Mcauley & Ors v Panagiotidis (No 3) No. DCCIV-96-1062 Judgment No. D6

[1999] SADC 6

MCAULEY & OTHERS v KATERINA PANAGIOTIDIS and DROSSOS PANAGIOTIDIS (NO 3)
[1999] SADC D6

Judge Lunn
Civil

Background

1. On 25 November 1998 I delivered reasons (Jud No D3916) determining various issues raised on the trial of the action.  Broadly speaking I held that it would be unconscionable to set aside the first mortgage against the 1st defendant unless that was conditional upon her paying to the plaintiffs the moneys applied from the first mortgage to discharge her liabilities under the mortgage which she gave on 9 July 1993 to the State Bank and the mortgage which she had given to the Commonwealth Bank.  I do not repeat what I said in those reasons of 25 November 1998 and these reasons need to be read in conjunction with them.  Since delivering those reasons I have heard further evidence and submissions relating to the amount which was secured by the 1993 State Bank mortgage, the form of the judgment, costs and other incidental matters.

The amount secured by the 1993 State Bank mortgage

1. The plaintiffs contended that the express terms of the mortgage document, including the standard terms which were incorporated into it, meant that the mortgage secured all of the moneys which were owed by both defendants to the State Bank.  I do not accept this.  However, the document is difficult to interpret and the issue can be resolved on other grounds.  The 1st defendant executed a guarantee to the State Bank contemporaneously with the mortgage although the mortgage makes no express reference to that guarantee.  Clause 2 of the guarantee states:

   “2..... That notwithstanding anything herein contained the total amount payable by the Guarantor hereunder shall not exceed the sum of Thirty Five Thousand Dollars ($35,000) and costs and expenses accrued or incurred by the Bank together with a sum equal to one year’s interest on that amount at the rate or rates charged by the Bank to the Debtor at the date of demand or of the determination hereof (as the case may be) and the costs and expenses incurred in obtaining payment of the said moneys together with interest at the rate or rates aforesaid on such total amount from the date that demand for payment thereof shall have been made hereunder until payment.”

Although I have very little evidence about the circumstances of the execution of these documents, and no evidence from any officer of the bank who was actively involved in the transaction, I find that the mortgage document and the guarantee document are so intertwined that they should be read together and that the amount secured by the mortgage should be limited to the amounts referred to in clause 2 of the guarantee as quoted above.  This is consistent with the terms of a document on bank letterhead, although not signed by the bank, but obviously prepared and accepted by it, which was addressed to the Commonwealth Bank indicating the terms of the mortgage.

1. In its context I find that “a sum equal to one year’s interest on that amount” in clause 2 of the guarantee is limited to whatever interest had properly accrued on the principal sum of $35,000 at the time of the determination of the liability, which was 14 February 1994 when the State Bank mortgage was discharged on the settlement between the parties on the first mortgage.  Thus only interest from 30 June 1993 to 14 February 1994 can be claimed under clause 2 of the guarantee.  I accept the evidence of Ms Field that the applicable interest rate was 10.9% per annum.  The amount recoverable for interest to 14 February 1994 under clause 2 is therefore only $2,394 and the total amount recoverable, subject to any continuing interest, is therefore $37,394.  I do not consider that clause 2 of the guarantee requires that any credits to the overdraft account of the 2nd defendant can be applied to reduce either the $35,000 or the one year’s interest.

Whether the liabilities on the State Bank mortgage and the Commonwealth Bank mortgages are to be reduced for contingencies?

1. Counsel for the 1st defendant submitted that any liability to be imposed on her in respect of the State Bank mortgage debt as a condition of relief to her on the first mortgage should be discounted as her liability on the State Bank mortgage was only contingent, and she may not have ever been called upon to meet it.  Neither counsel nor I could find any authority on whether such contingencies should be brought into account.  I need not pursue the legal question because in any event even if they were to be brought into account I would not have found that the amount should be reduced.  On the evidence which I have about the financial affairs of the 2nd defendant, which is referred to in my earlier reasons, it is clear that his liabilities far exceeded his assets at the relevant times.  There is no prospect that he could have discharged the overdraft to the State Bank out of his own resources, and it is virtually certain that ultimately the State Bank would have had recourse to its mortgage from the 1st defendant to obtain payment.  Insofar as the 2nd defendant could have discharged some of the overdraft liability presumably that would have been applied first against the excess of the overdraft above the $35,000 limit, and would have been most unlikely to have saved the 1st defendant from having to pay out to the State Bank the full extent of her liability under the guarantee.  Upon the 1st defendant having discharged her liability to the bank under the guarantee she would have had a legal right to claim contribution from the 2nd defendant for what she had so paid.  This would have probably made her a creditor in the 2nd defendant’s 1996 bankruptcy.  There is no evidence that she would have received any dividend in that bankruptcy or, if for some reason the debt did not crystallise until after the bankruptcy, that the 2nd defendant has any other means to satisfy it.  Accordingly, the effect of the moneys borrowed on the first mortgage to pay out the State Bank mortgage was to benefit the 1st defendant by an amount of $37,394 which she would inevitably have otherwise had to pay to the State Bank.

2. Similar conclusions apply in relation to the $10,000 which was paid out of the first mortgage to discharge the 1st defendant’s mortgage to the Commonwealth Bank.  That bank had already taken the first steps towards enforcing its mortgage and there is no doubt that the 1st defendant had to find $10,000 quickly to pay out that bank or face having her house sold.  As I found on page 15 of my previous reasons, the 1st defendant received reimbursement of this $10,000, but authorised the 2nd defendant to apply it in his business.  Accordingly, the effect of the $10,000 being applied out of the moneys from the first mortgage to discharge the Commonwealth Bank mortgage was to benefit the 1st defendant in satisfying a liability which she would have had to have discharged from her other resources but for entering into the first mortgage.

Interest on the amounts representing the State and Commonwealth Bank mortgages after their discharges

1. The benefit received by the 1st defendant from the first mortgage also included not having to service debts for which she would have been liable if the State Bank mortgage and the Commonwealth Bank mortgage had not been discharged from the first mortgage.  In relation to the State Bank mortgage clause 2 of the guarantee quoted above made the 1st defendant liable after service of a notice of demand for additional interest until payment.  If the notice of demand had been served later than 14 February 1994, she would have been liable for a greater amount for the “sum equal to 1 year’s interest”, although that would have been capped at 1 year’s interest if the notice of demand had been served more than a year after 30 June 1994.  There is no evidence about how long the State Bank might have allowed the overdraft liability to continue, but from the other circumstances of the 2nd defendant’s business from mid 1993 onwards, which I dealt with as far as I was able on the evidence in my previous reasons, it is highly likely that the State Bank would have determined the overdraft arrangement and have called up the guarantee fairly soon after 30 June 1994.

2. The interest on the plaintiffs’ first mortgage was fully paid up until about the beginning of 1996.  Some arrears accrued thereafter until June 1996 and after that time no interest payments were made.  The 1st defendant is to be given the benefit of those interest payments which were made on the first mortgage in assessing what benefit she had from the moneys from that mortgage which were used to satisfy the State Bank and Commonwealth Bank mortgages.  Her benefit emanating through the first mortgage for not having to pay interest on those other mortgages only runs from early 1996.

3. Under clause 2 of the State Bank guarantee the defendant would have been liable for continuing interest on the total sum of $37,394 at the rate charged at the relevant time by that bank. However, there is no evidence about what those rates were. I will assess it at a conservative commercial borrowing rate for the relevant period in a similar fashion to the assessment of pre-judgment interest under s39 of the District Court Act, and generally having some regard to the rates in the Third Schedule to the District Court Rules 1992. On such evidence as I have I find that the 1st defendant would have paid $8,000 in interest to the State Bank during the period from 1996 to 19 January 1999 and during which she was in default in payment of the interest due under the first mortgage. This means that as a result of the first mortgage she has benefited in what would have otherwise been her liability to the State Bank by $45,394.

4. In relation to the $10,000 which was paid to discharge the Commonwealth Bank mortgage it is likely that she would have had to have borrowed that sum from Growdens or some like lending institution in any event.  Accordingly, it is appropriate to assess the interest benefit in respect of that $10,000 as the proportion of the outstanding interest on the whole of the first mortgage which the $10,000 bears to the total principal of $122,500.  The outstanding interest under the first mortgage to 19 January 1999 is $54,371 and the proportion of that represented by the $10,000 is $4,438.  Accordingly, the benefit which the 1st defendant has derived to this date from the first mortgage in respect of the discharge of her liability to the Commonwealth Bank is $14,438.

5. The 1st defendant also benefited to some small degree by the payment out from the first mortgage of various expenses for which she was liable, or potentially liable, under the State Bank mortgage and the Commonwealth Bank mortgage.  It is impossible to assess these amounts precisely.  Overall I find that the total benefit to date derived by the 1st defendant from the application of the first mortgage moneys to discharge her liabilities under the State Bank mortgage and the Commonwealth Bank mortgage is $60,000.

Appropriate form of judgment

1. The plaintiffs, other than the last-named plaintiff, submitted that they should have judgment for possession and the full amount now payable under the first mortgage unless the 1st defendant satisfied a pre-condition of payment of a sum which I have now assessed at $60,000, before that judgment in their favour took effect.  To the contrary, the 1st defendant’s counsel submitted that there should only be a balance judgment against the 1st defendant for $60,000 and that no order for possession should be made unless that sum was not paid.

2. The precedent books do not assist in determining what is the appropriate form of judgment.  In Vadasz v Pioneer Concrete SA Pty Ltd (1995) 184 CLR 102 at 115-6 the High Court said:

   “The appellant is, ‘seeking the assistance of a court of equity and he who seeks equity must do equity’.  The court must look at what is practically just for both parties, not only the appellant. ....’  As Olsson J said in the present case: ‘the practical approach adopted by the learned trial Judge was clearly justified, if not demanded, by the situation revealed by the evidence.”

In Cheese v Thomas [1994] 1 All ER 35 the English Court of Appeal said in a similar context at 41-42:

“It is axiomatic that, when reversing this transaction, the court is concerned to achieve practical justice for both parties, not the plaintiff alone.  The plaintiff is seeking the assistance of a court of equity, and he who seeks equity must do equity .... achieving a practically just outcome in that regard requires the court to look at all the circumstances while keeping the basic objective firmly in mind.  To carry out this exercise the court is, of necessity, exercising a measure of discretion in the sense that it is determining what are the requirements of practical justice in the particular case.”

Here the practical course, which is in accordance with the legal principles, is to give judgment in favour of the plaintiffs on the first mortgage conditional upon the 1st defendant not first doing equity to the plaintiffs.  This is consistent with the form of judgment approved by the High Court in Maguire v Makaronis, 25/6/97, FC97/020, unreported.  The proposal of the 1st defendant would be contrary to principle in that it would require the avoidance of the 1st mortgage before she had done equity for the plaintiffs.

Operation of s55a of the Law of Property Act

1. The defendant’s counsel submitted that the judgment proposed was contrary to s55a of the Law of Property Act 1936. I do not agree. That section bars the enforcement of a mortgage unless certain notices have been served on the mortgagee. If the 1st defendant pays the $60,000, it will defeat the enforcement of the mortgage. That first mortgage will only become enforceable if the court refuses equitable relief to the 1st defendant in respect of it because she has not done equity to the plaintiffs in paying the $60,000. If the 1st defendant fails to be entitled to equitable relief in setting aside the first mortgage, there is no suggestion that the plaintiffs have not duly complied with s55a of the Law of Property Act. There is no need under that section for the plaintiffs to serve a further notice on the 1st defendant requiring payment of $60,000 before they can recover that sum.

Costs

1. There was no argument that the 1st defendant was entitled to her costs as against the last named plaintiff insofar as the action related to the second mortgage.  Rather than require a laborious and expensive taxing exercise to determine precisely what costs related to that second mortgage, I exercise a broad discretion to fix those costs at 7.5% of the 1st defendant’s costs of the action.  In relation to the issues on the first mortgage the other plaintiffs sought an order for their costs of the action, but the 1st defendant did not seek an order for costs.  On the first mortgage both parties partly succeeded.  The plaintiffs had not made any offer which reflected the ultimate result of the issues.  Without interfering with other costs orders previously made, there is to be no order as to the balance of the costs of the action.

Terms of judgment

1. As there is no counterclaim I do not intend to make declarations concerning the validity of the mortgages.  Subject to counsel being at liberty to speak to the precise terms of the minutes, there will generally be judgment in the following terms:

1...... Judgment for the 1st defendant against the last-named plaintiff in respect of his cause of action on mortgage No 7811998.

1. The last-named plaintiff is to pay to the 1st defendant 7.5% of her costs of the action as agreed or taxed.

1. Paragraphs 4 and 5 below are not to have effect if within sixty days, or within such further time as the court allows, the 1st defendant pays to the plaintiffs, except the last-named plaintiff, $60,000 plus interest on that sum as from today at the rate applicable under the Third Schedule to the District Court Rules 1992 adjusted on a daily basis until payment.

2. Subject to paragraph 3 above an order for possession over the subject property in usual terms under Part XVII of the Real Property Act 1886 in favour of the plaintiffs other than the last-named plaintiff.

3. Subject to paragraph 3, judgment for the plaintiffs other than the last-named plaintiff, against the 1st defendant for $176,871, which includes pre-judgment interest.

4. Subject to other orders for costs which have already been made, there be no order as to the costs of the action.

5. Liberty to any party to apply.