New South Wales Supreme Court CITATION : Phillip Ashley Dickson v Geoffrey Philip Reidy [2004] NSWSC 1200 HEARING DATE(S) : 05/11/04 JUDGMENT DATE : 14 December 2004 JUDGMENT OF : Nicholas J DECISION : para 51 CATCHWORDS : Equity - equity of exoneration - jointly owned land mortgaged to secure loans for the benefit of one owner - bankruptcy of principal borrower - sale of land - whether proceeds of sale in hands of trustee in bankruptcy charged to secure right of exoneration - whether right abandoned Farrugia v Official Receiver in Bankruptcy (1982) 43 ALR 700 Hall v Hall (1911) 1 Ch 487 Lin v Official Trustee in Bankruptcy (2002) 187 ALR 220 CASES CITED : Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116 Orr v Ford (1989) 167 CLR 316 Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56 Parsons v McBain (2002) 192 ALR 772 PARTIES : Phillip Ashley Dickson - Plaintiff Geoffrey Philip Reidy - Defendant FILE NUMBER(S) : SC 4388/03 COUNSEL : D H Murr SC - Plaintiff J Simpkins SC - Defendant SOLICITORS : Stephen Wawn & Associates - Plaintiff PricewaterhouseCoopers - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION Nicholas J 14 December 2004 4388/03 Phillip Ashley Dickson v Geoffrey Philip Reidy JUDGMENT 1 His Honour: In these proceedings the Plaintiff claims a declaration that the Defendant holds on trust for him the share of the net proceeds of the property at No. 25 Mathewson Street, Eastgardens received by him as property of the bankrupt estate of Terri Louise Dickson, and an order that the Defendant pay to him the proceeds of the sale. 2 The claims arise in the following circumstances. 3 The Plaintiff and his wife, Terri Louise Dickson (the/his wife) were the registered proprietors as joint tenants of the property at No. 25 Mathewson Street, Eastgardens (the property). 4 On 24 April 2003 a sequestration order was made against the wife's estate, and on 28 April 2003 the Defendant was appointed trustee of her estate. 5 On 8 August 2003 the property was sold for the sum of $747,000.00 by the Plaintiff and the Defendant as the wife's trustee in bankruptcy. At the time of the sale the property was under a mortgage to secure the principal amount of a loan of $470,000.00 from Lawteal Pty Ltd. After discharge of the mortgage and other liabilities the net proceeds of sale amounted to $230,616.60. These proceeds were paid as to half, $115,313.30, to the Plaintiff, and as to the other half, $115,313.30, to the Defendant as the wife's trustee in bankruptcy. It is this amount which the Plaintiff claims from the Defendant. 6 The Plaintiff contends that the jointly owned property was mortgaged to secure the loan which was wholly for the benefit of the wife and, in the circumstances, the doctrine of exoneration applies so that her interest in the property was subject to a charge to secure his right of exoneration from liability for the loan. He claims that her interest in the property which passed to the Defendant was subject to that charge, and thus he is entitled to the whole of the net proceeds of sale rather than to one half thereof. 7 The Plaintiff was the only witness. He was cross-examined on his affidavits. He impressed me as a truthful witness and I accept his evidence. Background 8 In about June 1992 the Plaintiff and his wife purchased the property with the benefit of an arrangement whereby the vendor, Mr Stephen Lam, provided a loan of $184,000.00, interest free, repayable on demand on 5 days notice. Mr Lam was given, and held, the title documents as security. 9 The Plaintiff, his wife, and their children lived together at the property until he and his wife separated in April 2000. The Plaintiff left the property to live elsewhere. He was then unemployed. His wife was then, and for sometime past had been, employed by the business conducted by one Mr Don Page under the name of Botany Bay Distribution. 10 On an occasion in 1999 the Plaintiff was told by his wife that Mr Page had asked her to buy into his business, and that she was interested in doing so. The suggestion was dismissed by the Plaintiff. 11 On an occasion in 2000, during the time of the Olympic Games, the Plaintiff had a telephone conversation with his wife in which she requested him to ask Mr Lam to agree to hand over the title documents to the property to enable her to borrow money for the purchase of a share in the business. The Plaintiff's request to Mr Lam to do so was refused. 12 In late October or early November 2000 the Plaintiff and his wife had conversations in which she pressed him to join with her to borrow $70,000.00 for the payment of arrears of rent owed by Mr Page for the premises at which his business was conducted. She told him that if the business failed she would lose her job, and they would not be able to make payments on the house. On one of these occasions Mr Jason Pecotic, the managing director of AAA Finance Services Pty Limited, explained that a 28 day loan was required to stave off the eviction of Mr Page from the premises whilst Mr Page's application for a loan was being processed. 13 On about 13 November 2000 the Plaintiff and his wife signed an agreement under which they borrowed $70,000.00 for a term of 30 days, to be used for business purposes only. It was secured by an unregistered mortgage over the property dated 16 November 2000 signed by the Plaintiff and his wife. No part of the loan was received by the Plaintiff. It was the Plaintiff's understanding, which I accept, based on representations made to him by Mr Pecotic that the loan monies would be paid to, or on behalf of, Mr Page. 14 In about late November 2000 the Plaintiff was told by his wife that the lender required repayment of the loan as there had been unforseen circumstances in relation to the finalisation of Mr Page's application. 15 On about 21 December 2000, at his wife's request, the Plaintiff accompanied her to the office of Mr Angus Begg, solicitor, in Sydney. There they had discussions with Mr Pecotic who told the Plaintiff of his wife's wish to borrow enough money to buy into Mr Page's business which appeared to be a good investment. In response to the Plaintiff's apparent lack of enthusiasm Mr Pecotic went on to say: "You know Phil there might not be a lot you can do about it. If you don't agree Terri may proceed with divorce proceedings and considering your situation with three young kids, your share of the settlement wouldn't be very much at all". With this his wife expressed agreement. There was further discussion which resulted in the Plaintiff's agreement to join with his wife in borrowing the sum of $343,000.00 secured by a mortgage over the property. It was the Plaintiff's evidence, which I accept, that at the time he believed that of the money borrowed $70,000.00 would be paid to AAA Finance Services Pty Ltd, $100,000.00 would be paid to Mr Lam, and the balance would be paid to Mr Page for the acquisition by his wife of an interest in the business Botany Bay Distribution. 16 Prior to signing the loan documents the Plaintiff told his wife that he could not contribute anything towards repayment. She replied that he would not have to, and could forget about paying the $90.00 per week maintenance for the children. In fact he had not been making this payment for some time. 17 At the meeting the wife handed the title documents to Mr Begg. She later told the Plaintiff that Mr Lam had given them to her. 18 On 19 January 2001 the loan of $343,000.00 was secured by a mortgage over the property to Richmond Export Pty Ltd and Ivan Dyce Pty Ltd. Mr Begg's letter of 16 January 2001 to R. L. Kremnizer & Co, solicitors discloses that the loan was spent in the payment of costs and disbursements associated with the transaction, the repayment of the loan from AAA Finance Services Pty Ltd, payment to Australian Transport and Logistics of $62,000.00, payment to W & B Constructions of $16,000.00, and payment to Botany Bay Distribution Pty Ltd of $169,232.44. 19 The Plaintiff received no part of the loan monies and, contrary to his understanding, no payment was in fact made to Mr Lam. 20 On 3 August 2001 the wife arranged for the refinancing of the loan and increased the amount borrowed to $400,000.00. It was secured by a mortgage over the property to Permanent Custodians Ltd. She achieved this by forging the signature of the Plaintiff on the mortgage document which she admitted to him in a conversation on 26 February 2003. It appears from the document that the mortgagor's signatures were witnessed by Mr Page. The Plaintiff was ignorant of this transaction at the time, and received nothing from it. 21 On an occasion in December 2002 the Plaintiff was advised by his wife that she had not been paying interest on the loan, the business was going bad, and the mortgagee required the sale of the property. Arrangements were made to refinance to avoid eviction. 22 On 12 February 2003 Lawteal Pty Ltd approved the application for a loan of $470,000.00. It was secured by registered mortgage dated 14 February 2003. It was used to pay associated costs and disbursements, and to pay the sum of $434,822.31 in discharge of the mortgage to Permanent Custodians Ltd. It was also used to pay the sum of $10,046.25 interest on the loan. There is no clear evidence as to payment of the balance being the sum of $22,846.49. 23 On 29 April 2003 the Plaintiff and his wife entered into a contract for the sale of the property to a Mr R. E. Graham (the purchaser) for the price of $750,000.00. The contract was terminated. On 8 August 2003 a new contract was made between the Plaintiff and the Defendant as vendors for the sale of the property to the purchaser at the price of $747,000.00. Completion took place the same day. The net proceeds of sale was $230,626.60, half of which was paid to the Plaintiff and half to the Defendant. 24 On 13 August 2003 the Plaintiff paid to Mr Lam the balance outstanding on the vendors' loan in the sum of $76,640.00. 25 On 18 August 2003 the Plaintiff filed the summons in these proceedings. The issues 26 The equity of exoneration is conveniently explained in Parsons v McBain (2002) 192 ALR 772 at p 779: "20. The equity of exoneration is an incident of the relationship between surety and principal debtor. It usually arises where a person has mortgaged his property to secure the debt of another, whether or not that other has covenanted to pay the debt. However, it will also arise in a case where, although not an actual suretyship, the relationship is treated as one of suretyship. This is Lord Selbourne's third class of suretyship mentioned in Duncan, Fox & Co v North and South Wales Bank (1880) 6 App Cas 1 at 10. For the doctrine to apply in this class, the following facts will usually exist. First, a person must charge his property. Where the person is the beneficial owner of the property it will be sufficient if the charge is by his trustee. Second, the charge must be for the purpose of raising money to pay the debts of another person or to otherwise benefit that other person. Third, the money so borrowed must be applied for that purpose: see generally Re Berry (a bankrupt) [1978] 2 NZLR 373. 21. An equity of exoneration operates in the nature of "a charge upon the estate of the principal debtor by way of indemnity for the purpose of enforcing against that estate the right which [the beneficiary] has, as between [the beneficiary] and the principal debtor, to have that estate resorted to first for the payment of the debt": Gee v Liddell [1913] 2 Ch D 62 at 72. Thus, where co-owners mortgage their property so that money can be borrowed for the benefit of one mortgagor, the other has an interest in the property of the co-mortgagor whose property is to be regarded as primarily liable to pay the debt". (See also Farrugia v Official Receiver in Bankruptcy (1982) 43 ALR 700 at p 702, and, relevantly, at p 703 where Deane, J held that the charge which Mrs Farrugia had upon her husband's interest in the property by way of indemnity to secure her right of exoneration was not obliterated by his bankruptcy, and that his interest which passed to the official receiver was subject to it). 27 In Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116 Bryson, J at pp 129-130 observed that the doctrine of exoneration depends on the presumed intention of the parties and continues to exist to supply a presumption of the intention of parties as to who should be principal and who should be surety. He said (p 130): " … The doctrine serves to illustrate that the intention of a party may establish which is to stand as surety and which as principal even though both appear to incur substantially the same legal obligation. Although contemporaneous agreements, arrangements and expression of intention are the usual sources of evidence about the intentions of parties on such a subject, there is no reason why their intentions may not be inferred from the circumstance in which they acted. Intentions, like other facts, may be proved from circumstances. Circumstances could conceivably furnish very clear proof of intention as to who was to be principal and who was to be surety, and the intended and actual application of funds raised when two persons incur a common liability would often have an important, even predominant part in the proof of the relevant intention". 28 It is to be remembered that the doctrine of exoneration is based on an inference in each case from all the facts of that particular case. (Hall v Hall (1911) 1 Ch. 487 at p 498). 29 For the Defendant it is submitted that the equity of exoneration does not apply to any of the loans in this case because it has not been shown that they were for the substantial benefit of the wife and it is not enough to show merely that she received some incidental benefit. For example, it was said the loan of $70,000.00 was to benefit the wife's employer, Mr Page, and not her. It was also put that the purpose of the loan of $343,000.00 was to repay the $70,000.00 loan, to pay $100,000.00 off Mr Lam's loan to the benefit of both the Plaintiff and his wife, and to provide funds to the wife for the acquisition of an interest in Mr Page's business. 30 It was also put that for the Plaintiff to succeed it was necessary to show that it was his intention to act as if a surety for his wife in respect of each loan, and that the evidence does not prove such intention. 31 In summary, the Plaintiff submitted that the facts demonstrated that each of the transactions was entered into wholly for the benefit of the wife, that the monies obtained were wholly subject to her direction and control, and nothing was received by, or subject to the control or direction of, the Plaintiff. It was put that each transaction was entered into in the expectation that the loan for which the property was provided as security would be repaid by the wife, or from sources over which she had control, or by others with whom she was associated. 32 In my opinion the Plaintiff's submissions should be accepted. I find that the evidence establishes that all the loans were arranged on the wife's initiative and that she prevailed upon the Plaintiff to join with her in providing their property as security for them. The circumstances of each transaction show that in agreeing to his wife's proposal he intended to stand in the position of a surety to support the loan with the understanding, as was the fact, that the whole of it was for her use and benefit and not for his. I also find that the evidence shows that the disposition of funds raised by the loans was wholly at her direction and under her control, and that the Plaintiff received no benefit from any of them or, with the exception referrable to payment of $100,000.00 off Mr Lam's loan, expected that he would. 33 In my view the fact that the funds were raised and applied for the use of the wife without benefit to the Plaintiff is sufficient to attract the doctrine (cf, e.g., Lin v Official Trustee in Bankruptcy (2002) 187 ALR 220 paras 23-26). The equity is not confined to a situation in which the liability is incurred to discharge a debt or obligation personal to the co-owner of the secured property. Thus, for example, in the circumstances of this case, it is not of significance that the wife caused the $70,000.00 to be made available for the payment of Mr Page's rent. Also, the fact that funds were raised in one case by forging the Plaintiff's signature on the mortgage document has no significance when deciding whether he has a right of exoneration in respect of that transaction. 34 Insofar as the evidence does not establish the destination of some part of a particular loan, nevertheless when the whole of the evidence is taken into account there is ample basis for the inference that it was probably spent in furtherance of the wife's interests. Having regard to the uncontradicted evidence that the Plaintiff received no benefit, it seems to me that the only rational conclusion is that the whole of each loan was in fact availed of by the wife for her purposes, and I so find. Reinforcement for this conclusion is the evidence of the length to which she was prepared to go to secure the monies by way of threatening divorce proceedings, and forging the Plaintiff's signature, and not causing payment to be made to Mr Lam. 35 Accordingly, I hold that the Plaintiff has established a right of exoneration in respect of each of the loans and, finally, in respect of that from Lawteal Pty Ltd on 14 February 2003 of $470,000.00. As a consequence the Plaintiff has established a charge on his wife's interest in the property to secure that right, which property has passed to the Defendant subject to the charge. 36 However, for the Defendant it is submitted that the benefit of the charge was lost in the circumstances in which the sale of the property took place and the net proceeds distributed so that the Plaintiff is left only with a claim as an unsecured creditor against the bankrupt wife's estate. 37 In support of the submission reliance is placed upon correspondence between the parties' solicitors and with Sharah & Associates, solicitors, between 29 May and 8 August 2003 concerning the sale of the property. It is put that the correspondence which conveys the Plaintiff's instructions as to settlement is evidence that he no longer maintained his claim to a charge and, in effect, acquiesced in proceeding with settlement on the basis that there was no charge or, in effect, that he had abandoned it. 38 By their letter dated 29 May 2003 to the Defendant's solicitors the Plaintiff's solicitors claimed an equity of exoneration and consequential entitlement to the whole of the wife's share of the net proceeds of sale under the contract made on 29 April 2003. It was foreshadowed that proceedings would be taken against the Defendant to enforce this right and an assurance was sought that the Defendant not deal with her share of the proceeds pending determination of the claim. 39 By letter dated 3 June 2003 the Defendant's solicitors wrote to the Plaintiff's solicitors stating agreement to proceed with the sale on the basis that the Defendant received 50% of the net proceeds. 40 By letter dated 4 June 2003 the Plaintiff's solicitors wrote to the Defendant's solicitors agreeing to the sale. It included the assertion that the Plaintiff had an action against the Defendant which he intended to pursue, and the request for the assurance was reiterated. 41 By letter dated 5 June 2003 the Defendant's solicitors wrote to the Plaintiff's solicitors in the following terms: "Our client cannot give the undertaking requested by your client, when your client has not put forward any evidence to support its claim. Our client as trustee has certain duties and obligations conferred upon him by the Bankruptcy Act. Our client would be in breach of those duties if it were to give the undertaking to your client in circumstances where your client has not and will not put forward any evidence to support their claim. Accordingly, any settlement proceeds that our client receives will be dealt with in the ordinary course of the administration of the estate of Terri Louise Dickson. Our client is prepared to grant the purchaser early access to the premises on the grounds set out in your letter subject to the following conditions: (i) the rent paid by the purchaser is market rent, and (ii) a fresh contract for sale is entered into by all the parties on or before 6 June 2003, (iii) settlement of the property occur on or before Wednesday of next week. Please let us know if your (sic) agrees to the above terms. If so, please provide us with a draft of the undertaking and details of the rental to be paid by the purchaser". 42 By letter dated 6 June 2003 the Plaintiff's solicitors wrote to Sharah & Associates instructing them to act for the Plaintiff on the proposed sale of the property. 43 On 2 July 2003 Sharah & Associates instructed the purchaser's solicitors on the disposition of the proceeds of sale. Item 12 directed the net balance of the proceeds be divided equally between the Plaintiff and the Defendant. On 6 August 2003 Sharah & Associates further instructed the purchaser's solicitors to the same effect. 44 On 8 August 2003 settlement took place, and the net balance of the proceeds of sale were paid as directed (see para 5). 45 For the Defendant it is submitted that the instructions given by Sharah & Associates on 2 July and 6 August 2003 that the net balance be paid equally to the parties following the letter to the Plaintiff's solicitors from the Defendant's solicitors of 5 June 2003 constitutes a waiver by the Plaintiff of his rights against the Defendant, or an election to abandon or not enforce them. (Orr v Ford (1989) 167 CLR 316 at pp 337-338; Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56 at paras 57-62). 46 In my opinion there is no substance in the submission. Having regard to the circumstances in which those instructions were given they cannot be reasonably understood as evidencing the Plaintiff's abandonment of his claim against the Defendant. The prior correspondence between the solicitors contradicts that conclusion. 47 Further, in my opinion, it cannot be said that by giving these instructions the Plaintiff was accepting the Defendant's proposal that the settlement proceeds received by him should be dealt with in the ordinary course of administration of the wife's estate as stated in the letter of 5 June 2003 and without regard to the equity claim. It is plain that the matter about which agreement was sought in the final paragraph of this letter was the basis upon which the purchaser be granted early access to the property, and had nothing to do with agreement on the Defendant's position. The correspondence relied upon indicates that there was a distinction between how the purchaser's solicitors were to dispose of the net balance of the proceeds of sale and the Plaintiff's claim in respect of the Defendant's share upon his receipt of them. The Defendant's submissions fail to take account of this distinction. 48 Furthermore, of course, there was no evidence from the Defendant that he proceeded with settlement on the basis that the claim had been abandoned, or that he had been prejudiced as a consequence of the net proceeds being distributed in the way they were. 49 Accordingly, I hold that the Plaintiff did not lose the benefit of the charge in the circumstances in which settlement took place and the net proceeds were distributed to each of the Plaintiff and the Defendant. 50 The Defendant's final submission was that, assuming the Plaintiff has established his claim, the amount recoverable should be limited to the remaining funds in the bankrupt estate after payment of monies in the ordinary course of its administration which is said to total about $78,000.00. In my opinion the submission must be rejected. The wife's interest in the property passed to the Defendant subject to the charge. The proceeds of sale received by the Defendant were likewise charged to the benefit of the Plaintiff (paras 26, 35). The Defendant had been on notice of the claim since the letter to his solicitors of 29 May 2003 earlier referred to. Conclusion 51 For these reasons the Plaintiff is entitled to a declaration in terms of para 1 of the summons, and I propose making orders that the Defendant pay to him the sum of $115,313.30 together with interest calculated from 8 August 2003. 52 In the circumstances I expect the parties to agree on the terms of the final orders to be made including questions as to interest and costs. It is appropriate that I direct the Plaintiff to bring in short minutes and to afford the parties the opportunity to address me in relation to any outstanding issues. Arrangements should be made with my Associate by 4pm 16 December 2004 for the re-listing of the matter. ********** Last Modified: 12/17/2004 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.