Callisi Pty Ltd v Sterling & Freeman Advisory Pty Ltd
[2023] VSC 300
•6 June 2023
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2021 04840
| CALLISI PTY LTD (ACN 077 538 106) | Plaintiff |
| and | |
| STERLING & FREEMAN ADVISORY PTY LTD (ACN 606 745 340) & ANOR | Defendants |
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JUDGE: | M Osborne J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 2 February 2023 |
DATE OF JUDGMENT: | 6 June 2023 |
CASE MAY BE CITED AS: | Callisi Pty Ltd v Sterling & Freeman Advisory Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2023] VSC 300 |
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EQUITY & SECURITIES – Marshalling – Apportionment – Whether second mortgagee has equity to require marshalling or apportionment – Whether fact that second mortgagee also has interest in the second property bars claim – Whether fact that first mortgagee has discharged the mortgage over second property bars claim – Whether second mortgagee over second property is prejudiced such that neither marshalling nor apportionment is available – National Bank of New Zealand Ltd v Caldesia Promotions Ltd (1996) 3 NZLR 467 – Commonwealth Trading Bank v Colonial Mutual Life Assurance Society Ltd (1970) 26 FLR 338 – Mir Bros Projects Pty Ltd v Lyons [1977] 2 NSWLR 192 – Barnes v Racster (1842) 17 CCL 40 – Bancorp Investments (Fund 2) Ltd v Bhugra Holdings Ltd [2006] BCFC 893 – Burgess v Hill [2019] VSCA 94 – Chase Corporation (Australia) Pty Ltd v North Sydney Brick and Tile Co Ltd (1994) 35 NSWLR 1.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | D Williams KC | Davies Moloney |
| For the First Defendant | A Kirby | Coterminous Legal |
HIS HONOUR:
Introduction
This case requires consideration of the equitable doctrine or principles of ‘marshalling’ and ‘apportionment’, or as it is sometimes referred, ‘marshalling by apportionment’. In Across Australia Finance Pty Ltd v Kalls (‘Across Australia Finance’) Bryson AJ observed that ‘the law of marshalling is not highly defined or clearly stated’.[1] To similar effect, the current authors of Meagher, Gummow and Lehane’s Equity: Doctrine and Remedies (‘Equity: Doctrine and Remedies’) note that ‘various authorities including recent English appellate authorities display a measure of ambivalence as to the underlying nature of the doctrine’.[2] In a helpful article published in Butterworth’s Conveyancing Bulletin, entitled ‘Marshalling’, the author, Tony Schumacher observed that the textbooks on equity ‘state bare principle and are notable for their lack of exposition on the practical application of the principles’.[3] Moreover, often the facts of relevantly decided cases are complicated with many of the key authorities decided centuries ago. As a result, the necessary analysis is not free of complexity. It is useful at the outset to set out some simple examples which illustrate the application of the principles.
[1]Across Australia Finance Pty Ltd v Kalls (2008) 14 BPR 26, [22] (Bryson AJ) (‘Across Australia Finance’).
[2]JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane’s Equity: Doctrine and Remedies (LexisNexis, 5th ed, 2015) [11.010] (‘Equity: Doctrines and Remedies’).
[3]Tony Schumacher, ‘Marshalling’ (1989) 5(8) Butterworths Conveyancing Bulletin 89.
A owns Blackacre and Whiteacre. Each is valued at a little over $1 million. A mortgages both properties to Lender 1, securing an advance of about $1 million. Subsequently, A mortgages Blackacre alone in favour of Lender 2, securing an advance of about $500,000.
A is in financial distress and defaults under the two mortgages to Lender 1 and the mortgage to Lender 2. A also owes money to numerous unsecured creditors.
If Lender 1 was to exercise its security rights over Whiteacre, all things being equal, the proceeds of sale will be sufficient to discharge Lender 1’s debt. Lender 2 will be content because it can then exercise its security rights over Blackacre, which will facilitate repayment of its advance.
Lender 1, however, is minded to exercise its security rights over Blackacre. The proceeds of sale will, all things being equal, likewise discharge Lender 1’s debt. Lender 2’s security over Blackacre will however effectively be rendered worthless as a result. Lender 2 may have to proceed against A for its debt and then seek to execute any judgment obtained against A by execution against A’s assets which will include Blackacre free of the mortgage debt to Lender 1 but Lender 2’s debt will rank equally with debts owed to a raft of other unsecured creditors.
Lender 2 would prefer that Lender 1 enforces its security rights against Whiteacre, so each can have their secured debts repaid. But as a general proposition, Lender 1, as the priority security holder, is able to realise its securities in whatever order it chooses, notwithstanding that its choice may be detrimental to Lender 2 and confer no additional benefit on Lender 1.
But Lender 2 may still have a remedy. In certain cases, equity intervenes by the marshalling doctrine, which allows Lender 2 to resort to Whiteacre to the extent to which Lender 2’s security over Blackacre has been exhausted via a process akin to subrogation, so as to confer on Lender 2 the same priority that Lender 1 had against Whiteacre.
In many cases, however, a third lender comes into the picture. Assume that Lender 3 has also advanced $500,000 to A upon security of a mortgage over Whiteacre alone. Thus, the security position is that Lender 1 ranks first, with mortgages over both Blackacre and Whiteacre securing its $1 million debt. Lender 2 ranks second over Blackacre with its mortgage securing its $500,000 debt, but has no security over Whiteacre. Lender 3’s position mirrors that of Lender 2; Lender 3 ranks second over Whiteacre and its mortgage secures its $500,000 debt, but has no security over Blackacre.
If Lender 1 chooses to exercise its security rights over Blackacre, Lender 3 will be content. Any repayment of Lender 1’s debt will result in the discharge of Lender 1’s ranking security over Whiteacre, effectively elevating Lender 3’s security so that it ranks first.
Unlike the earlier scenario involving only Lender 1 and Lender 2, equity will not permit Lender 2 to rely on the marshalling of securities in such a way as to allow Lender 2 by the same subrogation type process to stand in Lender 1’s shoes with respect to Lender 1’s interest in Whiteacre, because to do so would prejudice Lender 3.
If Lender 1 chooses to exercise its security rights over Whiteacre, Lender 2 will be content for the same reasons as Lender 3 would be if Lender 1 exercised rights against Blackacre. In such a case the marshalling of securities will not be permitted at the suit of Lender 3, because to do so will prejudice Lender 2.
If it is the case that Lender 1 is able to realise its first ranking securities in whatever manner it wishes, are the fates of Lender 2 and Lender 3 simply left to the whim of Lender 1?
According to the plaintiff, Callisi Pty Ltd (‘Callisi’), the answer is no. It submits that while Lender 1 may exercise rights as mortgagee as Lender 1 pleases, the loss to the subsequent security holders will not lie where Lender 1’s actions make it fall. It submits that the proper approach is that Lender 1’s debt is apportioned rateably between Blackacre and Whiteacre according to their value and then the competing subsequent equities of Lender 2 and Lender 3 are adjusted. Callisi submits that in a case such as that in as the example above, the debt owed to Lender 1 of $1 million is treated as if it was apportioned over Blackacre and Whiteacre according to their respective values. In a case where both properties are valued at $1 million, the $1 million debt is apportioned as if $500,000 is repaid from the exercise of Lender 1’s securities over each of Blackacre and Whiteacre. In the simple case where the debts and property values are as set out in the example, Lenders 1, 2 and 3 will all be content. Of course, in many cases, that will not be so.
This process is generally considered as a species of marshalling and is sometimes referred to as ‘marshalling by apportionment’. Some describe it as an application of the doctrine of contribution.
Callisi submits that in the present case, it is entitled to invoke equity’s assistance so as to invoke a like remedy. Callisi held a second ranking mortgage over a property at 3/1 Irving Road, Toorak (‘Toorak Property’). The first ranking mortgage was held by Sterling & Freeman Advisory Pty Ltd (‘Sterling’), the first defendant. Sterling also held a first ranking mortgage over another property at 606/576-578 St Kilda Road, Melbourne (‘St Kilda Road Property’), securing the same debt as secured by the mortgage over the Toorak Property.
Sterling exercised its security rights over the Toorak Property and procured repayment of its debt from the proceeds of sale of that property. Callisi’s second ranking mortgage over the Toorak Property was rendered valueless as a result. Sterling then discharged its first mortgage over the St Kilda Road Property. Sterling’s choice to exercise its security rights over the Toorak Property worked to the disadvantage of Callisi as the holder of the second mortgage over the Toorak Property and to the advantage of the holder of the second mortgage over the St Kilda Road Property.
The St Kilda Road Property has also now been sold and the second mortgagee of that property has had its debt repaid from the proceeds of sale.
Callisi submits that Sterling’s debt, although repaid from the proceeds of sale of the Toorak Property, in fact has to be apportioned over the Toorak Property and the St Kilda Road Property by reference to their respective values, with the competing equities of Callisi as the second mortgagee over the Toorak Property and the holder of the second mortgagee over the St Kilda Road Property adjusted accordingly.
As it happens, the holder of the second mortgage over the St Kilda Road Property is also Sterling, but its interest in the subordinate security over the St Kilda Road Property arose in a different transaction and secured a different debt to that secured by its first mortgage over the Toorak Property and the St Kilda Road Property. Both parties advanced their submissions in this case on the basis that this makes no difference to the analysis and that the same result should follow as if Sterling’s second mortgage over the St Kilda Road Property was held by a third party (for convenience, Lender 3).[4]
[4]Sterling, qua the holder of the Sterling St Kilda Road Mortgage, is in the position of Lender 3 in the example above (as well as being in the position of Lender 1).
There is another relevant factor; Callisi also has a secured interest in the St Kilda Road Property, albeit one which is third ranking and subordinate to Sterling’s interest qua Lender 3.
In this proceeding therefore, Sterling wears two hats; one, as the priority security holder over both the Toorak Property and the St Kilda Road Property, which exercised its security rights over the Toorak Property alone then discharged its securities, including that over the St Kilda Road Property; the second, in a role analogous to Lender 3 in the earlier hypothetical scenario.
Regardless of the hat it wears, Sterling submits that Callisi is not entitled to any relief; it says that marshalling only applies where the disappointed second mortgagee of the first property has no interest in the second property; thus, it says that Callisi’s third ranking security over the St Kilda Road Property prevents its claim for relief.
Secondly, it says that marshalling will not apply where it will prejudice a subsequent encumbrance, as it will here, as Sterling will be prejudiced qua Lender 3.
Thirdly, it says that because Sterling’s first mortgage over the St Kilda Road Property has been discharged, there is no security on foot in respect of whose interest Callisi can be subrogated.
The facts in more detail
Until their recent sale, SM Kelly Pty Ltd (‘SMK’) was the registered proprietor of the Toorak Property and the St Kilda Road Property.
The Toorak Property was subject to a first mortgage (‘Toorak First Mortgage’) which secured obligations arising under a loan agreement for $1.47 million (‘the First Loan Agreement’) entered into by SMK with Permanent Mortgages Pty Ltd (‘Permanent’) on or about 16 June 2017. The Toorak First Mortgage was registered on 3 July 2017.
At the same time, SMK entered into a second loan agreement with Permanent, pursuant to which Permanent advanced $910,000 (‘the Second Loan Agreement’) on security of a first mortgage over the St Kilda Road Property (‘the St Kilda Road First Mortgage’). The St Kilda Road First Mortgage was registered on 3 July 2017.
The debts and securities were cross-collateralised, such that a default under the First Loan Agreement constituted a default under the Second Loan Agreement and the St Kilda Road First Mortgage and vice versa.
On or about 26 April 2018, Kazzi Family Holdings Pty Ltd (‘Kazzi’) advanced the sum of $780,000 to SMK. The loan was secured by a mortgage over the Toorak Property which was registered on 14 May 2018 (‘the Toorak Second Mortgage’). By the terms of the Toorak Second Mortgage, the mortgagor, SMK, also charged other assets including all real estate owned by SMK, which included the St Kilda Road Property.
On or about 18 June 2018, Permanent assigned all its rights, interest and remedies under the Second Loan Agreement and transferred the St Kilda Road First Mortgage to Perpetual Trust Company (‘PTC’). The transfer of the St Kilda Road First Mortgage was registered on 18 June 2018.
On or about 25 July 2018, Standby Nominees Pty Ltd advanced SMK the sum of $75,000, secured by a registered mortgage over the St Kilda Road Property.
On or about 31 August 2018, Sterling entered into a loan agreement with SMK in respect of an advance by Sterling of up to $220,000 (‘Sterling 2018 Loan Agreement’), secured by, inter alia, a mortgage over the Toorak Property (‘Sterling Toorak Mortgage’) and a mortgage over the St Kilda Road Property (‘Sterling St Kilda Road Mortgage’).
On or about 23 October 2018, Sterling and SMK varied the Sterling 2018 Loan Agreement, increasing the upper limit of the advance to SMK to $320,000. The funds advanced (‘Sterling 2018 Debt’) were used to pay out the loan from Standby Nominees Pty Ltd and its mortgage was discharged. Part of the advance was used to repay part of the loan owing to Kazzi.
On 25 October 2018, Kazzi assigned the balance of its debt and transferred the Toorak Second Mortgage to Callisi. The transfer of the Toorak Second Mortgage was registered on 5 December 2018.
On 1 November 2018, Sterling lodged a caveat on the title to the Toorak Property, claiming an interest as mortgagee pursuant to the Sterling Toorak Mortgage, which remained unregistered. On the same day, Sterling lodged the Sterling St Kilda Road Mortgage which upon registration ranked second behind the St Kilda Road First Mortgage which was now registered in the name of PTC.
On 2 November 2018, Australian Secure Capital Fund Pty Ltd (‘ASCF’) lodged a caveat on the title to the Toorak Property, claiming an interest as chargee pursuant to a charge granted 14 August 2018.
On 16 November 2018, ASCF lodged a caveat on the title to the St Kilda Road Property claiming an interest as chargee pursuant to an agreement with SMK dated 14 August 2018.
On or about 7 February 2019, Permanent assigned all its rights, interests and remedies under the First Loan Agreement and the Toorak First Mortgage to PTC. The transfer of the Toorak First Mortgage was registered on 7 February 2019.
On 7 March 2019, Callisi lodged a caveat over the St Kilda Property claiming an interest as mortgagee arising pursuant to a mortgage dated 26 April 2018.
On 13 March 2019, Sterling exercised its rights under the Sterling 2018 Loan Agreement to appoint a receiver to the property of SMK. The receiver took possession of the St Kilda Road Property.
On 26 September 2019, PTC obtained a default judgment against SMK; obtaining orders for possession of both the Toorak Property and the St Kilda Road Property and judgment for the debt in the sum of $2,482,371.73.
On or about 24 October 2019, Sterling took an assignment of PTC’s interest in the judgment (‘the Assigned Debt’), the First Loan Agreement and the Second Loan Agreement and transfers of the Toorak First Mortgage and the St Kilda Road First Mortgage. The transfers were registered on 25 October 2019.
On 31 October 2019, Callisi obtained an order for possession of the Toorak Property and judgment for the unpaid debt of $910,452.66, plus interest of $229,483.99 together with standard costs.
Subsequently, Sterling commenced a separate proceeding for possession of the Toorak Property alone and obtained an order for possession on 18 November 2019. Due to various factors associated with the COVID-19 pandemic, Sterling was unable to take steps to enforce its order for possession.
By contract of sale entered into on 30 October 2021, Sterling as mortgagee in possession (under the Toorak First Mortgage) sold the Toorak Property for $3,250,000 with settlement to occur on 28 January 2022.
As at 10 January 2022, Sterling was owed $3,051,616.97 pursuant to the Assigned Debt, and $1,751,561.60 pursuant to the Sterling 2018 Loan Agreement.
The precise amount owing to Callisi at that date is unclear on the evidence but it would appear to be around $1,500,000 (excluding standard costs), noting that Callisi had obtained judgment against SMK on 31 October 2019 for an amount inclusive of interest to the date of judgment for $1,139,936.60 and for standard costs.
On 28 February 2022, the St Kilda Road Property was sold by the receiver on behalf of SMK for $1,180,000.
The securities encumbering the two properties ranked as follows:[5]
[5]It is assumed that the unregistered interests the subject of the caveats exist on the grounds set out, that priority arises by reference to the asserted date of creation, and that any failure to lodge a caveat does not amount to postponing conduct.
Toorak Property (value $3,250,000)
First, Sterling, pursuant to the Toorak First Mortgage granted in favour of Permanent and registered on 3 July 2017, then the subject of transfer to PTC registered on 7 February 2019 and a further transfer to Sterling registered on 25 October 2019.
Second, Callisi, pursuant to the Toorak Second Mortgage granted in favour of Kazzi and registered on 14 May 2018, then the subject of transfer to Callisi registered on 5 December 2018.
Third, ASCF, pursuant to its charge dated 14 August 2018 notified by caveat lodged 2 November 2018.
Fourth, Sterling, pursuant to the unregistered Sterling Toorak Mortgage granted 31 August 2018 pursuant to the Sterling 2018 Agreement.
St Kilda Road Property (value $1,180,000)
First, Sterling, pursuant to the St Kilda Road First Mortgage granted in favour of Permanent and registered on 3 July 2017, then the subject of transfer to PTC registered on 18 June 2018 and a further transfer to Sterling registered on 25 October 2019.
Second, Sterling, pursuant to the Sterling St Kilda Road Mortgage, registered on 1 November 2018.
Third, Callisi, pursuant to its charge over the St Kilda Road Property contained in the Toorak Second Mortgage dated 26 April 2018 notified by caveat lodged 7 March 2019.
Fourth, ASCF, pursuant to its charge dated 14 August 2018 notified by caveat lodged 2 November 2018.
The January 2022 application for injunctive relief
In early January 2022, Callisi applied for interlocutory injunctive relief seeking in effect to restrain settlement of the sale of the Toorak Property save upon terms that Sterling would take only around $1.5 million of the proceeds which was the amount that Callisi believed that Sterling was owed under the Toorak First Mortgage.
The application was dismissed. It was made in the mistaken belief that the First Loan Agreement and the Toorak First Mortgage were not cross-collateralised with the Second Loan Agreement and the St Kilda Road First Mortgage, and understated the amount of the debt secured by the Toorak First Mortgage.
In the course of argument, the Court noted that the equitable principle of marshalling may be relevant but insofar as it was, the doctrine did not operate in such a way as to prevent Sterling from realising its securities in any order it chose.[6]
[6]Mir Bros Projects v Lyons [1977] 2 NSWLR 192 (‘Mir Bros’).
Events after the January 2022 application
In the result, the sale of the Toorak Property settled and Sterling received the entirety of the net proceeds of sale of $3,147,771.10 and applied the proceeds in partial repayment of its debt then owing of $3,298,039.69, and discharged the Toorak First Mortgage. The puisne secured parties, most relevantly, Callisi as the holder of the Toorak Second Mortgage, received nothing. The sale proceeds were applied fully in reduction of the Assigned Debt.
Notwithstanding a relatively small shortfall on the Assigned Debt, on 23 February 2022, Sterling discharged the St Kilda Road First Mortgage. Upon the discharge of that mortgage, Sterling nevertheless became the senior mortgagee in any event due to the Sterling St Kilda Road Mortgage which became the highest ranking security, having priority over all subsequent encumbrances, including Callisi’s unregistered charge.
The Sterling 2018 Debt secured by the Sterling St Kilda Road Mortgage which now totalled $1,751,561.60 is a different debt to the Assigned Debt owed to Sterling which prior to discharge was secured by the Toorak First Mortgage and the St Kilda Road First Mortgage.
Settlement of the sale of the St Kilda Road Property took place on about 29 August 2022; the entirety of the net proceeds were paid to Sterling, which had become the senior security holder by reason of the Sterling St Kilda Road Mortgage which had previously ranked second behind the St Kilda Road First Mortgage which had been discharged shortly after settlement of the sale of the Toorak Property. The proceeds were received by Sterling and applied in part repayment of the Sterling 2018 Debt. The Sterling St Kilda Mortgage was discharged at settlement.
Callisi’s complaint and Sterling’s response
Callisi notes that it was open to Sterling to obtain repayment of the Assigned Debt by exercising its security rights over either or both of the Toorak Property and the St Kilda Road Property. It argues that had it first exercised its security rights over the St Kilda Road Property, it could have applied the net proceeds of sale of circa $1,200,000 in partial satisfaction of the Assigned Debt of $3,298,039,[7] and then applied the sales proceeds of the Toorak Property as were necessary to fully repay the Assigned Debt (assume say $2,098,000) and discharge the Toorak First Mortgage, leaving a balance of say $1,049,732 for Callisi as the holder of the Toorak Second Mortgage.
[7]The actual debt was not clear on the evidence, for simplicity this figure is used; see above [53] and [54].
Instead, by applying the entirety of the proceeds of the sale of the Toorak Property in repayment of the Assigned Debt, Sterling left nothing for Callisi as the holder of the Toorak Second Mortgage. Callisi complains that the sale of the Toorak Property then resulted in the entirety of the proceeds of sale of the St Kilda Road Property being available for the next ranking security holder over the St Kilda Road Property which was Sterling, which held the Sterling St Kilda Road Mortgage.
Callisi complains that the effect of Sterling’s choice to obtain repayment of the Assigned Debt by exercising its security rights only over the Toorak Property and not the St Kilda Road Property, rendered worthless Callisi’s Toorak Second Mortgage, which had the effect of putting Callisi in the position akin to that of an unsecured creditor of SMK.[8]
[8]Because the Toorak Second Mortgage was worthless as was Callisi’s third ranking charge over the St Kilda Road Property.
Callisi initially described its claim as one based on the equitable right or principle of marshalling which gave rise to an entitlement to apportionment although in oral submissions described the claim more directly as one of apportionment or marshalling by apportionment. However it is characterised, it contends that Sterling is required to apportion the Assigned Debt of $3,298,039 rateably over the value of the Toorak Property ($3,250,000) and the St Kilda Road Property ($1,180,000). It notes that the Assigned Debt represents 74.45% of the total value of the securities ($3,298,039.69/$4,430,000).
Callisi submits that equity proceeds on the basis of achieving the same outcome as if Sterling had adopted that approach. Thus, if Sterling had applied 74.45% of the value of the Toorak Property to the Assigned Debt, it would have applied $2,419,625 of the proceeds of sale in partial discharge of the Assigned Debt with the balance necessary to discharge the first mortgage debt of $879,414.69 drawn from the proceeds of sale of the St Kilda Road Property. That in turn would have left $830,375 available of the proceeds of the Toorak Property which could have been used to partially discharge the Toorak Second Mortgage. Callisi says that it is entitled to marshal the St Kilda Road First Mortgage to the extent necessary to achieve an equitable outcome which, in the present circumstances, requires Sterling to pay to it the sum of $830,375.
Sterling denies that marshalling has any role to play. First, it says that the principle only has application where the disappointed puisne mortgage, here Callisi as the holder of the Toorak Second Mortgage, has no security over the second property. Because Callisi has security over the St Kilda Road Property, Sterling says marshalling does not apply. Secondly, Sterling argues that the principle will not be applied where its application would prejudice a puisne encumbrancer over the second property, here Sterling as the holder of the Sterling St Kilda Road Mortgage. Thirdly, it submits that had the principle been otherwise applicable its effect would have been to subrogate Callisi to the mortgagee’s interest in the St Kilda Road First Mortgage, thus giving it priority over lower ranking securities such as the Sterling St Kilda Road Mortgage. Because the St Kilda Road First Mortgage has been discharged there is no interest of Sterling in respect of which Callisi can be subrogated which gives it priority over the interest of the holder of the Sterling St Kilda Road Mortgage.
Although the facts were not in dispute, the legal issues which arise from the undisputed facts are of some complexity.
Callisi had some difficulty in framing its claim in the lead up to trial, resulting in various amendments and a summary dismissal and alternative strike out application which in the end was adjourned for hearing at the same time as the trial of the proceeding.
Part of the complexity arises because Sterling was both the senior security holder of the Toorak Property and the St Kilda Road Property as the holder of the Toorak First Mortgage and the St Kilda Road First Mortgage which secured the Assigned Debt and separately is the holder of the subordinate Sterling St Kilda Road Mortgage which secured the Sterling 2018 Debt. The choice by Sterling in its former capacity as to the order in which it realised its securities and applied the proceeds is the very reason for this proceeding, but it is Sterling’s latter interest which is as relevant to the way in which Callisi brings its case. As noted above, in argument both parties submitted that it is convenient to consider the arguments on the basis that the Sterling St Kilda Road Mortgage was held by a third party.[9]
[9]Such as Lender 3 in the earlier cited example.
Marshalling and apportionment
In Sykes and Walker’s The Law of Securities, the authors state:[10]
[T]he primary application of the marshalling principle is one where a mortgagee (the first mortgagee) holds securities over two properties both belonging to the one owner, and another mortgagee (the second mortgagee) has security over one of them only. In that instance, the second mortgagee has the right to say that the first mortgagee should, other things being equal, satisfy herself or himself out of the property to which he or she alone has right of recourse and if, contrary to such principle, the first mortgagee proceeds against the other property, then the second mortgagee is entitled to claim against the property which is solely mortgaged to the first mortgagee to the extent of any insufficiency caused by the first mortgagee’s action. In its most straightforward application, where A is the owner of both Blackacre and Whiteacre and A mortgages Blackacre and Whiteacre to B, and then only Blackacre to C, Blackacre is C’s only security. The doctrine assumes that B should normally resort to Whiteacre and if it does not, and exercises security rights over Blackacre so that the latter property is rendered inadequate to pay C, C can treat herself or himself as a mortgagee of Whiteacre to the extent of that inadequacy.
[10]Edward I Sykes and Sally Walker, The Law of Securities (Law Book Company, 5th ed, 1993) 182 (‘The Law of Securities’).
In Snell’s Equity, the doctrine is explained in this way:[11]
[W]here there are two creditors of the same debtor, the creditor having a right to resort to two funds of the debtor for payment of his debt, and the other having a right to resort to one fund only, the court will ‘marshall’, that is to say arrange for funds so that both creditors are paid as far as possible. A person having resort to two funds shall not by his choice disappoint another having one fund only.
[11]John McGhee, Snell’s Equity (Thomson Reuters, 34th ed, 2022) [39-085].
In Equity: Doctrine and Remedies, the authors describe the purpose of marshalling as ‘prevent[ing] the caprice of the double claimant (A) from disappointing the single claimant (B)’ and ensuring that ‘a person having resort to two funds shall not by his choice disappoint another having one only’ before going on to explain the essence of the doctrine as one where if the double claimant’s claim is fully satisfied from Fund (1), Fund (2) is not fully released to creditors and equity allows the single claimant (B) to have the benefit of a double claimant (A)’s security.[12]
[12]Equity: Doctrine and Remedies (n 2) [11-005].
The authors note that the doctrine does not interfere with A’s exercise of security rights, but by a species of subrogation, places B in the place of A, so far as is necessary to permit B to proceed against Fund (2) to the extent to which Fund (1) would have satisfied B’s claim but for its depletion by A. Thus, if A’s claim for $1,000 is satisfied by exhausting Fund (1), equity permits B’s claim to be satisfied from Fund (2) (and that) on the taking of accounts between mortgagor and first and second mortgagee, since equity regards as done that which ought to be done, the accounts will be taken on the footing that the first mortgagee has marshalled the securities as equity requires.
Importantly, however, the single claimant’s right to marshal is not allowed to prejudice a third party (even a volunteer) provided the third party takes without notice of the mortgage.
In Dolphin v Aylward, the common mortgagor mortgaged Blackacre and Whiteacre to X, settled Whiteacre on Y who took as a volunteer, and then gave a second mortgage of Blackacre to Z.[13] The House of Lords held that Z could not marshal the double mortgage against Whiteacre because this would prejudice Y who, although a volunteer, took without notice of the mortgage to X.
[13][1870] LR 4 H L486.
To related effect here, Sterling argues that the right of the single claimant cannot be allowed to prejudice mortgagees of one of the other estates. Thus, assuming that Callisi is properly to be regarded as a single claimant (which Sterling does not accept), Sterling submits that any equity in favour of Callisi which allows it to marshal the first mortgages held by Sterling over the Toorak Property and the St Kilda Road Property will prejudice Sterling qua holder (as Lender 3) of the Sterling St Kilda Road Mortgage and is not permissible.[14]
[14]Gibson v Seagrim (1855) 52 ER 741; 20 Beav 614, 619 (‘Gibson’); Flint v Howard [1893] 2 Ch 54, 72.
This submission also gains some support from Barnes v Racster.[15] In that case, Racster mortgaged the property (‘Foxhall’) to Barnes in 1792 and to Hartwright in 1795. In 1800, he mortgaged Foxhall and another property (‘No 32’) to Barnes securing both the original advance from Barnes and a further advance. In 1804 he mortgaged Foxhall and No 32 to Williams. Each subsequent encumbrancee took with notice of prior encumbrances. Subsequently Racster defaulted. A sale of No 32 would have been sufficient to pay out the entirety of Barnes’s debt. The issue in the case was whether Hartwright could as against Williams, compel Barnes to resort to No 32 which would have left Hartwright as the ranking security holder over Foxhall.
[15](1842) 17 CCL 40 (‘Barnes v Racster’).
The Vice-Chancellor, Sir JL Knight Bruce, commenced his analysis by considering the position without reference to the two subsequent encumbrances to Hartwright and Williams and observed that the effect of the security granted in 1800 was to make No 32 and Foxhall liable pari passu and rateably to Barnes in respect of the two charges.
Proceeding from that starting point, the Vice-Chancellor considered that Hartwright had no right in or interest in No 32, or any equity enforceable against Racster which would prevent Racster from dealing with No 32. On that basis, Hartwright could not compel Barnes to resort to No 32; where throwing the entirety of the mortgage over to the fund that Hartwright did not have an interest in would prejudice Williams. Marshalling was not permitted.
But the Vice-Chancellor’s rejection of Hartwright’s claim continued:
I think that Hartwright had not any equity to prevent Racster from doing what he did, namely, carrying his estate to market or selling or pledging it as charged but according to the tenor of the security of 1800, that is, rateably and pari passu with Foxhall.
Thus, the Vice-Chancellor concluded that Hartwright and Williams stood on equal footing; Barnes’ debt was to be paid out of the respective proceeds of No 32 and Foxhall pari passu and rateably according to the amounts with residue of No 32 applied towards paying Williams. This meant that Hartwright was not left without remedy; the charge of the double interest holder (Barnes) was apportioned rateably between the two properties according to the value of them and the competing equities of Hartwright and Williams were adjusted accordingly.[16]
[16]Equity: Doctrines and Remedies (n 2) [11-185]; Bugden v Bignold (1843) 2 Y & CCh Cas 377; 63 ER 167; Gibson (n 14).
Applied to the circumstances of this case, Callisi submits that the debt owed to Sterling comprising the Assigned Debt must be apportioned rateably between the two properties according to their value with the competing equities of Callisi (as the holder of the Toorak Second Mortgage) and Sterling (as the holder of the Sterling St Kilda Road Mortgage) adjusted accordingly.
Equity: Doctrine and Remedies describes this outcome as a species of marshalling referring to it as ‘marshalling by apportionment’ but observe that it is better understood as an application of the doctrine of contribution.[17] The relevant passage is footnoted by references to inter alia the decision of Elias J sitting in the High Court of New Zealand in National Bank of New Zealand Ltd v Caldesia Promotions Ltd (‘National Bank v Caldesia’),[18] and Scarth J of the Supreme Court of British Columbia in Bancorp Investments (Fund 2) Ltd v Bhugra Holdings Ltd (‘Bancorp Investments’).[19]
[17]Equity: Doctrines and Remedies (n 2) [11-110].
[18](1996) 3 NZLR 467 (‘National Bank v Caldesia’).
[19][2006] BCFC 893, [25] (‘Bancorp Investments’).
In National Bank v Caldesia, Elias J dismissed an appeal against a refusal to strike out a statement of claim in respect of a claim by the National Bank, which sought among other things to rely on the equitable doctrine of marshalling. The claim was brought by the National Bank against Caldesia as the registered proprietor of two blocks of land (for ease of understanding, block A and block B) and against the senior security holder JRA, which had acquired registered first mortgages over both block A and block B formerly held by a Mr Primi. Separately, JRA held a registered second mortgage over block B and an unregistered mortgage over block A securing a different debt to that secured by its acquired registered first mortgage. National Bank held an unregistered mortgage over block A which had priority over JRA’s unregistered mortgage over block A but had no security over block B.
Caldesia defaulted and JRA exercised powers of sale under the registered first mortgages it had acquired from Mr Primi in respect of both block A and block B. The sale and settlement of block A occurred first leaving JRA with a shortfall in respect of the debt secured by the registered first mortgages which consequently left nothing from the sale of block A for the National Bank. JRA also exercised power of sale under the acquired registered first mortgage from Primi in relation to block B and used the proceeds on settlement to discharge the shortfall on the debt secured by the registered first mortgage. JRA intended to use the balance of the proceeds to discharge the second debt secured by the registered second mortgage over block B (and also secured by the unregistered mortgage over block A which ranked below the National Bank’s mortgage), which would have largely paid out JRA’s second debt. The order in which JRA exercised its first mortgage security over block A and block B thus had a significant effect on the position of the subordinate security holders, National Bank and JRA. If JRA had chosen to sell block B first, then this would have been to the advantage of National Bank and to the detriment of JRA. Settling block A first had the opposite effect. National Bank argued that JRA was required to apportion the debt secured by the registered first mortgages rateably between block A and block B according to their value. The facts therefore bear considerable similarity to the present case.[20]
[20]There were some additional facts present in the case which can be put to one side for present purposes.
Her Honour upheld the Master’s determination to not strike out such a claim noting that marshalling provides a ‘fair basis for adjusting claims against different securities where a prior mortgagee has recourse to both securities but has realised them in a manner which defeats claims against one’.[21]
[21]National Bank v Caldesia (n 18) 477.
Her Honour noted that absent such apportionment, where a double claimant is secured in respect of the same debt by a 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, which disadvantage would be mirrored by junior mortgagees in respect of the other block should the double claimant decide to resort to it.[22]
[22]Ibid 475.
After noting the observation in Equity: Doctrine and Remedies, to the effect that the doctrine is probably better understood as an application of the doctrine of contribution, her Honour concluded:[23]
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.
[23]Ibid 475.
Her Honour also referred approvingly to the decision of Neasey J of the Supreme Court of Tasmania in Commonwealth Trading Bank v Colonial Mutual Life Assurance Society Ltd (‘Commonwealth Trading Bank’).[24]
[24](1970) 26 FLR 338 (‘Commonwealth Trading Bank’).
In Commonwealth Trading Bank, the Colonial Mutual Life Assurance Society Ltd (‘Society’) had advanced money to the mortgagor on security of a property in Bellerive with collateral security by way of an assignment of a mortgage over an endowment policy it had issued over the life of the mortgagor. Subsequently, the bank lent money to the borrower on security of a second mortgage of the property. Thus, the Society had security over two assets, the property and the policy, with the bank holding security over only the property. The bank’s security was subordinate to that held by the Society.
The Society exercised power of sale over the property, then reassigned the endowment policy to the borrower who surrendered it to the Society in return for payment to the borrower of its surrender value, which was more than the amount owing to the bank. Subsequently, the Society paid to the bank the balance of proceeds of the sale of the property which left a shortfall owing to the bank. The bank commenced proceedings claiming a declaration that at the time of the reassignment and surrender of the endowment policy, the Society held it on trust for the bank and sought an order for the taking of accounts and payment of the amount due, and in the alternative, damages for breach of trust.
The bank argued that that upon the sale of the property and knowing of the bank’s second mortgage and the possibility that the balance of the proceeds of sale after satisfying the Society’s debt might lead to a shortfall owing to the bank, the Society became a trustee for the bank in respect of the policy. It argued that as a result the bank obtained an equitable interest in the policy. The bank argued that in those circumstances, the Society should have either only conveyed the legal interest in the policy to the mortgagor reserving the bank’s equitable interest or not reassigned the policy because the effect of reassignment was to destroy the bank’s equitable interest in the policy.
The claim failed; the judge rejected the argument that the bank had an equitable interest in the policy or its proceeds. Relevantly however, his Honour accepted that the bank had a ‘prima facie’ right to seek an equitable remedy from a court to enforce ‘its equity to marshall’,[25] but found against the bank because it did not exercise that right by action in court after it received the notice of the sale of the property. His Honour considered that the fact of there being assets within the control of the court, was fundamental to the operation of the doctrine.[26]
[25]Ibid 343, 350.
[26]Ibid 346
In the context of his Honour’s rejection of the argument that the effect of the doctrine constituted the first mortgagee as a trustee of the second, Neasey J considered that the rule a court will refuse to marshall where its effect would be to aid one encumbrancer and injure another was consistent with the rejection of the trust argument. But in endorsing the rule that marshalling will not be applied to the prejudice of another encumbrancer, his Honour recited the oft stated example:[27]
[27]Ibid 347.
….the rule is clear that where Blackacre and Whiteacre are mortgaged to A, and afterwards Blackacre is mortgaged to B and Whiteacre mortgaged to C, marshalling will not be applied so as to prejudice either B or C.
Relevantly, his Honour’s reasons continued:
In such a case their rights are to require that As debt shall be satisfied rateably out of the two estates so as to leave a proper proportion thereof respectively to satisfy the claims of B and C, the ultimate surplus arising from those estates being payable to the mortgagor or those claiming under him.
In Bancorp Investments, Scarth J considered an application by lienees that the debt of a prior mortgagee holding security over two properties be apportioned against the value of the two properties. The facts are somewhat complex and the claim failed because the properties were not owned by the same debtor and because there was doubt that lienees stood in the same position as mortgagees.
The significance of the case for present purposes lies with his Honour’s description of the related but distinct doctrine of marshalling and principle of apportionment. His Honour described marshalling as a doctrine which enables a court to prevent a creditor who can resort to two funds of a debtor from defeating a creditor who can resort to only one by ‘“marshalling” or arranging the funds so that both creditors are paid as far as possible’ whereas apportionment ‘is an equitable form of relief related to the doctrine of marshalling under which the rights of creditors of equal degree which are subordinate to the those of the holder of the first charge are adjusted inter se by deeming the holder of the first charge to have been satisfied on a rateable basis by reference to the value of the properties concerned.’[28]
[28]Bancorp Investments (n 19) [45].
In considering that submission, Scarth J referred to an earlier decision in Richmond Savings Credit Union v Zilbershats (‘Richmond Savings Credit Union’), where Burnyeat J wrote the following in respect of apportionment:[29]
Apportionment
12In a situation where an owner mortgages both properties in favour of the same first mortgagee but then mortgages the first property to ‘B’ and the second property to ‘C’, the doctrine of ‘marshalling by apportionment’ applies: … where each of the two funds has been assigned or charged by the debtor to a different subsequent claimant, equity interposes so as to secure that the claim of the first claimant is borne by the two funds rateably.
As between ‘B and C’ in the example noted above, the loss will not lie where the first mortgagee makes it lie. The charge of the first mortgagee will be apportioned rateably between the two properties (according to their value) so that the competing interests of ‘B and C’ can be adjusted.
[29](1997) 35 BCLR (3d) 136 (SC) (citations omitted).
Justice Scarth concluded his analysis by noting that the purpose of marshalling was to enable the court to prevent a creditor who can resort to two funds of a debtor from defeating a creditor who can resort to only one of the funds by marshalling or arranging the funds so that both creditors are paid as far as possible. He described apportionment as an equitable form of relief related to marshalling under which the rights of creditors of equal degree which are subordinate to those of the holder of the first charge are adjusted inter se by deeming the holder of the first charge to have been satisfied on a rateable basis by reference to the value of the properties concerned. His Honour then referred to various authorities which distinguished between marshalling and apportionment.
Amongst the cases supportive of the distinction between the two related principles cited by his Honour was Citibank Canada v McDonnell (‘Citibank’),[30] a decision of the Supreme Court of British Columbia, where Pitfield J considered that in the circumstances the petitioner was entitled to an apportionment remedy such that the debt of the first mortgagee which held security over two properties was deemed to have been satisfied on a rateable basis by reference to the value of the properties involved.
[30][2003] BCSC 861.
The mortgagor, McDonnell, granted a mortgage in favour of Citibank over two properties (one in Vancouver, the other in Langley) securing a loan of $1.35 million. The Crown registered a judgment obtained against McDonnell as a charge against the Langley property only. Subsequent to the Crown’s charge against the Langley property, PAC Agencies Ltd (‘PAC’) obtained a mortgage over both properties from McDonnell which was registered as a third ranking security over the Langley property (behind Citbank and the Crown) and second ranking over the Vancouver property (behind Citibank).
Citibank commenced foreclosure proceedings and obtained an order for the sale of both properties. PAC applied for a marshalling or apportionment order. Justice Pitfield considered that apportionment rather than marshalling was appropriate. He distinguished between the two by observing that the properties could not be marshalled at the behest of PAC except to the resulting prejudice of the Crown as an order requiring Citibank to recover first on the security of the Langley property would mean that the Crown as second mortgagee would recover nothing from its sale and that PAC would be advantaged as a result. Conversely, if the Crown were to apply for a marshalling order so that Citibank could first be required to recover from the sale of the Vancouver property, as Citibank had in fact done, PAC would be prejudiced as its recovery would be reduced and as such a marshalling order was not appropriate.
Justice Pitfield then turned to apportionment noting that the doctrine could provide equitable relief where a single creditor holds a first charge against two properties, different persons hold second charges in respect to the same properties and the total value of the properties is insufficient to discharge all claims. His Honour observed that the effect of apportionment was to require the competing claimants to accept the rateable allocation of the debt owed to the creditor in first position to the separate properties by reference to the comparative value of the properties and that as between subsequent claimants of equal degree, the creditor who is first in line is deemed to have recovered from each of the properties on a proportionate basis notwithstanding the process against one of the properties to the exclusion of the other. If that occurred, the first charge holder’s choice of realisation would not skew recovery to the prejudice of one or the other of the subordinate creditors.
National Trading Bank v Caldesia, Commonwealth Trading Bank, Bancorp Investments, Richmond Savings Credit Union, and Citibank all provide support for the approach urged by Callisi.
Support for the approach is also found in the judgment of Bryson AJ in Across Australia Finance. In Across Australia Finance, the now bankrupt mortgagor owned properties in Rose Bay and another in Pyrmont. The two properties had been sold, relevantly under direction of the Court. The Rose Bay property was subject to a registered first ‘all moneys’ mortgage to NAB, and to a second ranking unregistered mortgage in favour of a Mr Hill and a third ranking unregistered mortgage in favour of Across Australia. The NAB ‘all moneys’ mortgage was also registered against the Pyrmont property which was also subject to a second ranking unregistered second mortgage in favour of Across Australia. The Rose Bay property was sold first with NAB taking all the proceeds of sale which were insufficient to discharge its debt. When the sale of Pyrmont settled, NAB took the bulk of the proceeds which were sufficient to discharge its debt with the balance paid into court.
Absent any remedy, the balance of the proceeds would be paid to Across Australia which held second ranking security over Pyrmont. Mr Hill, holding no security over that property, applied to the Court for a direction that the funds held in court be marshalled in a manner which gave him access to part.
Mr Hill succeeded; Bryson AJ made specific reference with evident approval to her Honour Elias J’s judgment in National Bank v Caldesia, concluding that it was inappropriate in the realisation of mortgages under the control of the Court that one or other puisne mortgagee should be disadvantaged or advantaged by the ‘accidental circumstance of the order in which properties were sold and the first mortgagee was satisfied’.[31]
[31]Across Australia Finance (n 1) [43].
As noted above, Sterling submits that no reliance can be placed on this approach on three broad grounds.
First, it submits that Callisi’s interest in the St Kilda Road Property by way of its third ranking security acts as a bar to any relief and submits that Mir Bros Projects Pty Ltd v Lyons (‘Mir Bros’) stands as authority for such a bar supported by passages in in Equity; Doctrines and Remedies and Fisher & Lightwood’s Law of Mortgage.[32]
[32][1977] 2 NSWLR 192; Equity: Doctrines and Remedies (n 2) [11-010]-[11-020]; ELG Tyler, Peter Young, Clyde Croft, Fisher & Lightwood’s Law of Mortgage (LexisNexis, 3rd ed, 2013) [30.9], [30.13] (‘Fisher & Lightwood’s Law of Mortgage’).
I do not accept that any such bar arises. Mir Bros primarily involved a contest between the plaintiff which held a fourth ranking security over land in Vaucluse and Berkman and Hake which held second and third ranking securities over the Vaucluse land as well as holding security over land in Bondi. Following the sale of the Vaucluse property and the discharge of the first mortgagee’s debt the first mortgagee’s solicitors held the balance of the sales proceeds in trust. The Bondi property was up for sale. The plaintiff sought an order to the effect that Berkman and Hake be prevented from accessing the Vaucluse fund until the Bondi property was sold. The defendants, which included Berkman and Hake, argued that no equitable principle operated to prevent a mortgagee from satisfying its security from whatever property it saw fit and otherwise submitted that any rights the plaintiff may have must be satisfied out of the proceeds of the Bondi property. Waddell J dismissed the plaintiff’s application but cited with approval the principle of marshalling by appointment in Equity: Doctrine and Remedies as well as what his Honour inferred was the separate principle of marshalling also summarised in Equity; Doctrine and Remedies.[33] Whilst the claimant in Mir Bros did not hold security over the Bondi property, the case does not stand as authority for the proposition that only a person who had no interest in the second property would be entitled to a share of the Bondi proceeds. The issue simply did not arise.
[33]Mir Bros (n 6) 196.
Nor do the passages in Equity: Doctrines and Remedies and Fisher & Lightwood’s Law of Mortgage directly engage with the proposition, although to be fair, both extracts illustrate the application of marshalling by reference to a single claimant, that is a security holder who has security over only one property, by enabling that security holder to stand in the shoes of the double claimant once the debt of the double claimant has been satisfied.
Similarly, the Court of Appeal in Burgess v Hill,[34] in upholding the trial judge’s decision in Hill v Love,[35] described the doctrine of marshalling in this way:
This case concerns the equitable doctrine of marshalling of mortgages, which allows a second mortgagee whose debt has not been paid from the sale of the mortgaged property to access the proceeds of sale of another property mortgaged by the same debtor to the same first mortgagee, even though the second mortgagee has no security over the other property. Marshalling rights are primarily relevant where the debtor is insolvent: as marshalling gives the second mortgagee priority over unsecured creditors.
[34][2019] VSCA 94, [1].
[35](2018) 53 VR 459, [43]–[44].
The Court of Appeal and the learned authors were dealing with marshalling simpliciter; that is the right of the single claimant to stand in the shoes of the double claimant by a process akin to subrogation so as to obtain the benefit of the double claimant’s security. In that context, it is unsurprising that the language used referred to a single claimant.
In contrast, the present case is one of apportionment or as it is sometimes referred: ‘marshalling by apportionment’. Whether it is regarded as a separate doctrine or as a species of marshalling does not matter. Nor does the fact that both require a common debtor mean that the asserted limitation of marshalling in its strict sense as being confined in a way that only assists a single claimant mean that apportionment cannot be invoked at the instance of a party in Callisi’s position which has a second ranking security over Blackacre against a party who has a second ranking security over Whiteacre, simply because Callisi has a third or even fourth ranking security over Whiteacre.
Apportionment operates to ameliorate the risk of prejudice to subordinate security holders with equal ranking securities as a result of the order in which the primary security holder chooses to realise the securities. Whilst the primary security holder is free to sell whatever security it wishes to sell, it otherwise should be indifferent as to which security recourse is had, to satisfy its debt. In order to prevent the return to the subordinate security holder being dependent solely on the choice of the primary security holder, an equity arises in favour of each equal next ranking security holder, such as to deem the first ranking security to have been satisfied on a rateable basis.
If the relevant principle is accepted as operating in this way, then what is critical is that there are two creditors with equal ranking securities each of whom stands to be affected by the decision as to the order of sale chosen by the primary security holder. It is the effect on these equal ranking securities which enlivens the relevant equity which is relevantly unaffected by other securities that one or more might hold.
Application of the principle
Returning to the case here, both Callisi as the holder of the second ranking security over the Toorak Road Property (the Toorak Second Mortgage) and Sterling as the holder of the second ranking security over the St Kilda Road Property (the Sterling St Kilda Road Mortgage) were both liable to have the value of their respective securities rendered worthless depending solely on the order in which the first mortgagee chose to realise its ranking security. It is the commonality of their shared interest in that potential prejudice which gives rise in each of them to an equity of the kind now articulated by Callisi. The fact that Callisi had a substantively worthless third ranking security over the St Kilda Road Property is not to the point; no more or less significant than the fact that the Sterling 2018 Debt was also secured by a substantively worthless third ranking security over the Toorak Property. Callisi’s worthless third ranking security over the St Kilda Road Property does not bar it from seeking a remedy to the effect that the first mortgagee’s debt is apportioned rateably by reference to the value of the St Kilda Road Property and the Toorak Road Property in the same way that it would not have barred Sterling qua holder of the Sterling St Kilda Road Mortgage from seeking the same remedy had the holder of the first mortgage first sold the St Kilda Road Property.
Acceptance of this aspect of Sterling’s submission is that the remedy would be open if Callisi had no interest in the St Kilda Road Property but is not open because it holds an interest which is in the circumstances clearly worthless, and in substance no different to Callisi having no interest. Recognising equity’s preference for substance over form, this would be a curious outcome. It is not an outcome supported by authority understood in its proper context and nor is such an outcome consistent with the apportionment principle as it should be understood. I also note that in Citibank, the claimant, PAC, was entitled to an apportionment remedy, notwithstanding that it had security over both properties.
Sterling also submitted that the decision of the Court of Appeal in Burness v Hill establishes that marshalling only applies where the first mortgagee has been paid in full from the sale of the ‘common property’ which is then identified in the submission as the Toorak Property ‘and the proceeds of sale from the other property are not needed (at least in full) to repay the first mortgagee’s debt’. There are two propositions embodied in the submission which are not reconcilable. Either the doctrine only applies where the first mortgagee has been fully repaid from the first property or the proceeds of sale of both the first and second properties are needed to discharge the debt. To the extent to which the submission is one to the effect that the doctrine only applies where the debt is discharged from the sale of the first property (the so called ‘common property’), I do not accept that the limitation has application here. First, their Honours, in quoting the decision of the Supreme Court of the United Kingdom in National Crime Agency v Szepietowski[36] were referring to marshalling in its strict sense, not apportionment; secondly, neither their Honours nor Lord Neuberger were seeking to delineate an irreducible requirement in such terms; rather the relevant example in those cases was one where the first mortgage debt had been discharged from the sale of the first property. No issue arose in either case to the effect that a claim is not maintainable because the first mortgagee also had recourse in part to the second property.
[36][2014] AC 338, 349–50 [31]–[32].
There is no principled basis on which such a limitation should apply in an apportionment context; the vice protectable by the principle’s application is that subordinate interest holders of equal standing should be protected from their securities being rendered valueless by the whim of the primary security holder. There is no reason why the principle can be invoked by a subordinate security holder where the entirety of the primary security holder’s debt has been discharged by the relevant security but not where the primary security holder needs also to have recourse to the second property, albeit after the debt has been reduced by a disproportionate extent from the sale of the first property. In any event in the present case, the primary security holder, Sterling, obtained satisfaction only from the Toorak Property and chose to write off the balance of its debt. The entirety of its debt to the extent to which it sought recovery was paid from the sale of the Toorak Property. Even if the qualification applies, which in my view it does not, it was satisfied here.
Next Sterling argues that the claim is not maintainable because the first mortgage over the St Kilda Road Property has been discharged, such that there is no mortgage over the St Kilda Road Property to which Callisi can be subrogated. I reject this argument as well. First, the references which appear to the puisne mortgagee being ‘subrogated’ to the interest of the first mortgagee over the second property arise in the context of marshalling in its pure sense, not apportionment.
Second, the references to ‘subrogation’ are used in the sense that they describe the effect of the relief to which the puisne mortgagee is entitled rather than a firm requirement that there be a subsisting encumbrance into which the puisne mortgagee can step; thus, the language used varies; viz in The Law of Securities the authors refer to the puisne mortgagee being able to ‘treat herself or himself as a mortgagee … to the extent of that inadequacy’; in Equity: Doctrines and Remedies, the authors refer to a ‘species of subrogation’; and Elias J in National Bank v Caldesia described the remedy as a ‘form of subrogation’.[37]
[37]The Law of Securities (n 10) 182; Equity: Doctrines and Remedies (n 2) [11-020]; National Bank v Caldesia (n 18) 475.
Third, Sterling discharged the first mortgage over the St Kilda Road Property (ie, the St Kilda Road First Mortgage) on 23 February 2022 and did so notwithstanding that the Assigned Debt which was secured by that mortgage had not been fully repaid and after Callisi had commenced proceedings against Sterling. Although the claim made in the proceeding had not at that stage been clearly articulated in the form it is now advanced, it cannot be doubted that in the broad, Callisi was complaining about the order of sale and the fact that as a result it was prejudiced in its capacity as the holder of the second ranking Toorak Second Mortgage and Sterling advantaged in its capacity as the holder of the second ranking Sterling St Kilda Road Mortgage. At the time that it discharged its first mortgage, Sterling was therefore aware that Callisi was seeking equitable relief connected with the sale of the properties and the application of the proceeds of sale. If Sterling as second mortgagee over the St Kilda Road Property was otherwise liable at that time to an equity suit relying on apportionment and on notice in a broad sense of the claim, it would be a surprising outcome if the consequence that otherwise would follow would be avoided by Sterling as first mortgagee discharging its first mortgage.
Further, in Chase Corporation (Australia) Pty Ltd v North Sydney Brick and Tile Co Ltd[38] the Court recognised that where a party released security with full knowledge of the right asserted by the other mortgagee, the release may not prevent the other mortgagee from maintaining a marshalling claim. That observation arose in the context of the characterisation of marshalling as a principle which requires parties to act equitably, with the court’s role one where necessary to enforce the equitable conduct. Such a characterisation is with respect, apposite and applies equally in an apportionment context. It allows for the possibility of relief being declined where the equity advanced by the claimant is met by a better equity of an affected party, such as one who has proceeded without notice of any claim. In the present case, had the second St Kilda Road Mortgage (the Sterling St Kilda Road Mortgage) not been held by Sterling but by a third party who had received the proceeds of sale from St Kilda Road unaware of Callisi’s claim, the outcome of this case would have been very different.
[38](1994) 35 NSWLR 1, 21, 25.
Sterling also argues that Callisi’s claim must fail because it prejudices Sterling, presumably in its capacity as the holder of the St Kilda Road Mortgage, relying on the frequently stated observation that ‘equity will not marshal securities where in aiding one encumbrancer, it would injure another.’[39] The answer to this submission is that it has application to marshalling in its strict sense, not apportionment. So much is clear from Barnes v Racster and Commonwealth Trading Bank.[40]Whilst the proposition is true insofar as it precludes marshalling, it does not preclude apportionment. Rather the remedy left available as a consequence of the preclusion of marshalling, is an equity to invoke apportionment.
[39]Fisher & Lightwood’s Law of Mortgage (n 31) [30.12].
[40]Barnes v Racster (n 15); Commonwealth Trading Bank (n 23).
If the remedy is properly characterised as a mere equity, as it must, given that it confers no proprietary interest in either the proceeds or the first ranking security (discharged or not), then the only impediment to its vindication by the remedy Callisi now seeks is if it is met by a competing superior equity on the part of Sterling.[41] There is no case advanced that Sterling was not entitled to sell the properties in the order in which it chose and to satisfy the debt secured by the first mortgages from whatever security it chose. Further, and whilst the discharge of the St Kilda Road First Mortgage is not relevant and cannot in any event assist Sterling, it is difficult to see how Sterling could have owed any obligation to Callisi to keep the mortgage on foot.[42] Either way, Sterling’s conduct as first mortgagee is not relevant. The only relevant question is whether Callisi’s equity to seek an apportionment remedy is bettered by Sterling as the holder of the second ranking Sterling St Kilda Road Mortgage.
[41]See also paragraph [119] above.
[42]In Equity: Doctrines and Remedies at [11-035], the authors postulate that in a case of marshalling in such a circumstance as this, Sterling might be regarded as a fiduciary of Callisi. It appears that this is a reference to marshalling in a strict sense.
In Commonwealth Trading Bank, Neasey J found against the bank effectively because it did not seek to enforce its right by action in court after it received notice of the sale of the property. In the present case, Callisi moved promptly; albeit that its case as originally framed is more properly regarded as a case complaining of the conduct of Sterling as first mortgagee. Nevertheless, whatever the difficulties it had in framing its claim, it cannot be in dispute that at the time that Sterling received its share of the proceeds of the sale of the St Kilda Road Property on 28 August 2022 as the holder of the Sterling St Kilda Road Mortgage (the previous second mortgage), Sterling was on notice of a contention advanced by Callisi to the effect that it was entitled in some way to a share of the proceeds, albeit that the claim had not yet been framed as one involving apportionment. Had the proceeds of the sale been paid into Court and been held at the time of this hearing, there would be no impediment to the relief now sought by Callisi. That the proceeds were paid out and received by Sterling as the holder of the Sterling St Kilda Road Mortgage whilst this proceeding on foot is not sufficient to lead to a contrary result. Sterling did not take any action in the belief that Callisi was not advancing any claim. It was aware of a claim but presumably considered it lacked merit. The position would of course be far different if the proceeds had been paid out to an unrelated mortgagee who had no notice of Callisi’s complaint.
Form of relief
In the result, Callisi’s claim succeeds.
In its written outline filed in advance of the hearing, Callisi submitted that if rateable apportionment occurred, it would have received $1,000,000 from the sale of the Toorak Property and Sterling as second mortgagee over the St Kilda Road Property would have received $367,500 from the sale of that property. Sterling criticised this aspect of the submission on the basis that the manner in which the respective amounts were calculated was unexplained. Callisi conceded that the explanation was unclear and initially submitted that the lack of clarity arose from the erroneous transposition of Callisi and Sterling such that Callisi not Sterling should receive $367,500 from the proceeds of sale of the St Kilda Road Property. On further reflection it submitted that this too was in error and sought and obtained leave to file and serve a further submission with a revised calculation.
In the revised calculation, Callisi submits that the debt of $3,298,039 (the Assigned Debt) represents 74.45% of the value of the properties. 74.45% of the value of the Toorak Property is $2,419,625. It argues that the balance of the debt of $878,414 should be treated as being recovered from the St Kilda Road Property and submits that had only $2,419,625 of the proceeds of the sale of the Toorak Property been treated as being applied in discharge of the Sterling’s first mortgage debt, the notionally adjusted balance of $830,375 would have been available to Callisi. As this excess is in the hands of Sterling, it submits that Sterling should be ordered to pay that sum to Callisi.
In my view, the approach more consistent with the authorities is that the sum required to satisfy the Assigned Debt of $3,298,039 is apportioned rateably between the Toorak Property and the St Kilda Road Property by reference to their respective values of $3,250,000 and $1,180,000.
This first requires a rateable calculation to be undertaken of the value of each property as a proportion of the total property value. Thus, the Toorak Property represents 73.36% of the total value of the properties and the St Kilda Road Property, 26.64%. The second step requires the Assigned Debt to be apportioned in that same proportion; that is, 73.36% of the $3,298,039, which is $2,419,441.41, is deemed to be recovered from the sale of the Toorak Property with the balance of $878,597.59 deemed to have been recovered from the sale of the St Kilda Road Property. Had this occurred, it would have meant that $878,597.59 remained available to Callisi as second mortgagee of the Toorak Road Property and only $301,402.41 remained available to Sterling as second mortgagee with respect to the Sterling St Kilda Road Mortgage. On this basis, Callisi would have been able to seek an order for $878,597.59.
In the result, it sought the lesser sum of $830,375 on the basis of a similar albeit not identical rationale. I consider that it is appropriate to confine any entitlement to the sum sought. It will be entitled to an order in its favour for that amount.
I shall hear from the parties as to the precise form of order and as to ancillary matters, including as to costs.
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