Supreme Court New South Wales Medium Neutral Citation: St George Bank - A Division of Westpac Banking Corporation, In the matter of [2011] NSWSC 730 Hearing dates: 4 July 2011 Decision date: 15 July 2011 Jurisdiction: Equity Division Before: Black J Decision: Order that funds paid into Court and interest thereon be paid out Catchwords: Entitlement to funds paid into Court pursuant to UCPR r 55.9 - whether equitable mortgage granted - unconscionability - mistake in respect of whether mortgage had been granted Legislation Cited: Real Property Act 1900 - s 58(3), s 118 Trustee Act 1925 (NSW) Cases Cited: - ANZ Banking Group Limited v Trustee of the Property of Maunder (a bankrupt) [2009] NSWSC 1356 - Avco Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679 - Residential Housing Corporation Ltd v Esber [2011] NSWCA 25 - State Bank of NSW v Berowra Waters Holdings Pty Ltd (1986) 4 NSWLR 398 - Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 - Taylor v Johnson (1983) 151 CLR 422 - Theodore v Mistford Pty Ltd (2005) 221 CLR 612 - Tutt v Doyle (1997) 42 NSWLR 10 - Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194 Category: Principal judgment Parties: St George Bank Limited - Applicant Andrea Murray - Respondent Representation: Counsel: S.B. Docker (Applicant) In person - (Respondent) Solicitors: Kemp Strang (Applicant) File Number(s): 10/313912 Judgment 1The Plaintiff, Westpac Banking Corporation ("Westpac") paid surplus monies arising on the exercise of a power of sale over mortgaged property ("Mosman Property") owned by the Defendant, Ms Andrea Murray ("Ms Murray"), into Court pursuant to r 55.9 of the Uniform Civil Procedure Rules. Initially, a third party, Mr Jatinder Mukhi, sought a declaration that Ms Murray was entitled to the monies paid into Court and an order or declaration that Ms Murray was liable to pay him a specified amount plus interest. Mr Mukhi no longer pursues that application. On 18 April 2011, St George Bank, a division of Westpac, ("St George") filed a Motion seeking declarations and an order that the funds paid into Court by Westpac and any interest thereon be paid out to St George. 2A Consent Order was filed in Court between St George and Ms Murray which provides that, relevantly, all of the funds in Court plus any interest earned thereon are to be paid out to St George. Nonetheless, this application should be determined by the Court on its merits, since its outcome may affect the interests of any potential claimants to the funds in Court other than Ms Murray. Factual background 3I have been provided with a helpful chronology and submissions by Mr Docker, Counsel for St George in these proceedings, and draw on that chronology and those submissions for this account of the relevant facts. 4In February 2000, St George entered into a loan agreement with JM & AM Enterprises Pty Ltd which required security to be provided by a first registered mortgage over certain land situated at St Ives ("St Ives Property"). In October 2002, St George entered into a further loan agreement with Ms Murray which provided for security by way of a first registered mortgage over the Mosman Property. The loan agreement of October 2002 resulted in the creation of two separate loans with separate identification numbers. 5By letter dated 2 December 2004, the then solicitors for Ms Murray requested the discharge of the registered mortgage over the St Ives Property. St George appears to have thereafter proceeded for a time on the incorrect basis that the loan over the St Ives Property and both loans over the Mosman Property were to be fully repaid and the security over both the St Ives Property and the Mosman Property would be released. An internal direction sent by one employee of St George to another on 17 December 2004 subsequently instructed that only the loan secured by the St Ives Property was to be repaid and that the mortgage over the St Ives Property and a fixed and floating charge over the assets and undertakings of JM & AM Enterprises Pty Ltd were to be discharged. That direction contemplated that documents relating to the Mosman Property would be returned to St George's NSW Custodian Unit since that loan was not to be discharged. 6On 20 December 2004, the loan secured by the St Ives Property was repaid but St George handed over to Ms Murray's then solicitor not only a discharge of mortgage and certificate of title for the St Ives Property but also a discharge of mortgage and certificate of title for the Mosman Property. The loan secured by the Mosman Property was not repaid at that time. 7Subsequently, on 21 December 2004, St George made an offer to Ms Murray to provide her with a Portfolio Loan facility with a credit limit of $550,000 which was accepted by Ms Murray on 22 December 2004. The terms of the relevant facility were set out in a Portfolio Loan Agreement Offer which provided relevantly, under the heading "Security", that "The following mortgages, other securities and guarantees, if any, have been or are to be taken by us: Security 1 Already held. Date: 23/05/1997. Registered number: 3189344. Name of mortgagor(s) (owner): Andrea M Murray-Baptista 1 st priority registered real property mortgage. Property address: [address of property omitted] Mosman NSW 2088 ..." Under the heading "Special Conditions", the Portfolio Loan Agreement Offer provided that, before St George had to lend, Ms Murray must produce evidence that the loan commitments in respect of the two loans which had previously been secured by the Mosman Property had been discharged. The terms of that Offer also provided that each security described in the section headed " Security" extended to the Portfolio Loan Agreement and that that agreement was covered by each of those securities. 8The General Terms and Conditions to the Portfolio Loan Agreement in turn provided that: "3.1 We only have to make funds available if: (g) we have received the securities detailed in the Offer under "Security" in a form satisfactory to us, and no-one is in default under any of them and they have not been withdrawn... 3.2 Our obligation to make the loan facility available to you ends if the settlement requirements in clause 3.1 are not finalised within 3 months of the disclosure date ." 9Although a mortgage over the Mosman Property was not then held nor obtained by St George, Ms Murray drew down the credit limit of $550,000 under the Portfolio Loan Agreement and those funds were applied to repay the two loans which had previously been secured by the mortgage over the Mosman Property. Ms Murray subsequently lodged the discharge of mortgage over the Mosman Property which had been provided to her then solicitor on 20 December 2004 for registration and that discharge of mortgage was registered on 4 February 2005. 10Ms Murray thereafter gave a mortgage over the Mosman Property to Westpac to secure a further loan and that mortgage was registered on 15 November 2005. 11St George later recognised that it had not obtained a registered mortgage securing Ms Murray's indebtedness under the Portfolio Loan Agreement and then lodged a caveat on the title of the Mosman Property and requested Ms Murray to give a new mortgage over that property. Ms Murray did not do so. Westpac, exercising its right as mortgagee of the Mosman Property, thereafter took vacant possession of the Mosman Property which was sold. 12On 21 September 2009, St George commenced proceedings in the District Court in Sydney against Ms Murray in respect of its debt under the Portfolio Loan Agreement and default judgment was entered in favour of St George in those proceedings in the amount of $602,757.48 inclusive of costs. 13On 21 September 2010, Westpac paid into Court the sum of $349,821.12 which were surplus funds following the exercise of its power of sale over the Mosman Property ("Surplus Funds"). St George's claim to payment out of Court 14The matters which must be established to support a payment out of Court under Div 3 of Pt 55 of the Uniform Civil Procedure Rules were summarised by Slattery J in ANZ Banking Group Limited v Trustee of the Property of Maunder (a bankrupt) [2009] NSWSC 1356 at [8], where his Honour said that: "First the applicant must demonstrate an entitlement to the funds. Second, the applicant must show that there are no competing claimants to the funds which would prevent payment out to the applicant. Third, where other claimants may be affected, the applicant must show that he has notified those other claimants. Finally, the applicant must calculate or provide a formula for the calculation of the amount to be paid out of Court." 15The first issue to be addressed is whether St George can demonstrate an entitlement to the Surplus Funds. The starting point for a determination as to dispersal of surplus funds arising from a sale by a mortgagee is s 58(3) of the Real Property Act 1900 which provides: "(3) The purchase money to arise from the sale of any such land, estate, or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly in payment of the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee; thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be." 16The first and second priority payments referred to in Real Property Act s 58(3) were here made by Westpac on the sale of the Mosman Property. The third priority payment referred to under s 58(3) is not applicable since the reference to a subsequent mortgage in s 58(3) is concerned only with registered mortgages: Residential Housing Corporation Ltd v Esber [2011] NSWCA 25 at [53] ff. On its face, the fourth limb of s 58(3) contemplates that any surplus arising on the sale of the Mosman Property is to be paid to the mortgagor, Ms Murray. However, the operation of that limb of s 58(3) can be modified by the intervention of equity so that the section does not vest the surplus from a mortgagee's sale in a mortgagor free from all equities but subject to them: Avco Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679 at 683; Residential Housing Corporation Ltd v Esber above at [166]-[168]. 17St George seeks to demonstrate an entitlement to the Surplus Funds on two alternative bases. First, St George contends that the Portfolio Loan Agreement between St George and Ms Murray required her to give a mortgage over the Mosman Property as security for the Portfolio Loan. I have referred to the terms of the Portfolio Loan Agreement Offer and the associated General Terms and Conditions in paragraphs 7-8 above. In my view, although the Portfolio Loan Agreement Offer and the General Terms and Conditions contemplated that a mortgage over the Mosman Property had been or was to be taken by St George prior to Mr Murray drawing down the credit limit under that facility, it did not impose an obligation on Ms Murray to provide that mortgage. Rather, the Portfolio Loan Agreement Offer and General Terms and Conditions provided that St George was not obliged to make funds available unless and until that mortgage had been granted so that, if Ms Murray chose not to provide that mortgage, the relevant funds would not be advanced. 18In my view, an equitable mortgage over the Mosman Property was not created in the absence of an obligation upon Ms Murray to grant that mortgage: Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584, at 594-595; Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194, at 200; Theodore v Mistford Pty Ltd (2005) 221 CLR 612, at 622; [2005] HCA 45. 19Alternatively, St George argues that it can establish its entitlement to the Surplus Funds by reason of an in personam right against Ms Murray, on the basis that any attempt on her part to assert a right to the Surplus Funds would take unconscionable advantage of two errors of St George, namely that: (a) on 20 December 2004, St George gave Ms Murray the certificate of title, mortgage and discharge of mortgage over the Mosman Property by mistake, notwithstanding the loans then secured by the mortgage had not been repaid; or (b) alternatively, on 12 January 2005, St George advanced the Portfolio Loan to Ms Murray without obtaining a further mortgage over the Mosman Property under a mistaken belief that it had already obtained such a mortgage. 20St George characterises its mistake as a unilateral mistake and it acknowledges that it is necessary for it to establish that Ms Murray knew or had reason to know of its mistake in order to obtain relief on that basis: Taylor v Johnson (1983) 151 CLR 422; Tutt v Doyle (1997) 42 NSWLR 10, at 15A. St George submits that Ms Murray must have known of the first mistake on which St George relies, either on the date on which it occurred or shortly thereafter, or alternately at least by 4 February 2005 when she lodged the discharge of mortgage and it was registered. St George submits that Ms Murray must have known of St George's second mistake at least by 15 October 2005 when Westpac registered its mortgage over the Mosman Property. Ms Murray, who appeared in person on the Motion, has not sought to contest those submissions and I find that she knew or had reason to know of these mistakes at least by those dates. 21In these circumstances, I find that it would be unconscionable for Ms Murray to assert unencumbered title to the Mosman Property in circumstances where she knew or had reason to know of these mistakes; and s 58(3) of the Real Property Act would in turn operate inequitably if the funds in Court and interest thereon were paid out to Ms Murray as mortgagor rather than to St George. 22Counsel for St George drew my attention to the decision in State Bank of NSW v Berowra Waters Holdings Pty Ltd (1986) 4 NSWLR 398, where the plaintiff sought orders that the discharge of a mortgage, which had been discharged in error, was invalid and that the recording of that discharge in the register kept pursuant to the Real Property Act 1900 was made in error. Justice Needham declined to grant the orders sought on the ground that the claim was for recovery of land and was barred by s 24 (now s 118) of the Real Property Act . In my view, that decision is not authority that a mortgagee cannot bring a personal claim in equity against a mortgagor where a mortgage is discharged by mistake - indeed, Needham J expressly left open the possibility of alternative claims in observing that "[n]o questions arose of any other action open to the plaintiff, and, accordingly, I make no comment on the matter" (at 404). 23In my opinion, St George's in personam claim against Ms Murray arising from the matters to which I have referred in paragraph 19 above is sufficient to support an entitlement to payment of the Surplus Funds. 24I now turn to the question whether St George has shown that there are no competing claimants to the Surplus Funds which would prevent payment out to St George and, if other claimants may be affected, has shown that it has notified such other claimants. 25The certificate of title for the Mosman Property suggests that, at the time Westpac exercised its power of sale, the potential claimants to the Surplus Funds were two caveators, St George and Mr Mukhi, and Ms Murray as the registered proprietor of the Mosman Property. The Notices of Motion filed by Mr Mukhi and St George seeking access to the Surplus Funds were advertised on 17 May 2011 by Mr Mukhi's solicitors and the evidence establishes that neither Mr Mukhi's solicitors nor St George's solicitors have been advised of any other competing claims to the Surplus Funds. Mr Mukhi's solicitors have advised the Court that Mr Mukhi does not press his claim for the funds in Court and does not oppose the orders sought by St George. By letter dated 16 June 2011 Ms Murray consented to St George receiving the Surplus Funds and she joins in the Consent Order to which I referred in paragraph 2 above. 26In these circumstances, I am satisfied that St George has shown that potentially competing claimants to the funds have had appropriate notice of St George's application. 27I am also satisfied that St George has established, by the default judgment in the District Court proceedings for $602,757.48 inclusive of costs, that its claim substantially exceeds the amount held in Court of $349,821.12 plus any interest earned thereon. 28On the basis of these findings, I am satisfied that St George has established each of the matters necessary to support its application for payment to it of the Surplus Funds and interest thereon under Div 3 of Pt 55 of the Uniform Civil Procedure Rules. 29In its Motion initially filed in these proceedings, St George alternatively sought orders for the transfer of its proceedings in the District Court against Ms Murray to this Court and a charging order over the funds in this Court. In oral submissions, Counsel for St George indicated that the application for this relief would not be pressed if St George were otherwise successful in establishing its claims as equitable mortgagee or based on mistake. Since I have found in favour of St George in respect of its claim as equitable mortgagee, and would alternatively have found in its favour in respect of its claim based on mistake, it is not necessary for such orders to be made. 30I make an order in the form of paragraph 1 of the Consent Order agreed between St George and Ms Murray, namely that all of the funds in Court plus any interest earned thereon be paid out to the Applicant, St George Bank Limited - a Division of Westpac Banking Corporation. 31The Court was also asked to note certain matters which had been agreed between St George and Ms Murray as part of the same agreement as the Consent Order noted above. I do not need to note the matters referred to in paragraphs 2 and 3 of that Consent Order which do not arise having regard to the order which I have made above. I note the matters referred to in paragraph 4 of the Consent Order. ********** 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. Decision last updated: 15 July 2011