Bofinger v Kingsway Group Pty Ltd

The dispute in *Bofinger v Kingsway Group Pty Ltd* concerned the application of equitable principles to a guarantor who had paid off a first mortgage over property that was also subject to a second mortgage. The first mortgagee held the surplus proceeds from a sale of the property after satisfying the first mortgage. The second mortgagee claimed these surplus proceeds, arguing that the guarantor, who had also guaranteed the second mortgage, was not entitled to keep the first mortgage alive to the detriment of the second mortgage. The case was heard in the Court of Appeal of New South Wales.

The central legal issues before the Court of Appeal were whether the rule in *Otter v Vaux* applied to a guarantor in these circumstances, and whether the guarantor was entitled to be subrogated to the rights of the first mortgagee to the extent of the payment made, thereby gaining priority over the second mortgagee. The court also considered whether it would be unconscionable for the first mortgagee to transfer the surplus proceeds to the second mortgagee, given that the guarantor had also guaranteed the second mortgage.

The Court of Appeal held that the rule in *Otter v Vaux*, which prevents a mortgagor from keeping a first mortgage alive against a puisne mortgagee after paying it off, should be extended to a guarantor who has also guaranteed the second mortgage. The court reasoned that the guarantor, by guaranteeing both mortgages, had placed himself in a position where his interests were aligned with those of the second mortgagee in relation to the surplus proceeds. Therefore, it was not unconscionable for the first mortgagee to transfer the surplus to the second mortgagee, as the guarantor was not entitled to use the first mortgage to defeat the rights of the second mortgage which he himself had guaranteed. The court found that the guarantor was not entitled to subrogation in priority to the second mortgagee.

The appeal was dismissed, and the appellant was ordered to pay the costs of the appeal.