Li v F Vitale and Sons Pty Ltd
[2014] VSC 326
•8 July 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PRACTICE COURT
S CI 2014 02759
| QINGHUA LI | Plaintiff |
| v | |
| F VITALE & SONS PTY LTD (ACN 005 212 162) | First Defendant |
| THE REGISTRAR OF TITLES OF VICTORIA | Second Defendant |
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JUDGE: | MACAULAY J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 1 July 2014 |
DATE OF JUDGMENT: | 8 July 2014 |
CASE MAY BE CITED AS: | Li v F Vitale & Sons Pty Ltd & Anor |
MEDIUM NEUTRAL CITATION: | [2014] VSC 326 |
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REMOVAL OF CAVEAT — Transfer of Land Act1958 s 90(3) — Caveator claimed equitable interest as mortgagee said to arise by virtue of rights of subrogation — Principles of subrogation — Doctrine of marshalling — Caveator supplied goods to a company subject to retention of title clause — Company was also indebted to bank which held registered debenture charge over company’s assets and undertaking — Bank also held third party’s guarantee of company’s debt secured by mortgage over guarantor’s land — Bank dishonoured company’s cheques that would have paid out debt to caveator for goods supplied — Whether in the circumstances caveator was subrogated to bank’s interest as mortgagee over third party guarantor’s land — Scholefield Goodman & Sons v Zyngier [1984] VR 445 — No serious question concerning existence of a caveatable interest to be tried — Application to remove caveat granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Gronow | Karavias & Associates |
| For the First Defendant | Mr I Upjohn | Aitken Partners |
HIS HONOUR:
Introduction
On 18 November 2013, the first defendant, F Vitale & Sons Pty Ltd (‘Vitale & Sons’) lodged a caveat over property situated at 820 High Street, Kew (‘Kew property’). The interest claimed under the mortgage was described as ‘equitable interest as mortgagee’. The grounds of the claim were stated to be ‘under and by virtue of the rights of subrogation which the caveator [and Qinghua Ji][1] has to instrument of mortgage AJ455681H’.
[1]The printed words on the caveat appeared to have a handwritten addition inserted after the word ‘caveator’ — namely, ‘and Quingua Ji’. The inclusion or exclusion of that name makes no difference to the disposition of the application.
The registered proprietor of the Kew property is the plaintiff, Qinghua Li (referred to in some documents as Qinghua Ji). The Kew property is mortgaged to the National Australia Bank (‘NAB’) pursuant to the mortgage mentioned in the grounds of claim above.
By this application, Ms Qinghua Li applies under s 90(3) of the Transfer of Land Act 1958 for the removal of the caveat. Accordingly, the caveator, Vitale & Sons, must establish there is a serious question to be tried in relation to the estate or interest it claims, and must further establish that the balance of convenience favours the maintenance of the caveat until the trial of the proceeding.[2] The question whether the balance of convenience favours the maintenance of the caveat is approached by considering whether there is a lower risk of injustice by permitting the caveat to remain on title or by ordering its removal.[3]
[2]Piroshenko v Grojsman (2010) 27 VR 489 [7].
[3]Bradto Pty Ltd v State of Victoria (2006) 15 VR 65.
Vitale & Sons’ claim of an ‘equitable interest as mortgagee’ is by no means straightforward to comprehend. As the grounds of claim set out on the caveat itself indicate, the interest is said to arise by virtue of rights of subrogation. I will need to return to the principles of subrogation shortly but, before doing so, I will set out the essential factual basis upon which the caveator relies.
The essential facts relied upon are as follows:
(a)Vitale & Sons supplied plasterboard to another company, LH Blue Pty Ltd (‘LH Blue’) pursuant to a supply agreement made 27 May 2011. LH Blue was a building company. Four cheques were drawn by LH Blue on its account at NAB in May and August 2013, totalling $110 000, in favour of Vitale & Sons for payment of various invoices for the plasterboard. Those cheques were all dishonoured by the NAB.
(b)The terms of the supply agreement included a retention of title clause (Exhibit PEF‑1; clause 16). The clause provided that the goods would not pass to the buyer until the price was paid in full and that, while the seller retained full and legal equitable title in the goods, the seller authorised the buyer to sell the goods as agent for the account only of the seller. It further provided:
Proceeds of the sale are the property of the seller and the buyer will hold such proceeds for and on behalf of the seller in a fiduciary capacity.
(c)John Lu (also Ye Lin Lu) is a director of LH Blue. He is also the husband of the plaintiff, Ms Li. He was a guarantor of LH Blue’s liabilities to Vitale & Sons under the supply agreement. On 9 January 2014, Vitale & Sons obtained default judgment against John Lu for the amount then owing to it by LH Blue under the supply agreement. The judgment sum was $127 836.40.
(d)Meanwhile, on 12 December 2013, LH Blue had been wound up by order of the Federal Court of Australia.
(e)Going further back in time, on 24 June 2013, Vitale & Sons had registered its ‘retention of title interest’ under clause 16 of the supply agreement, as a security interest on the Personal Property Securities Register (‘PPS register’), pursuant to the Personal Property Securities Act 2009 (Cth) (‘PPS Act’).
(f)Even further back, on 21 December 2011, LH Blue had given the NAB a fixed and floating debenture charge over its undertaking, and all present and future property and assets of the company, to secure all moneys then and from that time onwards owing and which remained unpaid by the company to the NAB. The NAB’s security interest was recorded on the PPS register on 7 May 2012.
(g)Vitale & Sons alleges that Ms Li and LH Blue Family Pty Ltd, a company related to LH Blue, are both guarantors (and indemnifiers) of the debts of LH Blue to the NAB. (This matter is asserted in an affidavit sworn by its solicitor, but it is not clear that the evidence bears out that conclusion.[4])
(h)Ms Li and John Lu are directors of LH Blue Family Pty Ltd, trustee of the LH Blue Trust.
(i)As well as holding the guarantee and indemnity from Ms Li to secure the indebtedness of LH Blue under any banking facility granted to it, the NAB also held a mortgage over the Kew property (AJ455681H) to secure Ms Li’s obligations under the guarantee and indemnity, being the mortgage referred to on the face of the caveat as mentioned above.[5]
[4]See paragraph 17 of the affidavit of Philip Eric Fox, 26 June 2014. However, the guarantee produced on subpoena and handed to the Court at the hearing is a guarantee and indemnity given by Qinghua Ji, Ye Lin Lu, LH Blue and LH Blue Plaster Pty Ltd in favour of the NAB in relation to the indebtedness of LH Blue Family Pty Ltd as trustee for the LH Blue Trust.
[5]Alternatively, the mortgage over the Kew property was given as collateral security for the indebtedness of Qinghua Li as guarantor of LH Blue Family Pty Ltd’s debt (see the previous footnote). In that case, the mortgage over the Kew property is not collateral security for the debts of LH Blue but for those of a different company.
Mr I Upjohn, who appeared for Vitale & Sons, argued that the above facts and circumstances gave rise to an entitlement on the part of Vitale & Sons to be subrogated to the interest of the NAB as mortgagee of the Kew property. His argument appeared to raise two bases for subrogation to operate. One basis seemed to depend on the rights of a surety who satisfies a debtor’s debt to a secured creditor. The other seemed to rely on the doctrine of marshalling that would apply when a secured creditor resorts to one of two available securities to satisfy a debt, prejudicing another secured creditor that holds only one of those securities.
Although the first of those two bases has numerous qualifications and additional requirements as discussed in Meagher Gummow & Lehane’s Equity Doctrine and Remedies,[6] it at least involves the following features:
… where A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor.[7]
[6]Meagher Gummow & Lehane’s Equity Doctrine and Remedies (Butterworths LexisNexis, 4th ed, 2002), Chapter 9, Subrogation, ‘Payment out of prior securities’, 357ff.
[7]Ibid 358.
The second basis is succinctly illustrated in Goode on Commercial Law:[8]
This doctrine is designed to ensure that where creditor A has a charge over assets x and y and creditor B takes a second charge over asset y, B does not suffer, and the debtor is not unjustly enriched, as the result of A resorting to asset y before he resorts to asset x. While equity does not restrict A’s right to enforce his securities in any order he chooses, B will become subrogated to A’s rights over the asset x to the extent to which A has recouped himself from asset y.[9]
[8]Ewan McKendrick, ed., Goode on Commercial Law (Penguin, 4th ed, 2010).
[9]Ibid 687–688, citing Wallis v Woodyear (1855) 2 Jur NS 179; see also Tyler Young Croft, Fisher & Lightwood’s Law of Mortgage (LexisNexis Butterworths, 3rd Australian Edition, 2013) 717.
Mr Upjohn’s argument began with the proposition that the supply of plaster by Vitale & Sons to LH Blue ‘improved’ the value of NAB’s security, by way of debenture charge, held over LH Blue. That proposition was said to follow from the assumed fact (there being no particular evidence about this) that LH Blue’s use of the plaster enabled the company to continue to trade and perform building works for which it was entitled to receive payment from its clients. Mr Upjohn argued (although there was no evidence about this) that the supply of the plaster by Vitale & Sons resulted either in an increase in the value of stock on the balance sheet of LH Blue, or, after the plaster was affixed to a customer’s premises, deposits of money to its bank account from customers in payment for the works.[10]
[10]Or, at the very least, a chose in action being the enforceable debt arising from the installation of the plaster in building works.
Amongst other things, that proposition also seemed to raise the operation of the priority rules under the PPS Act. That is, it raised the question whether a supplier (in this case, Vitale & Sons) who sells product to a company which has given a prior, registered security interest in its assets and undertaking to another creditor (in this case, the NAB), ranks behind that other creditor under a later‑registered security interest over the particular goods supplied or the proceeds of sale of those goods (in this case, the retention of title clause). No argument was directed to that issue, but it may be that the later‑registered holder of the retention of title clause maintains priority over the earlier ranking security interest in the subject matter of its security.[11] If that is so, it is questionable whether the supply of goods did ‘improve’ NAB’s security as claimed.
[11]See Personal Property Securities Act 2009 ss 12, 14(1), 62.
Putting that issue aside, Mr Upjohn’s next proposition was that by not honouring LH Blue’s cheques in favour of Vitale & Sons, the NAB avoided increasing the size of the debt owed to it by LH Blue. So, he contended, the dishonouring of the cheques had the further consequence that LH Blue remained indebted to Vitale & Sons for the very amount of money for which LH Blue would have been indebted to the NAB had it honoured the cheques.
Mr Upjohn conceded that the bank was perfectly entitled to dishonour the cheques.
On those facts and propositions, Mr Upjohn’s written submissions proceeded as follows:
Had the Bank honoured the cheques [Ms Li] would have been liable on her guarantee of [LH Blue’s] indebtedness to the extent of a further $110,000. The Kew property would have been encumbered with such debt. So too would [LH Blue’s] assets under the debenture charge, which assets now included the plaster and the work in progress performed using the plaster.
By operation of the doctrine of marshalling the intervention of equity is attracted to prevent the prejudice, which would otherwise result to [Vitale & Sons], a secured creditor of [LH Blue], caused by NAB’s dishonour of the cheques. NAB had the means of satisfying [LH Blue’s] debt on the overdraft account out of other funds, including [Ms Li’s] mortgage over the Kew property.
The rationale for equitable intervention is the avoidance of prejudice caused to a mortgagee [who is] a single security by another mortgagee holding multiple securities in exercising its choice of fund out of which to satisfy the debt: a classical statement of a doctrine is in Aldrich v Cooper (1803) 8 Ves 382, 32 ER 402, per Lord Elden LC at p408 of ER:
Wherever there is a double fund, though this Court will not restrain the party, yet he shall not so operate his payments so as to disappoint another claim, whether arising by the law or by the act of the testator.
As I followed Mr Upjohn’s argument, it went as follows:
· by the NAB choosing not to honour LH Blue’s cheques to Vitale & Sons for that plasterboard, Vitale & Sons remained the creditor of LH Blue for the $110 000 rather than the NAB becoming the creditor of LH Blue for the same sum;
· therefore, Vitale & Sons (in effect) met or satisfied LH Blue’s debt to the NAB so that, on the first of the two bases identified above, Vitale & Sons is subrogated to the NAB’s mortgage security over the Kew property;
· further, or alternatively, the NAB had two ‘funds’ out of which it could enforce its debt against LH Blue: one was the company’s property under the debenture security; the other was the Kew property via the guarantee given by Ms Li secured by the mortgage;
· Vitale & Sons had only one fund from which it could enforce its debt, namely the company’s property (ie the plasterboard or the proceeds of sale thereof) secured by the retention of title clause;
· so, by the NAB choosing not to honour LH Blue’s cheques to Vitale & Sons for that plasterboard, the NAB, in effect, elected to enforce its ‘debt’ (for the cheques?) out of the first of those two funds, ie the company’s property, by not increasing the debt owed under the debenture charge. It did so, rather than recovering its ‘debt’ (which would have arisen if it had it honoured the cheques) under the second of the two available funds, ie the mortgage over Kew securing the Li guarantee/indemnity;
· therefore, on second of the two bases identified above, Vitale & Sons is entitled by the doctrines of marshalling and subrogation to enforce its debt against LH Blue by being subrogated to the NAB’s ‘second fund’, namely the mortgage interest in the Kew property.
Although the categories of case in which the doctrine of subrogation might apply is not closed, nevertheless, in my view, this chain of reasoning does not raise any serious question to be tried. It is misconceived and breaks down at numerous levels of principle and logic.
Vitale & Sons did not pay out any debt owed by LH Blue to the NAB. The ‘debt’ that Vitale & Sons appears to rely upon, is the debt LH Blue would have owed had the NAB honoured the cheques. But the NAB did not honour the cheques, and no relevant debt arose. Vitale & Son’s argument treats the refusal by the NAB to extend credit to LH Blue which, if extended, would have expunged LH Blue’s debt to Vitale & Sons, as being tantamount to Vitale & Sons paying off a debt owed to the NAB. It is not the same thing, or even the equivalent of it. In my view the refusal by the NAB to honour the cheques in those circumstances does not raise any serious question to be tried concerning the subrogation of Vitale & Sons to the NAB’s mortgage over the Kew property.
Secondly, the act of the NAB electing to dishonour the cheques drawn by LH Blue was not an election by the NAB to resort to one of two available securities, to the prejudice of Vitale & Sons who only had the one, to recover its debt. The NAB’s act was not an act to recover debt at all, still less to enforce a security. It merely avoided the creation of a further debt. It did not resort to any security. It did nothing to attract the operation of the equitable principle that exists to alleviate an unjust enrichment of the debtor (LH Blue) or the suffering of the creditor (Vitale & Sons).
In any event, the foundation for the operation of the marshalling principle has not been established. LH Blue did not, relevantly, grant two securities to the NAB. The ‘second’ security that Vitale & Sons points to — the one to which it wishes to be subrogated — is the mortgage given by Ms Li which secures her obligations under the guarantee and indemnity. It is not a security granted by LH Blue. As the writer of Fisher & Lightwood’s Law of Mortgages explained:
The doctrine only operates in relation to securities given by the debtor, not, for example, to a collateral security given by the debtor’s company or by some relative…[12]
[12]ELG Tyler, PW Young, CE Croft, Fisher & Lightwood’s Law of Mortgage (LexisNexis Butterworths, 3rd Australian Edition, 2013) 718.
Mr Upjohn placed some reliance upon the decision in Scholefield Goodman & Sons v Zyngier.[13] In my view that case does not assist his argument. In short, the facts were: S was a surety of the debtor to the bank; Z, the defendant, was found not to be a surety to the bank for the same debt; in those circumstances, despite S discharging the debtor’s debt (for which S was surety) to the bank, S was not entitled to the security the bank held over Z’s property. I disagree with Mr Upjohn’s submission that the parallel between that case and the present is ‘obvious’ and the reason why the surety, S, lost in that case was on a point that is absent in this case. Not only is Vitale & Sons not a surety of the same debt of LH Blue to the NAB, it is not a surety at all.
[13][1984] VR 445; affirmed on appeal to the Privy Council, [1986] VR 311.
Mr Gronow, who appeared for Ms Li, enumerated a number of other objections to the reasoning and conclusion advanced for Vitale & Sons. It is unnecessary that I address all of them. In my view what I have said so far is sufficient to dispose of Vitale & Sons’ argument that there is any serious question to be tried in support of the caveat. But, most if not all of Mr Gronow’s arguments had merit. Some were different ways of addressing or expressing the same flaws I have mentioned. Others highlighted other potential weaknesses or objections: such as objectionable affidavit material; the nature of Vitale & Sons’ interest in the proceeds of the sale of plasterboard and whether it was a security interest;[14] whether a retention of title clause, despite being a ‘security interest’ recognised under the Personal Property Securities Act, is a relevant security for the purpose of the doctrines of subrogation and marshalling; and so on.
[14]But see ss 33 and 63 of the PPSA.
Having reached the view I have stated concerning any serious question to be tried, it is not necessary that I consider any question of the balance of convenience. Nor do I need to consider, as Mr Upjohn urged, the imposition of conditions upon the removal of the caveat.
I will simply order that the caveat be removed.
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