson paid out the capital. The result is, as Jessel MR said in Cuddon v Cuddon (1876) 4 Ch D 583, 585: "Where a tenant for life discharges an incumbrance on the capital instead of merely keeping down the interest, the presumption is that it is done for the benefit of the remaindermen and he is entitled to a charge on the capital for the amount he has thus paid, though the presumption may, of course, be rebutted." 32 There is nothing to rebut the presumption in this case. 33 Had everything been done according to the book, Mrs Tyson would have paid the appellant the monthly mortgage payments and he would have onpaid them to MUIOOF. The appellant would have kept accounts and debited the remaindermen with the capital debt and the life tenant with the interest and the rates. On the fall of the life interest, the appellant would have produced accounts, which, if accepted, would have wound up the trust and enabled the Henley Property to be sold and the proceeds distributed to the remaindermen. The proper time for taking accounts is at the date of death of the life tenant: Scholefield v Lockwood (1863) 4 De GJ & S 22; 46 ER 822, 825. 34 The parties did not do everything by the book. Probably this is for the very good reason that it would be too expensive to do so and that the informal arrangement they must have made produced what is often called a "win/win" situation. However, the basic rights of the parties remained the same.