New South Wales Supreme Court CITATION : Credit Union Australia Ltd v Lyons [2009] NSWSC 1188 HEARING DATE(S) : 29 October 2009 JUDGMENT DATE : 29 October 2009 JURISDICTION : Equity JUDGMENT OF : White J EX TEMPORE JUDGMENT DATE : 29 October 2009 DECISION : Refer to paras 32 and 33 of judgment. CATCHWORDS : BANKING AND FINANCE - Credit union seeks judgment for moneys advanced to customer by mistake – credit union inadvertently left line of credit account open after discharging the mortgages securing that account – first defendant liable as borrower under loan agreement – second defendant liable in restitution for moneys received from first defendant's account - EQUITY – equitable remedies - tracing – some moneys traced to reduction of mortgage debts secured over properties – those properties charged to plaintiff to secure moneys so advanced LEGISLATION CITED : Civil Procedure Act 2005 (NSW) CATEGORY : Principal judgment Ilich v R (1987) 162 CLR 110 Shields v Westpac Banking Corporation [2008] NSWCA 268 CASES CITED : Wambo Coal Pty Ltd v Stuart Karim Ariff [2007] NSWSC 589; (2007) 25 ACLC 809 Kang v Kwan [2002] NSWSC 1187 Boscawen v Bajwa [1996] 1 WLR 328 Plaintiff: Credit Union Australia Ltd PARTIES : 1st Defendant: Tanya Lynette Lyons 2nd Defendant: Wayne John Lyons FILE NUMBER(S) : SC 2746/09 COUNSEL : Plaintiff: R Harper SC Defendants: n/a SOLICITORS : Plaintiff: MacGillivrays Solicitors Defendants: n/a IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WHITE J Thursday, 29 October 2009 2746/09 Credit Union Australia Ltd v Tanya Lynette Lyons & Anor JUDGMENT 1 HIS HONOUR: This is an application by a credit union for judgment for an amount of advances it has made to its customer, the first defendant, under a line of credit account, together with interest. The line of credit account was initially secured by registered mortgages, but those mortgages were discharged in 2006 when the loan was re-financed. 2 By administrative oversight the line of credit account was not closed when the mortgages were discharged. The first defendant, or the second defendant acting as her attorney, was able to draw on the account back to its original overdraft limit. It was only when that limit was again exceeded in 2008, and the plaintiff made attempts to obtain repayment, that the relevant officers then dealing with the defendants appreciated that the account had been unsecured. 3 In addition to claiming judgment against the first defendant for the amount drawn on the account and interest, the plaintiff seeks judgment against the second defendant for an amount of $81,700 withdrawn from the first defendant's line of credit account and credited to his account with Westpac. 4 The plaintiff has also traced sums totalling $81,438 which have been applied by the defendants in reduction of a loan secured over a property at Springwood. The plaintiff has also traced sums totalling $71,880 applied by the defendants to reduce loans secured by registered mortgages over another property at Springwood and a property at Hazelbrook. 5 One of the Springwood properties has been sold. The plaintiff claims that the moneys withdrawn from the line of credit account after the discharge of the mortgages which secured the original advances, were allowed to be drawn down by mistake. It says that it should be inferred that the defendants knew of the mistake, and that the moneys that they were paid out were held on trust for the plaintiff. It claims that as it can trace various payments applied in the reduction of mortgages, it is entitled to an order charging the properties over which those mortgages were held with the amounts so applied and interest. 6 There has been no appearance filed for the defendants. The first defendant has been served. Orders for substituted service have been made against the second defendant. It is clear from correspondence received by the court that he is aware of these proceedings. 7 The matter came before the Chief Judge in Equity last week, and her Honour directed that the plaintiff notify the defendants that the matter would be listed before the Duty Judge today, and that the plaintiff would be seeking to enter judgment against the defendants. That notification has been duly given. It is appropriate to proceed with the application, albeit that the defendants did not appear. 8 The first defendant opened a line of credit account with the plaintiff in October 2002. The overdraft limit at that time was $247,500. The plaintiff was granted first mortgage security over a property owned by the first defendant at [xxx] Great Western Highway, Hazelbrook. In 2004 the line of credit was increased to $300,000. Further security was taken in the form of a mortgage over property owned by the first defendant at [xxx] Ferguson Road, Springwood. 9 In August 2006 those loans were re-financed. $305,000 was credited to the line of credit account, and the plaintiff's mortgages were discharged. At that time the account was in credit in the amount of $6,135.45. 10 On 18 and 29 August 2006 officers of the plaintiff sent internal memos to an addressee called "Release Settlements", which I take to be a division of the plaintiff, that the account be closed. However, the account was not closed. I readily infer, and indeed there is evidence to this effect, that this was due to administrative oversight. 11 There were further drawings on the account. On 10 November 2006 the account went back into debit. By 21 August 2008 the account had returned to its overdraft limit of $300,000 and in fact had exceeded that amount. Credit service officers of the plaintiff who were then dealing with the account were under the wrong impression that the account was secured by Real Property Act 1900 mortgages. 12 On 23 October 2008 they caused a notice of default to be served on the first defendant requiring repayment of what was called the "over limit amount" of then $5,531.55. The plaintiff then threatened to enforce the mortgage if the default were not remedied. However, the plaintiff had no mortgage to enforce. 13 Between 25 April 2007 and 7 April 2008 drawings totalling $81,700 from the line of credit account were credited to an account held by the second defendant with Westpac. The second and first defendants are husband and wife. From 14 March 2006, the second defendant held a power of attorney from his wife. 14 On 30 June 2006 the defendants applied for a loan of $805,000 to purchase a second Springwood property at [yyy] Great Western Highway, Springwood. That application was made through Latrobe Financial Services. It was successful. On 23 August 2006 the first defendant, as mortgagor, mortgaged that property to Permanent Mortgages Pty Ltd. The mortgage is stamped "for an advance of $805,000". 15 Between 26 March 2007 and 22 March 2008, $81,438 was withdrawn from the line of credit account and credited to a loan account in the name of the defendants with Latrobe Financial Services. It is clear from the loan statement of this account that it is the same loan as is secured by the mortgage over the second Springwood property at Great Western Highway. 16 On 24 July 2006 the defendants entered into a loan contract with Perpetual Limited to borrow two loans, one of $284,000 and another of $400,000. These loans were secured by first registered mortgage over the first defendant's property at [xxx] Great Western Highway, Hazelbrook and her property in Ferguson Road, Springwood. The Ferguson Road, Springwood property was sold on 4 February 2008. 17 Between 22 April and 30 December 2007 sums totalling $71,180 were withdrawn from the line of credit account and applied in reduction of the loans secured by the mortgages over the Hazelbrook property and the Ferguson Road, Springwood property. Both the properties at [yyy] Great Western Highway, Springwood and [xxx] Great Western Highway, Hazelbrook are listed for sale by auction this Saturday. 18 I will deal first with the personal claims against the first and second defendants. The first defendant, as the borrower from the plaintiff, is clearly liable for the amounts drawn under the line of credit account, together with interest at the rates provided for in her loan agreement with the plaintiff. As at 11 May 2009, being the date on which these proceedings were commenced, the debt was $300,895.38. 19 Because the plaintiff is entitled to interest as of right under the loan contract with the first defendant, it is not entitled to pre-judgment interest pursuant to s 100(3)(b) of the Civil Procedure Act 2005. The evidence is that the current interest rate is 6.02 per cent. The plaintiff does not seek judgment for an amount referable to a provision for default interest. 20 I direct entry of judgment for the plaintiff against the first defendant in the sum of $300,895.38 plus interest from 11 May 2009 to today, being the date from which the judgment will take effect, at the rate of 6.02 per cent per annum. 21 The next claim is that against the second defendant. There is no claim that the second defendant is liable for having withdrawn moneys from the first defendant's account. Rather it is said that he is liable for the amounts which were credited to his account with Westpac totalling $81,700. 22 As I have said, it is clear that the plaintiff allowed drawings on the line of credit account because it was acting under a mistake, and an important mistake, that the account was still secured. There is no direct evidence that either the first defendant or the second defendant was aware of that mistake. As I have said, the defendants have not appeared and so of course they have not put on any evidence. However, it was a term of the agreement on the opening of the line of credit account that it would be secured by mortgages initially over the Hazelbrook property, and subsequently over both the Hazelbrook property and the Ferguson Road, Springwood property. 23 In July 2006, solicitors acting for the defendants asked the plaintiff to prepare a discharge of the mortgage and to advise a "pay out" figure in anticipation of settlement. The natural expectation of the parties would have been that on the loan being paid out and the mortgages discharged, it would not be open to the defendants to redraw on the account. The obvious explanation as to why such drawings were permitted would be that it was through a computer error or administrative oversight. I infer that the second defendant knew or understood that the further drawings on the account were permitted only by error. 24 Whether the first defendant had such knowledge and understanding is more difficult on the materials. The materials on this application include a file note from an officer of the plaintiff in 2004 which records that the first defendant had recently been involved in a serious accident and was in intensive care. On 19 December 2008 the second defendant wrote that the first defendant was suffering from brain damage and was not capable of attending to her own affairs. He said that it was for this reason that he had taken control of her affairs under the power of attorney. That power of attorney is dated, so far as I can read it, 14 March 2006. 25 I infer that the drawings from the first defendant's line of credit account which were applied to the second defendant's account with Westpac, and those which were applied in reduction of the loans secured by mortgages, were drawn by the second defendant acting under power of attorney. His knowledge and understanding of the plaintiff's mistake, when acting for the first defendant as her agent, would be imputed to her. Hence I infer that both defendants had actual knowledge, or at least imputed knowledge in the case of the first defendant, that the drawings were permitted by the plaintiff by mistake. 26 In those circumstances, and possibly, in the case of the second defendant, even if he had not had such knowledge, the second defendant is liable in an action for restitution, or as it would formerly have been characterised, in an action for money had and received, for the drawings permitted by the plaintiff by mistake, which were applied for his benefit. (See Ilich v R (1987) 162 CLR 110 at 129 and 143.) 27 The plaintiff is entitled to interest under s 100 of the Civil Procedure Act in respect of its claim against the second defendant. That interest is sought only from 21 August 2008, by which time all of the payments for the benefit of the second defendant had been made. 28 I direct entry of judgment for the plaintiff against the second defendant in the sum of $81,700 together with interest at the rates prescribed in schedule 5 to the Uniform Civil Procedure Rules from 21 August 2008 to today, being the date on which the judgment is to take effect. 29 The moneys received by the defendants from the accounts, with knowledge that they were permitted to be drawn as a result of mistake, when the moneys were paid without any consideration passing from the defendants to the plaintiff other than the original promise made by the first defendant in her loan agreement, were at that time impressed with either a constructive or resulting trust in favour of the plaintiff. (See Shields v Westpac Banking Corporation [2008] NSWCA 268 at [16], [19] and [20] and cases there cited; Wambo Coal Pty Ltd v Stuart Karim Ariff [2007] NSWSC 589; (2007) 25 ACLC 809 at [38]-[43].) 30 Those moneys were not used as contributions to the purchase price of properties acquired by the first defendant. I do not accept that the plaintiff is entitled to declarations that properties of the first defendant are held by her on trust for the plaintiff. However, as certain of the payments can be traced as having been used to reduce the mortgage debts secured over the properties at Great Western Highway, Springwood, and Great Western Highway, Hazelbrook, the court may treat those lands as charged with the payment to the plaintiff of the amounts so applied. (See Kang v Kwan [2002] NSWSC 1187 at [204]-[207] and cases there cited; Boscawen v Bajwa [1996] 1 WLR 328 at 334-335.) 31 There is no evidence that the interests of innocent third parties would be adversely affected by an order charging those lands. The charge will not affect the rights of the registered mortgagees to exercise their power of sale, and will not affect the interests of any other person having prior security over the property without notice of the plaintiff's claim. It would be against good conscience for the defendants to be permitted to receive any surplus proceeds of sale of the property, free of the plaintiff's claim for repayment, where the plaintiff's money was applied to reduce the mortgage debts. That charge should also secure interest on the moneys so applied at the contractual rate. 32 For these reasons, subject to hearing from counsel as to the form of the order, I propose to further order that the property in folio identifiers 41/1090398 and 42/1090398, registered in the name of the first defendant and known as [xxx] Great Western Highway, Hazelbrook, be charged to the plaintiff to secure the sum of $71,180 plus interest from 23 October 2008 at 6.02 per cent, and to further order that the property in folio identifiers 1/651760 and 2/651761 registered in the name of the first defendant and known as [yyy] Great Western Highway, Springwood, be charged to the plaintiff to secure the sum of $81,438 and interest from 21 August 2008 at 6.02 per cent per annum. [Counsel addressed.] 33 I make those orders. Those orders may be entered forthwith. I order the defendants pay the plaintiff's costs. ****** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.