New South Wales Supreme Court CITATION : Across Australia Finance Pty Ltd v Kalls & Ors [2008] NSWSC 783 HEARING DATE(S) : 18/07/2008 JUDGMENT DATE : 4 August 2008 JURISDICTION : Equity JUDGMENT OF : Bryson AJ at 1 DECISION : (1) The proceedings are reserved for further consideration. (2) Liberty to apply. CATCHWORDS : MORTGAGES - marshalling - Kalls mortgaged properties in Rose Bay and Pyrmont to NAB on two "all moneys" mortgages - Kalls gave 2M over Rose Bay to Mr Hill and 3M to Across Australia - Kalls gave 2M over Pyrmont to Across Australia and Hill had no security over Pyrmont - 2MM and 3M unregistered and lacked effective power of sale - Across Australia sued for judicial sale and as empowered by the Court sold Rose Bay and NAB took all the proceeds, leaving Hill without effective security - Across Australia then as empowered by Court sold Pyrmont and NAB took most of the proceeds and was then thus paid - balance of proceeds of Pyrmont held by Across Australia's solicitor under undertaking to comply with Court's directions - HELD Mr Hill entitled to marshall against balance proceeds of Pyrmont - apportionment as if NAB had taken same percentage (93%) of proceeds of each security - 7% of proceeds of Pyrmont available for Mr Hill - Consideration of marshalling, apportionment, claims by Across Australia for costs of judicial sale proceedings. Parties to make calculations to give effect to decision. LEGISLATION CITED : Conveyancing Act 1919 s 112 Aldrich v Cooper (1803) 32 ER 402 Double Bay Newspapers Pty Ltd v A.W. Holdings Pty Ltd (1996) 42 NSWLR 409 Chase Corporation (Australia) Pty Ltd v North Sydney Mercantile Co. Ltd (1994) 35 NSWLR 1 Clifton v Burt (1720) 1 Peere Williams 678 Commonwealth Trading Bank v Colonial Mutual CASES CITED : Life Assurance Society Ltd (1970) Tas SR 120 Finance Corp of Australia Ltd v Bentley (1991) 5 BPR 11833 Lanoy v Duke of Atholl 2 Atk. 446 Miles v Official Receiver in Bankruptcy (1963) 109 CLR 501 Mir Bros Projects Pty Ltd v Lyons [1977] 2 NSWLR 192 National Bank of New Zealand v Caldesia Promotions Ltd [1996] 3 NZLR 467 Webb v Smith (1885) 30 Ch D 192 Across Australia Finance Pty Limited - Plaintiff Con Kalls - First Defendant PARTIES : National Australia Bank Limited - Second Defendant Mr Hill - Third Defendant St George Bank - Fourth Defendant SunCorp Metway - Fifth Defendant FILE NUMBER(S) : SC 2027/07 J M Ireland QC - Plaintiff COUNSEL : N/A - First, Second, Fourth and Fifth Defendants J K Chippindall - Third Defendant Maloney Lawyers - Plaintiff SOLICITORS : N/A - First, Second, Fourth and Fifth Defendants Daniels Lawyers - Third Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRYSON AJ 4 August 2008 2027/07 ACROSS AUSTRALIA FINANCE PTY LTD v CON KALLS & 4 ORS JUDGMENT 1 HIS HONOUR: Mr Con Kalls is the first defendant and the mortgagor of four properties. He became a bankrupt after these proceedings were commenced, and still is. He has not taken a part in the proceedings or in the argument about accounting and marshalling. His Rose Bay property was subject to a registered first "all moneys" mortgage to National Australia Bank (the second defendant) (NAB) and to unregistered mortgages, the second to Mr Hill (the third defendant) and the third to Across Australia (the plaintiff). Mr Kalls gave a registered "all moneys" first mortgage to NAB over his property at Pyrmont, and also an unregistered second mortgage to Across Australia. These two properties have been sold under the control and direction of the Court. Mr Hill has applied to the Court for a direction for marshalling funds raised from the sale of the Pyrmont property in a manner which will give Mr Hill access to part of the proceeds of the Pyrmont property, over which he did not have security. 2 The Rose Bay and Pyrmont properties were sold under the control and direction of the Court in these proceedings. The Rose Bay property was first sold by Mr Kalls as vendor but that contract could not be completed because of his bankruptcy, and Rose Bay was sold again on the same terms by Across Australia. NAB took all the proceeds, which were not enough to pay its debt. 3 Later Across Australia as vendor sold the Pyrmont property, acting under directions of the Court including a direction fixing the minimum price. Almost all of the proceeds were taken by NAB; and this discharged the secured debt to NAB. The balance of the proceeds is held by Across Australia's lawyers in their trust account and they gave the Court an undertaking which makes the proceeds subject to the Court's control. The lawyers hold $284,488.06, but not all of this is really available. The debt to Across Australia secured by its second mortgage is more than that; and the debt to Mr Hill secured by his second mortgage over the Rose Bay property is also more than that. Mr Hill has no security or other interest in the Pyrmont property and can only gain access to proceeds of sale of Pyrmont if the Court decides that it is appropriate, under marshalling principles, for him to do so. 4 Mr Hill's prospect of being paid under his second mortgage depended on there being surplus proceeds of Rose Bay after NAB had exercised its rights. The course of events (and not any deliberate decision by NAB) meant that the proceeds of sale of Rose Bay came to NAB before proceeds of the sale at Pyrmont came to NAB. If things had fallen out so that the sales took place in the other order, Pyrmont first, the surplus of $284,488.06 after satisfying NAB would have arisen from the sale of the Rose Bay property, and unless some marshalling principles were applied all the surplus would have gone towards Mr Hill's mortgage leaving nothing for Across Australia. 5 The facts are not complicated by any element such as a claim that NAB or any mortgagee has deliberately prejudiced subsequent mortgagees or has inappropriately released security, nor is there any claim that NAB should account to any subsequent mortgagee for any part of the moneys which NAB has received. The Court can only deal with the $284,488.06. 6 Mr Kalls also owned two properties at Marrickville which were subject to a registered first mortgage to St George Bank, an unregistered second mortgage to Mr Hill and a third mortgage to Across Australia. St George Bank (the fourth defendant) sold the Marrickville properties and took all the proceeds, and there is still a deficiency owed to St George Bank. There is no prospect of any recovery by Mr Hill or by Across Australia. Mr Kalls also owned a property at Rockdale, over which he gave a registered first mortgage to SunCorp Metway (the fifth defendant), and later security interests. This property was sold by SunCorp Metway, with a deficiency. St George Bank and SunCorp Metway are not interested in the marshalling controversy and they are not parties to this application. No further attention need be given to the Marrickville properties or to the Rockdale property. 7 The application of marshalling involves assuming, for the purposes of accounting for moneys under the Court's control , that satisfaction of first mortgages made the same impact proportionally on the net proceeds of the sale of each of the two securities. The order in which the first mortgagee had access to the securities does not govern puisne mortgagees' rights. Under marshalling the second mortgagees are treated as between themselves as if the first mortgagee had treated each of the funds in the same way and taken the same proportion of each fund. Equity is equality. 8 This is what I mean by the same proportion of each fund. After paying many expenses relating to the sale, the net proceeds of Rose Bay were $2,134,811.75, all of which NAB took. After paying many expenses the net proceeds of the sale of the Pyrmont property were $2,220,823.87, and NAB took $1,936,335.81 to complete satisfaction of its debt, leaving the balance of $284,488.06. NAB took 100 per cent of the net proceeds of sale of Rose Bay and 87.19 per cent of the net proceeds of sale of Pyrmont. If NAB got its $4,071,147.56 by taking the same proportion of each fund it would take the same percentage of each. The total of the net proceeds of both sales is $4,355,635.62. The sums taken by NAB are 93.468506 per cent of the total. If NAB had taken that percentage of the net proceeds of each property it would have taken $1,995,376.65 from Rose Bay and $2,075,770.90 from Pyrmont. There would have been $139,435.10 left from Rose Bay for Mr Hill and $145,052.97 left from Pyrmont for Across Australia. 9 In this illustration I have treated $284,488.06 as the balance, but not all that sum is really available. I discuss the balance later. The balance still has to be determined and the calculations will have to be done again when it has been. In the present case the competition is between puisne mortgagees who have charges over different securities where their charges have been affected by realisation in favour of the prior mortgagee who has charges over both. This is the context in which marshalling is most often encountered in modern times, although it is far from the whole of the subject. The doctrine of marshalling has many applications. With the Victorian Age the case law becomes comprehensible; expositions from the time of Lord Eldon LC and earlier can be obscured by context. The underlying principles were established by brief passages in judgments principally dealing with competition among claimants in legal contexts which have long been obsolete, so that older expositions can be very difficult to follow. 10 Senior Counsel for Across Australia pointed out that there is underlying uncertainty as to the basis upon which equity acts and the character of the rights of the claimant. This is quite correct; courts of equity have marshalled funds and claims, in the absence of an altogether satisfactory exposition of the juridical basis for doing so, for about three centuries at least. There are several strands of grounds upon which equity has traditionally acted; the accidental nature of the impact of the actions of the prior creditor, a wish to avoid the defeat of a later claim by the decision or caprice of a prior creditor, a close but not altogether satisfactory analogy with subrogation, the Court's concern to deal justly when establishing entitlements to funds under its control, and the maxim that Equity is equality, leading to decisions which gave similar treatment to persons with closely similar interests. It is enough for me that courts of equity have for a very long time applied principles of marshalling, themselves not highly defined, to problems of this kind. The present controversy relates only to rights as between puisne mortgagees who have mortgages over different properties but are both affected by the way in which the first mortgagee has been satisfied under mortgages which the first mortgagee has over both properties. Where (as in this case) security properties have been sold under the control and direction of the Court, the Court cannot in my opinion do otherwise than address whether marshalling is appropriate when asked by one of the puisne mortgagees to do so. 11 It is important that in the present case I am not asked to do anything which is in any sense adverse to the interests of NAB. For this reason some contentions of counsel which related to remedies adverse to the first mortgagee do not require consideration. It is important to notice the general rule that marshalling will not be applied to prejudice the right of the holder of a security to realise his securities as he pleases. Marshalling operates to adjust interests among persons who are adversely affected by what the holder of a security does; such as (typically and in this case) holders of lower ranking securities. 12 The significant conflict of fact upon the affidavits relates to a telephone conversation which took place about 23 November 2006, immediately before Across Australia took security from Mr Kalls and made its advance, between Mr Patrick Maloney, the plaintiff's solicitor, and Ms Stella Voulgaris, a paralegal who works as personal assistant to Mr Caramanlis, who then acted for Mr Hill and also from time to time for Mr Kalls. In Mr Maloney's account, Ms Voulgaris told him in answer to his enquiry "We look after the loan on Mr Hill's behalf" and "The facility is in order and Mr Kalls is not in default". Mr Maloney asked her to put something in writing together with the amount outstanding. She sent him a message on that day which said and said only "We refer to our recent telephone conference. We confirm that the approximate payout figure in respect of this loan is $420,000 as at 30 November 2006". The message given to Mr Maloney in response to his request to "put something in writing" deals only with the approximate amount outstanding. 13 Later on the same day Mr Caramanlis witnessed the execution by Mr Kalls of the mortgage to Across Australia, and gave a solicitor's certificate of that event. 14 Ms Voulgaris denied, on affidavit and with great vehemence when cross-examined, that she had said to the effect that the loan was in order and was not in default. The loan in fact was in default as repayment should have taken place about six months earlier. As Mr Maloney was not cross-examined on this subject and counsel did not challenge his evidence I do not find it possible to resolve the conflict of facts, and I proceed on the basis that he probably was told that the loan was in order and that there had been no default. In saying this I do not reject Ms Voulgaris' evidence but I feel that the way in which the case was conducted requires me to make an assumption favourable to Across Australia. 15 Senior Counsel contended that it should be found that in this way Ms Voulgaris and hence Mr Hill caused Across Australia to enter into the mortgage and make its advance by misleading conduct and that for this reason the Court administering equitable remedies should withhold relief. Senior Counsel claimed that there was a useful analogy with the circumstances in which an interest prior in point of time may be postponed in competition with another interest, and referred to Double Bay Newspapers Pty Ltd v A.W. Holdings Pty Ltd (1996) 42 NSWLR 409 at 423. 16 In my opinion there is no substantial evidence that the brief information which Mr Maloney says he obtained from Ms Voulgaris caused Across Australia to enter into the loan and mortgage with Mr Kalls, or that but for the information being given Across Australia would not have done so, or would have taken any different course to what it did. It is extremely unlikely that such a small circumstance was causative of the decision to make the advance. Nor is there any evidence upon which it could be found that it was made known to Ms Vougaris that an important decision or anything of consequence turned on the completeness and accuracy of her answer or that she was incurring any risk. If anything had indicated that hundreds of thousands of dollars might turn on how she answered an inquiry on the telephone it seems unlikely that she would have given a polite answer, or any answer at all. There was no duty to answer. There is no evidence showing what led Across Australia to make the advance, but in the ordinary course of business it is highly likely that an appreciation was made of the value of the security property and the prospects of recovery, and short observations on the telephone, which the confirming written message did not deal with, are extremely unlikely to have had any significant influence. 17 It could not reasonably be understood, by Ms Voulgaris or by anyone on behalf of Mr Hill, that Mr Maloney was asking for advice about whether or not Across Australia should lend money on the property. If risks like that were involved in answering telephone inquiries solicitors, and mortgagees, acting reasonably would not answer such inquiries. They would just hang up. 18 The answer which I must take it was given was not in my opinion conduct which could affect priorities between equitable interests. In any event marshalling does not raise questions of priority between equitable interests; there is no basis on which Mr Hill has an equitable interest in the proceeds of the sale of the Pyrmont property. Senior Counsel characterised the application by saying that the Court was asked to award Mr Hill an interest in the Pyrmont property by some backdoor route. This is not in my opinion a correct characterisation of his application for marshalling. 19 Equitable principles which underlie the doctrine of marshalling, and to some extent what the doctrine requires, were considered in Miles v Official Receiver in Bankruptcy (1963) 109 CLR 501 by Dixon CJ, Menzies and Windeyer JJ at 510-512. This passage has the considerable authority of a statement of a unanimous High Court including Dixon CJ: The foregoing considerations have satisfied us that in applying the policy moneys as it did the Society acted strictly in accordance with its obligations as the assignee of the policy and under the mortgage. It resorted to what for it was the primary fund for the satisfaction in part of what was owing to it. What next requires consideration is whether, when the Society did what it was obliged to do and did not merely exercise an option to resort to the policy moneys rather than its mortgage for the satisfaction of what was owing to it, there is any room for equitable marshalling of assets in favour of the appellant to the prejudice of creditors or for any like application of the equitable principles that underlie the doctrine of marshalling. The equitable principle is stated by Lord Eldon in Aldrich v Cooper (1803) 8 Ves Jun 382 [32 ER 402[; 1 White & Tudor's Leading Cases in Equity 9th ed (1928) p 29 in these words — "If a party has two funds . . . a person having an interest in one only has a right in equity to compel the former to resort to the other, if that is necessary for the satisfaction of both . . . The principle in some degree is, that it shall not depend upon the will of one creditor to disappoint another" (1803) 8 Ves Jun, at pp 388, 389 [32 ER, at p 405]. In Jenkins v Brahe & Gair (1902) 27 VLR 643 a'Beckett J., after observing that the Court would not control the choice of a creditor, said — "But it appears to be settled law that the jurisdiction of the Court is not ousted by the act of the mortgagee" (that is, in resorting to one fund rather than the other) "when the Court can obtain control of the assets which the mortgagee could have applied to the discharge of his debt and out of which other creditors can be satisfied. 'If the mortgagee having a double fund has exercised his option in such a way as to disappoint a creditor by taking the only fund to which he could resort, such exercise of option will not have the effect of disappointing the creditor with one fund only, who will therefore be entitled to stand pro tanto in the place of the former': See notes to Aldrich v Cooper 1 White & Tudor , 7th ed (1897) p 61, and the authorities which support the proposition referred to in the notes" (1902) 27 VLR, at p 648. One of the authorities is Webb v Smith (1885) 30 Ch D 192, in which Lindley LJ when dealing with claims of competing creditors said — "The general principle of marshalling was stated by Sir William Grant M.R. in Trimmer v Bayne (1803) 9 Ves Jun 209 [32 ER 582] in the words that 'a person having resort to two funds shall not by his choice disappoint another, having one only' (1803) 9 Ves Jun, at p 211 (32 ER, at p 583). That appears to be a correct statement of the law. The vice of the argument for the plaintiff is that in truth there were not two funds to which the defendants could resort, that is, two funds standing upon an equal footing" (1885) 30 Ch D, at p 202. Referring to Lord Eldon's statement, it is clear that if the appellant could have been regarded as in a position equivalent to that of a creditor with resort to one fund only, she would have had no right in equity to compel the Society to resort to the mortgage instead of the policy moneys, particularly as its obligation to the appellant as the executrix of Miles in accordance with its covenants was to apply the policy moneys in reduction of the debts secured by the mortgage. Nor is the principle stated by a'Beckett J applicable even by way of analogy, because as we have already decided the policy moneys constituted the primary fund to which the Society was obliged to resort, it had no option to do anything other than what it did. As it is said in the notes to Aldrich v Cooper 1 White & Tudor, op. cit. p 41, "There must be two funds already in existence before the question of marshalling is raised, and the prior creditor or claimant must have equal rights against each fund". 20 The equitable principle stated by Lord Eldon L.C. in Aldrich v Cooper "The principle in some degree is, that it shall not depend upon the will of one creditor to disappoint another" and in similar terms by Grant MR in Trimmer v Bayne was treated by the High Court as a principle underlying the doctrine of marshalling, not a rule which is applied in the doctrine of marshalling. The passage was not a full exposition and Aldrich v Cooper was not a decision to the effect that marshalling was not available because there had not been an exercise of the will of the priority creditor; nothing like that was involved. This passage from the judgment in Aldrich v Cooper has been referred to many times. 21 In the present case Senior Counsel for Across Australia referred to this principle in support of a proposition to the effect that marshalling only applies where the burden of satisfying the first mortgagee which operated adversely to the claimant was deliberately decided upon or initiated by the first mortgagee, and was in Lord Eldon's words the will of one creditor. It was contended that as NAB took no initiative whatsoever and made no election, the law of marshalling has no application at all. Upon the facts of the present case, NAB did not take any step which could be regarded as an initiative, but stood back, not making endeavours itself to sell the security properties, but imposing requirements on the steps taken by Across Australia to bring about their sale. It was not the will or initiative of NAB that caused the Rose Bay property to be sold and converted into money before the Pyrmont property. NAB relying on the strength of its position as a registered first mortgagee awaited the production of funds as a result of the endeavours of Across Australia, and received them when those efforts made them available. NAB did not consent to judicial sale, but on 1 June 2007 the Court decided to order judicial sale. In and about June 2007 selling Rose Bay was Mr Kalls' project; when this was defeated by his bankruptcy the project was taken up by Across Australia. 22 There is in my opinion no reason in principle why marshalling should not be available in these circumstances, just as much as it is available in circumstances where the first mortgagee takes the initiative and decides which security property to realise first. 23 The law relating to marshalling is not highly defined or clearly stated. In Finance Corp of Australia Ltd v Bentley (1991) 5 BPR 11833 at 11841 Mahoney JA spoke of marshalling in these terms: Conceptually, the term "marshalling" describes a process, and not an entitlement. A process of marshalling is to be applied when there are reasons, within the principles of equitable and fair dealing established by Chancery jurisprudence, why the process should be applied. It is a process which applies, not merely in the more usual case where a creditor has access to two funds to satisfy his claim: see Meagher R, Gummow W and Lehane J. Equity Doctrines and Remedies, 2nd ed, p 299ff, [1101] ff; Snell E, Principles of Equity, 27th ed, p 404; but also in other and different contexts: see, eg, Halsbury's Laws of England, 4th ed, Vol 16, para 1231. 24 Further observations at 11842 show that that case was not an occasion for considering marshalling fully; his Honour said: On this basis, it is not necessary to consider the limitations upon the circumstances in which the process of marshalling will apply: see Meagher R, Gummow W & Lehane J, above, {1123}-{1130}; and in particular the general rule that the process will not be applied to prejudice the right of the holder of a security to realise his securities as he pleases: Wallis v Woodyear (1855) 2 Jur (NS) 179; Snell, above, p 404. 25 Marshalling received extensive consideration in Commonwealth Trading Bank V Colonial Mutual Life Assurance Society Ltd [1970] Tas SR 120. In the course of his review Neasey J stated at 128, after a review of texts and authorities at 126-128: It seems therefore that the operation of the marshalling principle depends upon the assets being subject in some way to the control of the Court, which reinforces the view that the doctrine depends not upon the creation of any equitable right of property in the fund over which the claimant had otherwise no security, but upon the grant by the Court of an equitable remedy in certain circumstances, and so I hold. 26 The present case falls within this limitation, as the properties were sold in accordance with directions of the Court. The control of the Court is enhanced by the funds being held under an undertaking. Necessarily proceedings for judicial sale involve determination of the rights of all persons who have security interests or other interests in the properties. Resolving all interests is an application of the obscurely expressed maxim "Equity delights to do justice". Across Australia could not (and on the terms of its Statement of Claim did not) invite the Court to do less than resolve all aspects of the controversy. 27 A significant statement of principle was made in Mir Bros Projects Pty Ltd v Lyons [1977] 2 NSWLR 192 Waddell J said at 196B: The simplest example of the application of this latter doctrine is where X has a charge over two funds, and Y a subsequent charge over one only of them. If X satisfies his charge out of the fund which is subject to Y's charge and the result is to deprive Y of the whole or part of the benefit of his security, he is, in effect, subrogated to X's rights against the other fund and has reccourse to the other to the extent necessary to satisfy his charge. It will be seen that both theprinciple relied upon in this case and the doctrine of marshalling have the same general object. In the case of the doctrine of marshalling it is, in my opinion, as is submitted for the defendants, well established that the doctrine does not prevent an earlier mortgagee satisfying his charge against whichever fund or security he thinks fit. This is the view expressed in Meagher, Gummow & Lehane, above, at par. 1102 et seq. It is established by a number of authorities cited for the defendants Noyes v. Pollock (1886) 32 Ch. D. 53, at p. 70 ; Commonwealth Trading Bank v. Colonial Mutual Life Assurance Society Ltd. [1970] Tas. S.R. 120; Jenkins v. Brahe (1902) 27 V.L.R. 643, at pp. 645-647; Manks v. Whiteley [1911] 2 Ch. 448, at p. 466; Wallis v. Woodyear (1855) 2 Jur. N.S. 179, at p. 180; Flint v. Howard [1893] 2 Ch. 54, at p. 73. 28 Waddell J's references to intention and caprice have echoes in many judgments but never with the object of showing that marshalling is limited to cases where the order in which the prior creditor was paid was determined by the prior creditor's intention or caprice. Waddell J went on to state and support his Honour's view that the exercise by the first mortgagee of his remedies and choice of which fund to resort to first cannot be controlled; this, with respect, is altogether orthodox and is not involved in the present case, where the conduct of NAB is not challenged and NAB did not receive the proceeds of Rose Bay property as a result of any deliberate step of its own. 29 Marshalling received further significant consideration in Chase Corporation (Australia) Pty Ltd v North Sydney Brick and Tile Co. Ltd (1994) 35 NSWLR 1. While considering the general principle of marshalling (at p18) Cohen J made a statement about marshalling by apportionment which is important in the present case. His Honour said at 18D: Marshalling by apportionment may occur in circumstances in which there is security over two pieces of property in favour of one creditor and a further security over each of those properties in favour of two separate creditors. It may of course occur in other ways. The principle is that although under the usual rule of marshalling the second mortgagee can look to the security over which it does not have security, this would create an unfair situation if that other property is also secured by a second mortgage. In those circumstances there must be an apportioning of the debt due to the first mortgagee over both properties so as to leave a balance in each to the second mortgagees. Thus, to take a simple example, if properties X and Y are mortgaged to A, with a second mortgage over X alone to B and a second mortgage over Y alone to C, then, upon A exercising its rights over one of the properties, there may be marshalling so that neither B nor C loses an opportunity to satisfy part or all of its debt. To this extent A's debt will be taken to have been paid rateably from both securities: Barnes v Racster (1842) 1 Y & C Ch Cas 401; 62 ER 944, applying the general principles of marshalling as set out in Lanoy v Duke of Athol (1742) 2 Atk 445; 26 ER 668 and Aldrich v Cooper . The plaintiffs submit that these principles should apply in the present case. Norbrik is what could be described as the double claimant, having access as the result of its lien to two parcels of shares mortgaged to each of the single claimants, Tehuso and Chase. This assumes the validity of the lien over the Chase shares, which I have held to be valid, and the existence of the lien over the Tehuso shares. The defendants do not dispute the principles of marshalling by apportionment. Norbrik submits that it was entitled to claim its right of lien against whichever of the parcels of shares it chose and is not liable for having permitted Tehuso to have its shares transferred. Tehuso for its part submits that for several reasons marshalling should not have occurred in the circumstances of this case. 30 As the judgment of Cohen J showed, marshalling took an altogether different course as it developed in the United States of America in the 19th century and since, and there rests on the basis of an equity which the claimant can enforce against the prior mortgagee, conceivably extending to injunctions or other judicial remedies controlling the exercise by the prior mortgagee of his rights. If the law developed in this way, the will and motivations of the prior mortgagee, and the state of a prior mortgagee's knowledge of the interest of the claimant would be prominent considerations. The law in England and Australia developed in a completely different way; the prior mortgagee can exercise his rights as he sees fit and the claim for marshalling does not depend on impugning the prior mortgagee's decision or conduct. In my opinion it is not correct in principle to treat the will or election of a prior mortgagee as a significant part of the ground for a claim for marshalling. 31 Apportionment was spoken of in National Bank of New Zealand v Caldesia Promotions Ltd [1996] 3 NZLR 467 at 475 by Elias J. Her Honour said: In the case where a double claimant is secured in respect of the same debt by mortgage over two separate lands held by the mortgagor, junior mortgagees having a single claim in respect of one of the lands would be disadvantaged if the double claimant resorts in the first instance to the land against which their security applies. That disadvantage will be mirrored by junior mortgagees in respect of the other block, should the double claimant decide to resort to it. In those circumstances, a type of marshalling operates to apportion the debt owed to the double claimant rateably between the two lands according to their value: Lanoy v Duke and Duchess of Athol (1742) 2 Atk 444; Barnes v Racster (1842) 1 Y&C Ch Cas 401; Bugden v Bignold (1843) 2 Y&C Ch Cas 377; Flint v Howard [1893] 2 Ch 54; Baglioni v Cavalli (1900) 83 LT 500; Mir Bros Projects Pty Ltd v Lyons [1977] 2 NSWLR 192 ; Gibson v Seagrim (1855) 20 Beav 614; Victoria & Grey Trust Co v Brewer (1970) 14 DLR (3d) 28; Smyth v Toms [1918] 1 JR 338. The principle is often referred to as "marshalling by apportionment", although some cases have suggested that it is not properly part of the doctrine of marshalling and Meagher, Gummow and Lehane (supra) at para 1124 suggests that it is probably better understood as an application of the doctrine of contribution. Whatever its proper classification, I am satisfied from the authorities cited that it is a principle of general application applying wherever a double claimant can disappoint another creditor by electing to satisfy his claim from one fund or security. The doctrine does not interfere with the right of the double claimant to realise his securities as he sees fit. It applies in application of a form of subrogation where the double claimant is indifferent as to whether he is satisfied from one security or the other, or as to the proportions in which he achieves satisfaction from each. Rateable apportionment in such circumstances is the equitable solution and does not prejudice the junior creditors of each security. 32 Her Honour's words "… wherever a double claimant can disappoint another creditor by electing to satisfy his claim from one fund or security" became part of the support claimed by Senior Counsel for the proposition that it is only where the claimant had been defeated by an election or decision of the double claimant that the doctrine applies. I am satisfied that it was not Elias J's intention to exclude circumstances arising otherwise than by election. Reasoning by corollary in this way is not a reliable method of understanding judgments. 33 It must respectfully be said that Aldrich v Cooper is not a decision which is distinguished for clarity. The facts do not relate to competing security holders, but to competition between the holder of a security over freehold and copyhold estates and also over personal assets of an intestate, in competition with simple contract creditors who, under the law of that distant time, could enforce their claims only against personal assets. Lord Eldon's chief concern was the authority of Robinson v Tonge, a case decided by Lord Hardwicke LC on 15 October 1739 which had never been cited and was completely unknown until referred 60 years later to by Cox, the editor of the fifth edition of Peere Williams Reports. See Cox's note to Clifton v Burt (1720) 1 Peere Williams 678, 24 ER 566 at P. Wms 681 ER 568. What Robinson v Tonge was said to be authority for and the reason why it was said to be significant in Aldrich v Cooper was this: "But the Court said that copyhold estates were not liable either in law or equity to the testator's debts further than he subjected them thereto; and ordered that the copyhold estate should bear its proportion with the freehold estate for payment of the mortgage, and should not be liable to make satisfaction for the specialty debts." In other words, specialty debts could not be marshalled against the copyhold estates, although those estates were liable to the mortgage debt under the mortgage which the testator had given over them. This caused evident difficulty to Lord Eldon. He did not deliver a single judgment but spoke about the state of his opinion on three different occasions, finally deciding not to follow Robinson v Tonge. The third time his Lordship embarked on giving reasons he described Robinson v Tonge as "… not reconcilable with the general classes of cases" and included the copyhold estates in the marshalling exercise. The editors of the sixth edition of Peere Williams added this to Cox's note, and this is what we have at 24 ER 568. Mr Cox's note is appended to Clifton v Burt, a decision of Lord Parker in 1720. Lord Parker is better known to history as Lord Macclesfield, and his chief distinction is his impeachment and disgrace over corrupt involvement in the South Sea Bubble scandals. Clifton v Burt itself related to competition among beneficiaries in circumstances now long obsolete. 34 Cox's note can be taken to list all the cases in the 18th Century and earlier which bear on marshalling and can now be retrieved; many related to claims of beneficiaries against deceased estates, many to claims of creditors against deceased estates and some to both. The first proposition in Cox's note at P. Wms 681, ER 568 is "… It has been long settled, that where one claimant has more than one fund to resort to, and another claimant only one, the first claimant shall resort to that fund, on which the second has no lien, Lanoy v Duke of Atholl 2 Atk. 446". In the course of his notes Cox said "… It is to be observed, that none of the rules above-mention subject any fund to a claim to which was not before subject, but only take care that the election of one claimant shall not prejudice the claims of the others, 2 Atk. 438; …" (again referring to Lanoy v Duke of Atholl). 35 Lord Eldon went to some trouble to find out, apparently from Cox himself, the source of the reference to Robinson v Tonge, accepted that the note of that case was correct, but overruled it. See 8 Vesey Junior 390, 32 ER 406. In the course of showing why he was unwilling to follow Robinson v Tonge Lord Eldon made an exposition of marshalling at 8 Vesey Junior 394-395 32 ER 407, in the course of which he said (of a specialty creditor whose debt arose under a covenant or in a deed and under the law of that time was enforceable against the heir of the debtor after the debtor's death): "In that case then the Court says, as that specialty creditor by his specialty contract can affect the land, he has two funds; the freehold and the personal estate; and he shall not by his election disappoint the natural and moral equity of the creditor by simple contract to be paid out of the single fund, which his debt affects. [395] The simple-contract creditor therefore has no more in law any claim against the freehold estate than the specialty creditor in Robinson v Tonge had upon the copyhold estate. But in the former case the Court has said, the caprice or election of a bond creditor shall not operate to the prejudice of the simple-contract creditor; …". 36 Caprice and election were referred to by Lord Eldon to illustrate one case where marshalling is available, not to delimit the availability of marshalling. Lord Eldon also said, in a further illustration "But it is the ordinary case to say a person having two funds shall not by his election disappoint the party having only one fund; and equity, to satisfy both, would throw him, who has two funds, upon that, which can be affected by him only; to the intent that the only fund to which the other has access; may remain clear to him." These observations could be seen and indeed have been seen as a basis for two propositions which I do not accept. One is that the Court will control the decisions of the prior creditor and compel him to exercise his rights in any way which will advantage the subsequent creditor entitled to marshalling. When Lord Eldon spoke of throwing him who has two funds upon that which can be affected by him only, his Lordship was not speaking about compelling the conduct of any prior creditor, but about carrying out an accounting exercise and allocating debt which had been paid against one fund rather than another. Another proposition I do not accept is that it is only where the incidence of the exercise of the prior creditor's rights adverse to the subsequent creditor resulted from caprice or election, that is, from deliberate decision, that marshalling applies. It was not Lord Eldon's concern to establish any such rule, and none of the reasons which he stated would show any principle to support such a rule. In my opinion there is no basis in principle for such a limitation. 37 To my reading it does appear from Cox's note and from Lord Eldon's judgment that it was not, even at that time, a part or a consequence of the law of marshalling that the caprice, election or decision of the prior creditor was controlled by the Court; the Court's concern was to adjust rights among other persons affected by the prior creditor's decision. 38 In Lanoy v Duke of Athol (1742) 2 Atkyn 445, 26 ER 668, already a classic authority in 1803, Lord Hardwicke LC at Atk 446, ER 669 stated the Court's practice without referring to election, caprice or any similar element. References to election and caprice appear frequently in expositions of marshalling. However I have not seen it stated that it is essential that a decision of the prior creditor should underlie a marshalling remedy. 39 It is conceivable that restraining or controlling the conduct of the prior creditor may have underlain the origins of marshalling in equity, where a prior creditor obstructed the subsequent creditor by a choice made with malice against the subsequent creditor or for some other improper purpose; although I have not seen any reference to such a case. Observations in Webb v Smith (1885) 30 Ch D 192 at 200 by Cotton LJ could be understood as supporting intervention to control the conduct of the prior creditor; but this is not what courts have done; they have rather conformed with the view expressed briefly by Page-Wood VC in Wallis v Woodyear (1855) 2 Jur NS 179 at 180 to the effect that the prior creditor has "a right to take the first money that is realised by any of his securities which first comes to hand." The authorities and text writers are referred to in Meagher, Gummow & Lehane's Equity Doctrines and Remedies 4th ed at [11-010]. 40 I have been referred to Bondi Securities Pty Ltd v AGC (Advances) Ltd an unreported decision of Master Windeyer (as Windeyer J then was) of 31 August 1990 (not reported). In that case Master Windeyer gave summary judgment against the claim for marshalling on the ground that no reasonable cause of action was disclosed. The puisne mortgagee of a property had sold the property under its power of sale but had then been obliged by Conveyancing Act 1919 s 112 to pay the whole proceeds to the prior mortgagee. The first mortgage was thus satisfied in part. The first mortgagee then sold another secured property, paid itself out completely and paid the surplus to a second mortgagee of the other property, which had priority over the plaintiff, a third mortgagee of that other property. Master Windeyer held that subrogation of the interests of the first mortgagee could not assist as the first mortgage had been discharged. The claim to subrogation and also the claim to marshalling depended on treating the surplus of realisation paid to the prior mortgagee under s 112 as if it had been paid by the claimant from its own funds; but that was not the case. 41 In the course of his reasons Master Windeyer referred to Porter v Associated Securities (1979) 1 BPR 9279 (Needham J) and also to Aldrich v Cooper and to Lord Eldon's observations. Master Windeyer referred to the fact that the prior mortgagee had made no election; but this to my reading was not part of the ground upon which he decided that no reasonable cause of action was disclosed. In Porter Needham J referred to a claim that the plaintiff had remedies under the doctrine of subrogation at 9295-9296. In a passage enmeshed in the facts of that case Needham J referred to Lord Eldon's observations and to the fact that the prior mortgagee in that case had made no election. His Honour said at 9296 "It was the defendant who sold the beachfront land under its power of sale. In my opinion it cannot complain that, in accordance with its statutory duty in such circumstances, it was obliged to pay the debt of the prior encumbrancer out of the proceeds of sale. No equity arises in such a case". That was the point of decision; it has no application to the present case, although it was relevant to Bondi Securities Pty Ltd v AGC (Advances) Ltd. A little earlier at 9295 Needham J said "There seems little doubt that, if the bank had acted under its first mortgage to sell the beachfront land and taken from the proceeds the whole of the debt owed to it, leaving insufficient money to meet the defendants claimed, the defendant would have been able to rely upon the doctrine of marshalling". 42 In the present case NAB did not take all the available proceeds of the sale of Rose Bay because of a deliberate decision or any chosen course of action by NAB which threw its claim against Rose Bay rather than against Pyrmont. Across Australia attended to the sale of Rose Bay first, and this meant that Across Australia had to pay the proceeds of sale of Rose Bay to NAB to induce NAB to release Rose Bay from its mortgage. When some months later NAB had to be asked to release Pyrmont from its mortgage, less than all the proceeds of Pyrmont was required. From the point of view of Mr Hill and also from the points of view of Across Australia and of NAB, an accidental circumstance decided the order in which the proceeds of sale of the two properties were applied to NAB's debts. Accident is a classic basis for equitable intervention. 43 It is inappropriate, in the realisation of mortgages under the control of the Court, that one or other of the puisne mortgagees should be disadvantaged or advantaged by the accidental circumstance of the order in which the properties were sold and the first mortgagee was satisfied. The appropriate equitable disposition is, without imposing any liability or responsibility on the first mortgagee NAB, that the Court should carry out its accounting or reckoning of the funds to which Mr Hill and Across Australia should have access on the basis that NAB was satisfied not by first taking all the proceeds of the Rose Bay property and then as much of the proceeds of the Pyrmont property as it needed, but by taking proceeds of both the properties over which it held security in rateable proportions. 44 Senior Counsel for Across Australia put forward a number of contentions against acting in this way, some in written submissions only and some developed orally. 45 It was contended that Mr Hill's claim and the declarations and orders which he seeks should not have been sought by Notice of Motion in the proceedings, and that he should have filed a cross-claim. I do not accept this. In proceedings commenced by Across Australia seeking judicial sale, application by persons who have security interests for directions relating to the proceeds are interlocutory business which it is appropriate to commence by Notice of Motion. 46 It was also contended that a previous Notice of Motion applying for identical relief had been dismissed and that the Court should not permit the claim to be reagitated. That Notice of Motion was dismissed for non-appearance, for a procedural failure, without consideration of the merits, and the present Notice of Motion does not seek re-opening of any earlier consideration. 47 Senior Counsel for Across Australia contended that marshalling is generally limited to cases where two properties were originally mortgaged for the same debt. As both properties were subject to "all moneys" mortgages to NAB, this is not an adverse consideration. 48 Counsel also referred to case law – Re Holland (1928) 28 SR (NSW) 369 at 378-9 where the action of the first mortgagee was dictated by a statutory or contractual obligation to the debtor relating to the order in which funds were applied. There is no such element in the present facts. 49 It was also contended that it was significant that Mr Hill had an opportunity to take security from Mr Kalls over the Pyrmont property and decided not to do so. Counsel referred to Re Mower's Trust (1869) LR 8 Eq 110, in which I find no assistance. I see no principle on which it is relevant to examine how mortgagees came to lend the amounts they did and not other amounts, to take the securities they did and not other securities, or generally to examine the wisdom of their conduct in making loans, which has no relation to equitable adjustment of rights as between them. Marshalling will not give Mr Hill a security which he earlier chose not to have: he will not get security over or any interest in the Pyrmont property. 50 Senior Counsel also contended that the third defendant was defeated, or that it was a strong discretionary consideration adverse to giving the third defendant a remedy, that (as evidence of Mr Hill's solicitor showed) Mr Hill had an opportunity, long before Across Australia took security over the Pyrmont property, to take security over the Pyrmont property in addition to security over the Rose Bay and another property for this debt; but decided not to do so. It was contended that the present application is the reverse of the intention upon which Mr Hill acted when he had an opportunity to take security over Pyrmont and decided not to do so; it was contended that he is now seeking security over the Pyrmont property; and counsel said that this is a special fact encountered in this case, not encountered elsewhere, which defeats the application. 51 Across Australia was not involved in that event and did not lend any money or take any security until many months later. Its conduct was not shaped or affected by any decision by Mr Hill not to take security over Pyrmont. In my opinion Mr Hill's decision not to do so is irrelevant now. There is no reason in principle why these circumstances should prevent him from having the advantage of marshalling. He is not (as Senior Counsel sought to characterise him) seeking now to have security over the Pyrmont property. 52 Evidence of Across Australia's solicitor shows that Across Australia has incurred legal costs and expenses relating to this litigation and the sale of the Pyrmont property, which have not all been paid. When the sale of the Rose Bay property was completed on 30 August 2007 real estate agent's commission, conveyancing costs and similar charges were paid out of the proceeds of sale before payment to NAB of the balance of $2,134,811.75. Before completion of the sale of the Pyrmont property took place Across Australia gave to the Court, in these proceedings, an undertaking which specified how the proceeds of sale were to be applied; accordingly when the sale was settled on 28 March 2008 the proceeds were applied to pay charges relating to the property and $1,936,335.81 was paid to NAB. The charges and expenses paid in this way were municipal and water rates, outstanding strata fees and land tax, the first mortgagee's legal costs and discharge and agents' commission. Across Australia also incurred marketing costs of $15,279.41 to its estate agents and conveyancing costs of $5,494.35 to its solicitors. In the ordinary course of business these would have been paid out of the proceeds of sale but the terms of the undertaking prevented this. For the purposes of the marshalling exercise, the proceeds of Rose Bay should first be charged with the conveyancing costs and marketing costs, that is $21,044.95. 53 Across Australia has also incurred legal costs relating to these proceedings. Its solicitor has set out on affidavit the amounts of five tax invoices related to costs of these proceedings, the most recent dated 2 April 2008; the total is $111,426.61. Across Australia has remedies in respect of these costs; it is no doubt entitled under the mortgage clauses to payment of these costs by Mr Kalls; and Across Australia has the benefit of an order for costs made in the proceedings against Mr Kalls. As Mr Kalls is a bankrupt there can be no confidence that these entitlements will actually produce any payment. In my opinion costs reasonably incurred by Across Australia in conducting this litigation up to the tax invoice of 2 April 2008 should be seen as expenses which it was necessary to incur to produce the fund now under dispute. In the absence of exercise by NAB of its powers of sale as first mortgagee, proceedings for judicial sale by Across Australia or some puisne mortgagee were necessary to produce any results for puisne mortgagees; neither Mr Hill nor Across Australia could use the powers of sale under the Real Property Act 1900 available for holders of registered mortgages. If proceedings for judicial sale had not been brought, the puisne mortgagees would have been left to wait until NAB took some action to realise its securities; it is not known how long that would have taken, but preserving the positions of puisne mortgagees would not have been a factor in NAB's course of action. Interest liabilities to NAB at default rates would have increased for an unknown period of time adversely to puisne mortgagees. In these circumstances the Court should in my opinion regard the payment of costs reasonably and properly incurred by Across Australia up to 2 April 2008 as a charge on the fund with priority over mortgage debts. 54 I do not take the same view of any costs incurred by Across Australia in the litigation after 2 April 2008 as I attribute those costs to the dispute relating to marshalling. 55 Before adopting or moderating the costs charged in the tax invoices there should be some process of assessment or other consideration to establish that the charges are charges for appropriate amounts as between Across Australia and its solicitors. 56 I will publish these reasons and ask the parties to consider how it should be established that the solicitors' charges are appropriate before I take the proceedings under further consideration. 57 Order: (1) The proceedings are reserved for further consideration. 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