Foxgold Pty Ltd v Paterson (No 2)
[2005] SADC 68
•29 June 2005
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
FOXGOLD PTY LTD v PATERSON (No 2)
Judgment of His Honour Judge Clayton
29 June 2005
EQUITY - GENERAL PRINCIPLES - ASSIGNMENTS IN EQUITY - WHAT AMOUNTS TO AN EQUITABLE ASSIGNMENT - SUFFICIENCY OF DIRECTIONS AND ORDERS FOR PAYMENT
Defendant liable on oral agreement to repay plaintiff moneys advanced for business debts plus interest. Plaintiff claimed money received from the sale of the defendant’s house were held on trust to satisfy debt.
Did words used by defendant constitute equitable assignment of future assets? Was the defendant a trustee of the funds or a debtor?
HELD: Words used by defendant amounted to an assignment of future property and created a trust.
Holroyd v Marshall (1862) 10 HL Cas 191; 11 ER 999; Tailby v Official Receiver (1888) 13 App Cas 523; Palette Shoes Pty Ltd v Krohn (1937) 58 CLR 1; Henry v Hammond [1913] 2 KB 515; Lyell v Kennedy (1889) 14 App Cas 437; Carey v Palmer (1924) 34 CLR 380; Palmer v Carey [1926] AC 703; Rodick v Gandell 1 DE G.M. & G. 763 at 777-778; Cohen v Cohen (1929) 42 CLR 91; Associated Alloys v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588 at 604 para 30; Meagher, Heydon & Leeming, "Equity Doctrines & Remedies" 4th edition para 6-265, considered.
FOXGOLD PTY LTD v PATERSON (No 2)
[2005] SADC 68
On 30 March 2005 I delivered reasons for judgment in which I found that the defendant was liable on oral agreements to repay to the plaintiff moneys advanced to a business conducted by the defendant’s husband and moneys paid to a creditor to discharge a mortgage over the defendant’s home. I found that the plaintiff was entitled to judgment for $210,350.35 plus interest.
Determination of the amount of interest and the issue of costs were deferred pending submissions.
In the statement of claim the plaintiff had sought a declaration that the defendant would hold the net proceeds of the sale of her house on trust for the plaintiff to the extent of the amount advanced by the plaintiff. In the alternative a similar declaration was sought with respect to the payment to the mortgagee.
The question of whether the proceeds of sale of the house were held on trust was not agitated at the trial. In my reasons for judgment I said:
I mention in passing that the house has been sold and there is no question of specific performance of any agreement to sell. The proceeds of sale are held in trust and the question is whether Mrs Paterson should be required to pay to the plaintiff the amounts which it paid to suppliers of the plaintiff and Cash Resources Australia Pty Ltd.
The parties did not argue the claim for a declaration and I did not deal with the claim.
The proceeds of the sale of the defendant’s house are currently held in the trust account of the defendant’s solicitor. I have been told that a misunderstanding has now arisen between the parties as to the basis upon which the proceeds are held and the plaintiff has requested leave to reopen for the purpose of pursuing its claim for a declaration.
The defendant did not contest the application to reopen. Counsel acknowledged that there has been a misunderstanding as to the basis on which the defendant’s solicitor is holding the money.
Having regard to the fact that the issues of interest and costs were still open, final judgment has not been entered and there was no opposition I heard argument on the question of whether the proceeds of sale of the defendant’s house were held by the defendant’s solicitors on trust for the plaintiff. I am influenced by the fact that there has been a misunderstanding between the parties. I think that the interests of justice will be best served by hearing the argument and resolving the issue.
I do not intend to recite all the facts, but it is necessary to mention a few for the purpose of putting these reasons into context.
The defendant’s husband operated a bakery which was in financial difficulty. Mr Algar was the principal director and shareholder of the plaintiff company. I set out passages from my reasons:
Mr Algar said that he told Mr and Mrs Paterson:
“Peter and Gail. I have been at the bakery. I’ve had a list of accounts that are required to be paid, they total approximately $120,000 and I am unable to ascertain the full extent of what is outstanding. Based on that information my opinion is that the bakery is insolvent and it should not continue to trade, because if you do trade it will be credit, you would be in breach of company law … you have two options.”
Mr Algar said that the first option was to voluntarily appoint a receiver to wind up the company which he estimated would cost about $20,000. The second option was to “… sell your house to continue trading. In this way you will be taking ownership and responsibility of your own actions and decisions, and you will be taken seriously”. Mr Algar said he looked at Mr Paterson who said, “I wish for the bakery to continue to trade” and he then looked at Mrs Paterson who said, “I will sell the house”. Mr Algar then replied, “On that basis I will help you and loan you monies to be repaid from the sale of the house”. Mrs Paterson looked at Mr Algar and said, “Yes I will sell the house to repay monies that were loaned to the bakery”.
(Paragraphs 20 and 21 of reasons)
I found that the conversation deposed to by Mr Algar did take place and I found:
... that on 16 December 2002 at a coffee shop at Glenelg, Mrs Paterson told Mr Algar that she would sell her house, that Mr Algar said, “On that basis I will help you and loan you monies to be repaid from the sale of the house” and Mrs Paterson looked at Mr Algar and said, “Yes, I will sell the house to repay monies that were loaned to the bakery”.
(Paragraph 21 of the reasons)
I also found that the parties did intend to create a legal relationship by the words that were spoken and that Mrs Paterson agreed to repay the monies which Mr Algar would advance on behalf of the French Bakery from the proceeds of the sale of her house.
Prior to the sale of the house the plaintiff lodged a caveat on the property. It is unnecessary for me to discuss whether there was a caveatable interest or not. When the house was sold discussions between the parties resulted in the caveat being lifted and the proceeds of sale being paid into the trust account of the defendant’s solicitors. It is those moneys which are the subject of the present application.
The plaintiff argues that the moneys held in the solicitor's trust account are held by the defendant in trust for the plaintiff. The claim does not depend upon the dealings which resulted in the caveat being lifted, but emanates from the dealings between the parties which give rise to the primary liability of the defendant. The plaintiff’s argument is that the agreement reached in December 2002 operated as an equitable assignment of a future asset namely the proceeds to be received from the sale of the defendant’s house. It was further argued that the equitable assignment of the future property established a trust so that the plaintiff is now entitled to have the judgment satisfied out of the money in the solicitor’s trust account.
The basic claim of the plaintiff is complicated by issues as to whether the moneys paid to satisfy the debt to the mortgagee (Cash Resources Australia Pty Ltd) are subject to the trust, whether interest on the judgment sum is included and whether the plaintiff’s party/party costs should be paid out of the trust.
Counsel for the defendant disputed that there had been an assignment. It was argued that my findings fell short of a finding that the proceeds of sale of the house were to be provided to the plaintiff.
There is no question that the defendant had the ability to assign her interest in the proceeds of sale of the house. There is, of course, a distinction between the house itself and a future asset being the money expected to be realised on its sale. The plaintiff does not assert that there had been any assignment of the defendant’s interest in the house itself.
Mr Algar advanced the funds to creditors and so the consideration for the agreement was paid. The real question is whether the words used by the parties were sufficient to create an assignment. Mrs Paterson said “yes I will sell the house to repay moneys that were loaned to the bakery”.
Another witness, Mr Morais, who said that the defendant told him “we have agreed to sell this house and repay John”, corroborated the evidence of Mr Algar. While corroborative of Mr Algar, the evidence of Mr Morais does not take the plaintiff’s claim any further.
The plaintiff relied upon Holroyd v Marshall[1]. In that case Lord Westbury LC said at 1006:
In equity it is not necessary for the alienation of property that there should be a formal deed of conveyance. A contract for valuable consideration, by which it is agreed to make a present transfer of property passes at once the beneficial interest, provided that the contract is one of which a Court of Equity will decree specific performance.
[1] (1862) 10 HL Cas 191; 11 ER 999
I do not think it matters that the amount to be advanced by the plaintiff was unascertained. The amount of the debt was dependent upon the amount that the plaintiff ultimately advanced to the creditors. In Tailby v Official Receiver[2] an assignment of future book debts was upheld.
[2] (1888) 13 App Cas 523
Meagher, Heydon & Leeming, “Equity Doctrines and Remedies”, 4th edition, states at paragraph 6-265:
The principle which emerged from Tailby v Official Receiver (supra) ... may be summarised as follows. Where:
(a)A for valuable consideration agrees to assign, or purports presently to assign, an expectancy, or future property, to B;
(b)the consideration has been paid, or executed; and
(c)A acquires property which falls within the description of that which he agreed, or purported presently, to assign;
then in equity that property vests in B as soon as it is acquired by A and can be identified, without any further assurance by A and without any action by B. It is an example of equity regarding as done that which ought to be done.
In Palette Shoes Pty Ltd v Krohn[3] the High Court of Australia was concerned with an asserted assignment of book debts. Dixon J, as he then was, said, after referring to Holroyd v Marshall, at page 26:
For the purpose of deciding in the present case whether the respondents’ title to the book debts depends upon what amounts to an assignment, it is important to notice the essential elements upon which Lord Macnaghten dwells. As the subject to be made over does not exist, the matter primarily rests in contract. Because value has been given on the one side, the conscience of the other party is bound when the subject comes into existence, that is, when, as is generally the case, the legal property vests in him. Because his conscience is bound in respect of a subject of property, equity fastens upon the property itself and makes him a trustee of the legal rights or ownership for the assignee. But, although the matter rests primarily in contract, the prospective right in property which the assignee obtains “is a higher right than the right to have specific performance of a contract,” and it may survive the assignor’s bankruptcy because it attaches without more eo instanti when the property arises and gives the assignee an equitable interest therein.
[3] (1937) 58 CLR 1
The question is whether the words used by Mrs Paterson gave effect to an assignment which resulted in the proceeds being held in trust following settlement on the sale of the house.
I was referred to Henry v Hammond[4] where moneys held by a shipping agent from the salvage of a wrecked ship after complying with instructions to sell the cargo and pay all claims and expenses were held not to be held in trust because the shipping agent was not bound to keep the moneys coming into his hands separate from his other moneys. Channell J said at 521:
It is clear that if the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a separate fund to the person entitled to it, then he is a trustee of that money and must hand it over to the person who is his cestui que trust. If on the other hand he is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money, then in my opinion, he is not a trustee of the money, but merely a debtor.
[4] [1913] 2 KB 515
That case was decided on the court’s finding that a shipping agent carries on a well understood business and it could not possibly be said that he was bound to keep the money of each of the persons by whom he is employed in the course of the business separate. If the moneys are in fact kept separate that will be a relevant consideration. Lyell v Kennedy[5].
[5] (1889) 14 App Cas 437
The law relating to equitable assignments was considered by the High Court of Australia in Carey v Palmer[6] and then by the Privy Council in Palmer v Carey[7]. Their Lordships referred to Rodick v Gandell[8] where Lord Truro said:
The extent of the principle to be deduced is that an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor ... will create a valid equitable charge upon such fund, in other words, will operate as an equitable assignment of the debts or fund to which the order refers.
[6] (1924) 34 CLR 380
[7] [1926] AC 703
[8] 1 DE G.M. & G. 763 at 777-778
The Judicial Committee agreed with the dissenting view of the Chief Justice in the High Court. Lord Wrenbury who delivered the judgment said at 707:
Their Lordships, therefore, fail to find in the agreement any provision creating, contractually or otherwise, any right of property in either the goods or the proceeds of sale of the goods. The Chief Justice says: “The words of the agreement on which the appellant relies are apt to express a contract by the bankrupt to apply the money in the purchase of goods, to sell those goods, and to pay the proceeds of sale into the appellant’s bank account, but I can see nothing in them to indicate that the intention was to assign any interest in goods purchased by the bankrupt or to create either a charge over or a trust of such goods in favour of the appellant.”
In the present case the question is whether the words used by Mrs Paterson indicate an intention to assign an interest in the proceeds of sale and make a separate fund from which the plaintiff could be paid? I find that they do.
Whether Mrs Paterson was a trustee or a debtor depends upon whether she was required to keep the money separate from her own moneys. In Cohen v Cohen[9] Dixon J referred to the following passage in Henry v Hammond where Channell J said:
We must apply that principle to a case where the property is a sum of money. It is clear that if the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a separate fund to the person entitled to it, then he is a trustee of that money and must hand it over to the person who is cestui que trust. If on the other hand he is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money, then, in my opinion, he is not a trustee of that money, but merely a debtor. All the authorities seem to me to be consistent with that statement of the law.
[9] (1929) 42 CLR 91
Dixon J then said:
The plaintiff entrusted the sale of her furniture to the defendant and authorized him to receive the proceeds as and for her property on her behalf. I think he was intended to account specifically for the proceeds. He was not merely to take the money, mix it with other funds as his own and treat his wife simply as his creditor whose debt, like other debts, was to be met out of his general resources.
Like the husband in Cohen I think that the agreement required Mrs Paterson to account specifically for the proceeds of sale. I think the agreement required her to use the money which she received from the sale of the house to satisfy the plaintiff’s debt. I think that the plaintiff had an equitable proprietary interest in the fund. Although the evidence is not as specific as it could be there is an inference that the only reason for the sale of the house was to repay the plaintiff.
I find that the contract specifically required Mrs Paterson to sell the house and to pay Mr Algar from the proceeds of sale. I find that the contract amounted to an assignment of so much of the proceeds of sale as were required to satisfy the debt. The fact that the trust may have only extended to portion of the proceeds of sale does not create a difficulty. Associated Alloys v ACN 001 452 106 Pty Ltd[10].
[10] (2000) 202 CLR 588 at 604, para 30
I find that a trust arises by reason of Mrs Paterson’s statement that she would sell the house to repay the moneys. This is a case where the trust was also embodied in a contract.
I have found in my earlier reasons that the payment to Cash Resources Australia Pty Ltd was subject to the original arrangement. Accordingly, the trust extends to that part of the debt.
As trustee Mrs Paterson is required to pay interest. It does not matter that there was no specific agreement to pay interest. A trustee cannot benefit from her breach of trust, namely, the failure to pay the moneys on the due date which was on settlement of the sale of the house. Also the general law entitles a plaintiff to interest calculated from the date on which payment of the debt was due. There is a question as to whether Mrs Paterson should pay interest at the court rate or pay the interest actually earned on the invested moneys.
The interest earned on the trust moneys forms part of the trust fund and at least that much interest should be paid. If the plaintiff seeks a higher rate than that actually earned I will hear counsel as to the amount of interest, but interest beyond that earned on the trust moneys would not be subject to the trust or payable out of the proceeds of sale. To put that a different way, the trust fund can only be used to repay the amount required to reimburse Mr Algar together with the income which the trustee has received on those moneys. To the extent that the proceeds of sale of the house may have exceeded the amount due to the plaintiff I find that the surplus was not assigned and is not subject to the trust.
Counsel for the plaintiff argued that the plaintiff’s party/party costs should be paid out of the proceeds of sale. I reject that argument. As I have said, the trust fund only extended to the sum required to reimburse the plaintiff and the income thereon.
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