Bofinger v Kingsway Group Limited [2009] HCA 44 13 October 2009 S161/2009
ORDER
1.Appeal allowed.
2.Set aside order 1 of the orders of the Court of Appeal of the Supreme Court of New South Wales entered 29 December 2008 and the orders of the Court of Appeal entered 8 July 2009 and in place thereof order that:
(a)appeal allowed;
(b)orders 1 and 2 of the orders made by Young CJ in Eq, entered 18 February 2008 be set aside; and
(c)the separate question stated on 16 November 2006 be answered as follows:
Question: In the circumstances of the case, were the sums of $268,307.33 and $432,712.53 and the securities over Lots 1 and 14 SP75069 held by the second defendant in trust for the plaintiffs as at 8 February 2006?
Answer: In the absence of prior consent or release by Mr and Mrs Bofinger, on 8 February 2006 Kingsway Group Limited was obliged to account to Mr and Mrs Bofinger as a constructive trustee for any dealing by it with the moneys and securities identified in the question for decision in favour of any other party, and to pay equitable compensation to Mr and Mrs Bofinger in respect of the
denial or limitation by such dealing of recoupment from those moneys and securities of moneys paid by Mr and Mrs Bofinger to Kingsway Group Limited, in total $1,519,234.40, from the proceeds of sale of their properties at 407 Willarong Road, Caringbah and 2/41 Bulwarra Street, Caringbah.
3.The first, second, fifth, sixth, seventh and eighth respondents pay the appellants' costs in this Court, in the Court of Appeal and of the proceedings to date in the Equity Division of the Supreme Court of New South Wales.
On appeal from the Supreme Court of New South Wales
Representation
G J McVay with A Tsekouras for the appellants (instructed by Warren McKeon Dickson Solicitors)
D R Sibtain with C K Amato for the first and eighth respondents (instructed by Watson Mangioni)
C M Harris SC with H P T Bevan for the second respondent (instructed by Bransgroves Lawyers)
R J H Darke SC with G K J Rich for the fifth to seventh respondents (instructed by Middletons Lawyers)
Submitting appearance for the third and fourth respondents
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
CATCHWORDS
Bofinger v Kingsway Group Limited
Guarantee and indemnity – Surety – Right to subrogation to securities – Three separate loans made to company, each secured by mortgage over company's property – Appellants guarantors of each loan – Appellants sold personal properties and used proceeds to reduce first loan – First mortgagee exercised power of sale over company's property to satisfy outstanding amounts owing under first loan and transferred surplus to second mortgagee –…
Grounds of appeal
[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.
[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.
[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.
Consideration
[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.
[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.
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AGLC
Bofinger v Kingsway Group Ltd [2009] HCA 44
Case
[2009] HCA 44
Decision Date
CaseChat Overview and Summary
The appeal before the High Court of Australia concerned a dispute between guarantors (the appellants) and a mortgagee (Kingsway Group Limited, the first respondent) and a second mortgagee. The appellants had guaranteed three loans made to a company, B&B Holdings, which were secured by mortgages over the company's property. After the appellants used proceeds from the sale of their personal properties to reduce the first loan, the first mortgagee exercised its power of sale over the company's property. The proceeds of this sale were used to satisfy the outstanding amounts under the first loan, with any surplus being transferred to the second mortgagee. The appellants contended that they were entitled to be subrogated to the rights of the first mortgagee in relation to the securities held by the second mortgagee, to the extent of their payments.
The central legal issues before the High Court were whether the appellants, as guarantors who had made payments towards a secured debt, had a right to subrogation to the securities held by the first mortgagee in priority to puisne mortgagees. The Court was also required to determine whether the terms of the guarantees excluded this right, whether the rule in *Otter v Lord Vaux* applied to prevent the appellants from exercising their right to subrogation, and whether the transfer of the surplus funds by the first mortgagee to the second mortgagee needed to be unconscionable for the doctrine of subrogation to apply. Additionally, the Court considered whether the first mortgagee held the surplus funds as a constructive trustee for the appellants and whether it had an obligation to account for its dealings with those funds.
The High Court allowed the appeal, finding that the first mortgagee was obliged to account to the appellants as a constructive trustee for any dealing with the surplus moneys and securities in favour of any other party, in the absence of prior consent or release from the appellants. The Court held that the first mortgagee was liable to pay equitable compensation to the appellants for the denial or limitation of their recoupment from those moneys and securities. The Court affirmed that the concept of unjust enrichment, while a unifying legal concept, does not operate as a definitive legal principle for direct application in Australian law, and that subrogation and contribution have distinct equitable foundations and operate with different results.
Consequently, the High Court set aside the orders of the Court of Appeal and the primary judge. It ordered that the first mortgagee was a constructive trustee of the surplus funds and securities for the appellants as at 8 February 2006. The Court further ordered the first, second, fifth, sixth, seventh, and eighth respondents to pay the appellants' costs.
Orders
Orders of the court
1. Appeal allowed.
2. Set aside order 1 of the orders of the Court of Appeal of the Supreme Court of New South Wales entered 29 December 2008 and the orders of the Court of Appeal entered 8 July 2009 and in place thereof order that:
(a) appeal allowed;
(b) orders 1 and 2 of the orders made by Young CJ in Eq, entered 18 February 2008 be set aside; and
(c) the separate question stated on 16 November 2006 be answered as follows:
Question: In the circumstances of the case, were the sums of $268,307.33 and $432,712.53 and the securities over Lots 1 and 14 SP75069 held by the second defendant in trust for the plaintiffs as at 8 February 2006?
Answer: In the absence of prior consent or release by Mr and Mrs Bofinger, on 8 February 2006 Kingsway Group Limited was obliged to account to Mr and Mrs Bofinger as a constructive trustee for any dealing by it with the moneys and securities identified in the question for decision in favour of any other party, and to pay equitable compensation to Mr and Mrs Bofinger in respect of the
denial or limitation by such dealing of recoupment from those moneys and securities of moneys paid by Mr and Mrs Bofinger to Kingsway Group Limited, in total $1,519,234.40, from the proceeds of sale of their properties at 407 Willarong Road, Caringbah and 2/41 Bulwarra Street, Caringbah.
3. The first, second, fifth, sixth, seventh and eighth respondents pay the appellants' costs in this Court, in the Court of Appeal and of the proceedings to date in the Equity Division of the Supreme Court of New South Wales.
Background
Background to the litigation
The primary case of the appellants is that the first mortgagee had distributed the surplus in breach of the constructive trust in which the surplus was held for them as sureties. The reasons which follow lead to a conclusion which, without going to the length of accepting all of the appellants' submissions, favours allowing the appeal.The agreed facts Something further now should be said respecting the agreed facts. These include attached documents and correspondence. There emerges what may be an incomplete account of events but it is upon this basis that the parties choose to present the question for separate determination. Part 28 r 28.2 of the Uniform Civil Procedure Rules 2005 empowered the Supreme Court to make orders for the decision of any question before trial. In such a proceeding care is to be taken that agreed facts are stated with precision[27]. This is important, not the least because the parties to such a proceeding will be bound by the determination of the question and will not be at liberty subsequently in the same proceedings to advance argument or adduce further evidence directed to showing that the separate question was wrongly determined[28].[27]Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334 at 357 [50]; [1999] HCA 9. [28]O'Toole v Charles David Pty Ltd (1991) 171 CLR 232 at 244‑247, 260, 298; [1991] HCA 14. B & B Holdings carried on business as a real estate developer and on land ("the Enmore land") in an inner suburb of Sydney constructed 17 town houses and one house. It was placed in liquidation by February 2006 and the joint liquidators are the fourth respondent in this Court. They have entered a submitting appearance. To finance the purchase of the Enmore land and the construction of the buildings thereon, in 2003 B & B Holdings borrowed $7,062,000 from the first mortgagee, Kingsway Group Limited. The interest rate initially was nine percent per annum. Then, as the project proceeded, B & B Holdings borrowed $1,400,000 from Rekley Pty Limited, the second mortgagee, and finally $350,000 from Mr John Edward Skehan, the third mortgagee. The indebtedness under these arrangements was secured in each case by registered mortgages against the title to the Enmore land and a property of B & B Holdings at Nullaburra Road, Caringbah. (There also appears to have been a fixed and floating charge in favour of the first mortgagee over the assets of B & B Holdings, but nothing turns upon this.) The fifth, sixth and seventh respondents ("the Solicitors") carried on their practice at 575 Kingsway, Miranda under the name "Willis and Bowring Solicitors". They acted for the first mortgagee and for the second mortgagee and, at least in February 2006, for the third mortgagee as well. The first mortgagee is Kingsway Group Limited but throughout this period was named "Willis and Bowring Mortgage Investments Limited" and carried on business also at 575 Kingsway. The fifth respondent, one of the Solicitors, was a director of the first mortgagee. The eighth respondent was an officer of the first mortgagee. The third mortgagee, the third respondent, entered a submitting appearance in this Court.
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
GUMMOW, HAYNE, HEYDON, KIEFEL AND BELL JJ
Kearney J also referred to the implied indemnity by the principal debtor which reflected the ultimate liability of that party in cases of suretyship[61]. It was that ultimate liability of B & B Holdings which in the present case founded the application of the doctrine of subrogation in favour of the appellants. Kearney J contrasted the right of subrogation with the right of contribution between those, such as the present appellants, who are subject to co‑ordinate liabilities or common obligations. There equity is moved by concern that the common exposure of the contributors to the creditor and the equality of burden not be defeated by the accident or chance that the creditor select for recovery one or some rather than all of the contributors[62].[61](1985) 3 NSWLR 403 at 405.[62]Friend v Brooker (2009) 83 ALJR 724 at 732 [38]; 255 ALR 601 at 609‑610.Unjust enrichment and the English decisions The appeal to this Court in Friend v Brooker[63], which concerned the equitable doctrine of contribution, was correctly conducted on the footing that the concept of unjust enrichment was not a principle supplying a sufficient premise for direct application in a particular case. The same is true of the equitable doctrine of subrogation. The oral submissions for the Solicitors correctly recognised this.[63](2009) 83 ALJR 724 at 728 [7]‑[8]; 255 ALR 601 at 604. In a passage in their reasons in David Securities Pty Ltd v Commonwealth Bank of Australia[64], Mason CJ, Deane, Toohey, Gaudron and McHugh JJ rejected the submissions that in Australian law unjust enrichment was more than "just a concept" and that it was "a definitive legal principle according to its own terms". The use of the phrase "unifying legal concept" earlier in the joint reasons[65] must be understood with what was said in that later passage[66]. In the years which have followed the Court has reaffirmed this position[67] and all other Australian courts are bound accordingly.[64](1992) 175 CLR 353 at 378‑379; [1992] HCA 48.[65](1992) 175 CLR 353 at 375. [66]Cf Ford (by his tutor Watkinson) v Perpetual Trustees Victoria Ltd (2009) 257 ALR 658 at 684.[67]Farah Constructions Pty Ltd v Say‑Dee Pty Ltd (2007) 230 CLR 89 at 156 [151] per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ; Lumbers v W Cook Builders Pty Ltd (In liq) (2008) 232 CLR 635 at 664‑665 [83]‑[85] per Gummow, Hayne, Crennan and Kiefel JJ; [2008] HCA 27. A not dissimilar fate met the attempt to adopt "proximity" as the "unifying theme" of the categories of case recognising a duty to take reasonable care to avoid a reasonably foreseeable risk of injury to another[68].[68]See Bryan v Maloney (1995) 182 CLR 609 at 619; [1995] HCA 17, and the later decisions collected in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 at 528‑529 [18]; [2004] HCA 16. The concept of unjust enrichment may provide a means for comparing and contrasting various categories of liability. Reference has been made to Cochrane v Cochrane[69] and this provides an example. Subrogation may be seen as preventing the unjust enrichment of the principal debtor who otherwise might escape carriage of ultimate liability and contribution prevents one of equal obligors bearing more than its share of the burden. The two doctrines do not let matters lie where they would fall if the carriage of risk between the various actors involved were to be left entirely to be worked out within the limits of their contractual obligations. But as Cochrane shows, and as explained above, the two doctrines have different foundations in equity and operate with different results.[69](1985) 3 NSWLR 403.
Ratio Decidendi
Legal Principle Established
Established by:
GUMMOW, HAYNE, HEYDON, KIEFEL AND BELL JJ