Reading v Commonwealth Bank of Australia

[2003] NSWSC 686

CITATION:	Reading v Commonwealth Bank of Australia [2003] NSWSC 686
HEARING DATE(S):	Tuesday, 6 May 2003
JUDGMENT DATE:	29 July 2003
JURISDICTION:	Equity Division
JUDGMENT OF:	Master McLaughlin
DECISION:	(1) I order that the amended statement of claim be struck out as against the First Defendant; (2) I order that the Plaintiffs pay the costs of the First Defendant of the notice of motion filed by the First Defendant on 27 November 2002 and of the proceedings; (3) The exhibits may be returned.
CATCHWORDS:	Practice - Pleading - Application to strike out amended statement of claim - Whether pleading discloses a cause of action against First Defendant - Cause of action pleaded in fraud against mortgagee - Actual knowledge of the fraud must be established - Whether Plaintiffs have an in personam claim against mortgagee - Cause of action pleaded in negligence can result only in an award of damages.
LEGISLATION CITED:	Contracts Review Act 1980 Real Property Act 1900 Transfer of Land Act 1958 (Vic)
CASES CITED:	Assets Company Limited v Mere Roihi [1905] AC 176 Bahr v Nicolay [No.2] (1988) 164 CLR 604 Barnes v Addy (1874) LR 9 ChApp 244 Barry v Heider (1914) 19 CLR 197 Blair v Curran (139) 62 CLR 464 Chasfild Pty Limited v Tarranto [1991 2 VR 316 Frazer v Walker [1967] 1 AC 569 Koorootang Nominees Pty Limited v Australia and New Zealand Banking Group Limited [1998] 3 VR 16 Port of Melbourne Authority v Anshun Pty Limited (1981) 147 CLR 589 Vassos v State Bank of South Australia [1993] 2 VR 316
PARTIES :	Noel George Reading (First Plaintiff) Margot Miriam Reading (Second Plaintiff) Nicole Reading (Third Plaintiff) Commonwealth Bank of Australia (First Defendant) Trevor Jon Schmierer (Second Defendant) Paul Leslie Reading (Third Defendant)
FILE NUMBER(S):	SC 2569/02
COUNSEL:	N. Obrart (Plaintiffs) R.G. McHugh (First Defendant)
SOLICITORS:	Jackson Smith, Solicitors (Plaintiffs) Corrs Chambers Westgarth (First Defendant) Carbone Anderson (Second Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

MASTER McLAUGHLIN

Tuesday, 29 July 2003

2569 of 2002 NOEL GEORGE READING and ORS -v- COMMONWEALTH BANK OF AUSTRALIA and ORS

JUDGMENT

1 MASTER: By notice of motion filed on 27 November 2002 the Commonwealth Bank of Australia, the First Defendant, sought substantively an order that the statement of claim be struck out pursuant to the provisions of Part 15 rule 26(1)(a) of the Supreme Court Rules. That notice of motion was on 26 March 2003 specially fixed to be heard by me on 6 May 2003.

2 However, before that notice of motion came on for hearing the Plaintiffs had served upon the Defendants, but had not filed, a form of a proposed amended statement of claim.

3 When the matter was called on 6 May 2003 Counsel for the First Defendant and Counsel for the Plaintiffs made submissions concerning the most appropriate and practical procedure which should be adopted in the circumstances which then obtained, where it was apparent that the Plaintiffs were no longer desirous of relying upon the statement of claim in the form in which that pleading had been filed on 18 November 27 August 2002.

4 Ultimately the Plaintiff and the First Defendant agreed upon the following orders, which were thereupon made by consent:

(1). The Plaintiffs have leave to amend their statement of claim in the form verified on 18 November 2002, subject to the First Defendant’s right to move to strike that pleading out.

(2). There be no order as to costs of the amendment.

(3). The First Defendant have leave to amend its notice of motion filed on 27 November 2002 to refer to the amended statement of claim.

5 The amended statement of claim was thereupon filed in Court and the hearing then proceeded as an application by the First Defendant to strike out that pleading.

6 That the basis of the present application and the complaints of the First Defendant concerning the form of the amended statement of claim be understood it is appropriate that I should set forth, at least in summary, the procedural history of this matter.

7 The proceedings were instituted by the filing of summons 2569 of 2002 on 7 May 2002.

8 The Plaintiffs named in that summons were Noel George Reading, First Plaintiff; Margot Miram Reading, Second Plaintiff. That summons named three defendants, being Commonwealth Bank of Australia, First Defendant (the present applicant); Trevor John Schmierer, Second Defendant; and Paul Leslie Reading, Third Defendant. Subsequently, pursuant to order made by consent on 11 July 2002, Nicole Katheryn Reading was joined as the Third Plaintiff in the proceedings. The First Plaintiff is the husband of the Second Plaintiff. The Third Plaintiff is their daughter. The Third Defendant is the son of the First and Second Plaintiff. He became bankrupt on 27 November 2000, pursuant to Part X of the Bankruptcy Act 1966. The Second Defendant is his trustee in bankruptcy.

9 Neither the Second Defendant nor the Third Defendant has taken any part in the proceedings. Neither has filed an appearance. Neither has been represented at or has participated in the present application. Indeed, neither is affected by the present application.

10 On 11 July 2002 an order was made for the filing of pleadings. In consequence, on 27 August 2002 the Plaintiffs filed a statement of claim. That was the document which was the subject of the notice of motion filed by the First Defendant on 27 November 2002. However, for reasons which are obscure, that statement of claim was given a fresh number, 4266 of 2002, rather than (as would have accorded both with logic and with practice) being filed in proceedings 2569 of 2002.

11 I have already recorded that that statement of claim has now been superseded by the amended statement of claim which was filed in Court on 6 May 2002.

12 The causes of action against the First Defendant which are pleaded in the amended statement of claim result from a number of conveyancing transactions in which the Plaintiffs and the Third Defendant were involved with the First Defendant. Those transactions relate to a house property situate at and known as 5 Clyde Street, Rutherford (referred to in the pleading as “Clyde Street”) of which the First and Second Plaintiffs had been the registered proprietors from about 1971 until some time in 1998, and which throughout that period and until the present time has been the residence of the First and Second Plaintiffs; and to a house property situate at and known as 6 Adams Street, Rutherford (“Adams Street”), which was purchased by the Third Defendant in 1998 and was sold by him in 2000.

13 It would appear that, for the purposes of protecting their residence from creditors of the business of the First Plaintiff, which was then in difficulties, the First and Second Plaintiffs on 21 April 1995 transferred Clyde Street to the Third Defendant, who subsequently became the registered proprietor thereof. Thereafter, allegedly unbeknownst to the First and Second Plaintiffs, the Third Defendant granted two separate mortgages over Clyde Street to the First Defendant. The Third Defendant also raised a loan with the First Defendant upon the security of Adam Street, the First, Second and Third Plaintiffs being parties to the loan contract with the First Defendant.

14 By the amended pleading the Plaintiffs assert that the mortgages over Clyde Street were procured by the fraud of the Third Defendant “within the meaning of section 42 of the Real Property Act (paragraph 23). Further, that the First Defendant had actual or asserted knowledge of certain matters concerning the relationship of the Plaintiffs (and, in particular, the First Plaintiff) to the Clyde Street property (including the facts that the First and Second Plaintiffs lived at Clyde Street, that the First and Second Plaintiffs considered Clyde Street to be owned by them, that the First Plaintiff (inadvertently referred to in paragraph 23E as “the First Defendant”) was making all the repayments in relation to Clyde Street, that the Third Defendant did not live at Clyde Street, and that the transfer of Clyde Street to the Third Defendant was procured by fraud of the Third Defendant and/or “was held on trust for the First and Second Plaintiffs”.

15 The amended pleading then, in paragraph 23H asserts,

In the premises the first and second mortgage were procured by the fraud of the First Defendant within the meaning of s42 of the Real Property Act .

16 The amended pleading then proceeds to assert that at all material times the First Defendant owed to the Plaintiffs a duty of care (paragraph 26), and that in breach of that duty the First Defendant granted to the Third Defendant a second mortgage over Clyde Street in relation to an overdraft facility for the Third Defendant’s business (paragraph 27), and that the granting of the second mortgage by the First Defendant was in breach of its duty of care (paragraph 27A), and that that breach of its duty by the First Defendant caused loss and damage to the Plaintiffs (paragraph 28).

17 The amended pleading then proceeds to allege that in or about November 1998 the First Defendant threatened to sell Clyde Street unless the First and Second Plaintiffs paid $30,000 to the First Defendant to pay out the overdraft (paragraph 29), that on 11 November 1998 the First and Second Plaintiffs paid $30,000 to the First Defendant to pay out the overdraft (paragraph 30), and that that amount was paid as a result of the First Defendant’s breach of its duty of care (31); further, or in the alternative, that the $30,000 was paid as a result of unconscionable and illegitimate pressure placed on the First and Second Plaintiffs by the First Defendant (paragraph 32), and that the First and Second Plaintiffs had no reasonable alternative but to submit to the pressure of the First Defendant (paragraph 33).

18 By paragraphs 34 to 39 the Plaintiffs plead an asserted cause of action in respect to a loan contract entered into by them with the First Defendant on or about 11 August 1997 in relation to the property known as 6 Adams Street, Rutherford (“Adams Street”). It is alleged that the Third Defendant did not explain that loan contract to the Plaintiffs (paragraph 35), and that the First Defendant did not explain that contract to the Plaintiffs (paragraph 36).

19 By the amended pleading the Plaintiffs allege that they did not sign that contract as a result of their independent and free judgment, but as a result of the trust and confidence they placed in the Third Defendant and the undue influence of the Third Defendant (paragraph 37). It is then alleged that the First Defendant knew or ought to have known that that contract was signed by the Plaintiffs (although paragraph 38 refers to “the First, Second and Third Defendants”) as a result of the undue influence of the First Defendant.

20 Paragraph 40 pleads that at all material times the Plaintiffs were under a special disability with regard to the Adams Street loan contract, that the First Defendant had notice of the special disability of the Plaintiffs (paragraph 41), and that in entering into the Adams Street loan contract with the Plaintiffs the First Defendant took advantage of the special disability of the Plaintiffs, such that to rely on that contract would be unconscionable (paragraph 42). Paragraph 43 of the amended pleading asserts a cause of action grounded upon the provisions of the Contracts Review Act 1980, alleging that the Adams Street contract was unjust.

21 In paragraphs 46 to 50 it is alleged, inter alia, that, in respect to the loan contract with the First Defendant in relation to Clyde Street, the Second and Third Plaintiffs signed that loan contract as a result of the undue influence of the Third Defendant (paragraph 49), and that the First Defendant had knowledge that that contract was signed by the Second and Third Plaintiffs as a result of the undue influence of the Third Defendant.

22 The Plaintiffs then plead that at all material times they were under a special disability with regard to the Clyde Street contract (paragraph 51), and that the First Defendant knew or should have known of the special disability of the Plaintiffs (paragraph 52). It is then alleged that in entering into the Clyde Street loan with the Second and Third Plaintiffs the First Defendant took advantage of the special disability of the Plaintiffs, such that to rely on the Clyde Street loan contract as against the Second and Third Plaintiffs would be unconscionable. Paragraph 54 asserts a cause of action in the Second and Third Plaintiffs attracting the provisions of the Contracts Review Act.

23 The present application of the First Defendant is brought pursuant to the provisions of Part 15 Rule 26(1)(a), which provides, relevantly,

Where a pleading -
(a) discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading;
….
the Court may at any stage of the proceedings, on terms, order that the whole or any part of the pleading be struck out.

24 In an application of the nature of that presently before the Court, being an application to strike out a pleading, it is appropriate that the Court should proceed upon the basis that the Plaintiffs at a final hearing will be able to establish the factual matters asserted by them in the pleading.

25 I have had the benefit of receiving a written outline of submissions from Counsel for the First Defendant. That written outline will be retained in the Court file.

26 The allegations made by the Plaintiffs in respect to the transfer by them of Clyde Street to the Third Defendant assert that that transfer was procured by the fraud of the Third Defendant within the meaning of section 42 of the Real Property Act 1900. Subsequently the First Defendant granted to the Third Defendant two mortgages over Clyde Street. It is asserted on behalf of the Plaintiffs that those mortgages can be impugned upon the ground of fraud attributed to the First Defendant. In support of that assertion the Plaintiffs submit that the First Defendant had constructive knowledge of the fraud of the Third Defendant and that the Third Defendant itself was thus guilty of fraud. The Plaintiffs in that regard rely upon the decision of Hansen J in the Supreme Court of Victoria in Koorootang Nomineees Pty Limited v Australia and New Zealand Banking Group Limited [1998] 3 VR 16, especially at 74-84. In that case His Honour had occasion to consider the effect of the registration of a forged mortgage in favour of a bank in the light of section 42(1) of the Transfer of Land Act 1958 (Victoria) (which contains provisions equivalent to those of section 42(1) of the Real Property Act 1900 (New South Wales).)

27 The First Defendant has an indefeasible title to the two mortgages, in consequence of the provisions of section 42 of the Real Property Act. That indefeasible title can be defeated only if there is fraud of the nature referred to in the section. Subsection (1) of section 42 provides relevantly,

…the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded…

28 The fraud which will vitiate the indefeasibility of the registered proprietor of (in the instant case) the subject mortgages is, in the words of Mason CJ and Dawson J in Bahr v Nicolay [No.2] (1988) 164 CLR 604 at 614, “actual fraud, personal dishonesty or moral turpitude” on the part of that registered proprietor”. In the same case Wilson and Toohey JJ said, at 636, “It is in the conduct of the [registered proprietor] that fraud must be found”.

29 It is settled law that fraud by a person from whom the registered proprietor claims (in the instant case, fraud by the Third Defendant) does not affect the title of the registered proprietor unless knowledge of the fraud is brought home to the registered proprietor or its agent (Assets Company Limited v Mere Roihi [1905] AC 176).

30 In Koorootang Hanson J expressly acknowledged, at 73,

It has long since been held that “fraud” in section 42(1) is confined to fraud on the part of the registered proprietor or his agent: Assets Co Limited v Mere Roihi [1905] AC 176 at 210; Frazer v Walker [1967] 1 AC 569 at 580; Breskvar v Wall (1971) 126 CLR 376 at 384 per Barwick CJ; Barr v Nicolay [No.2] (1988) 164 CLR 604 at 633 per Wilson and Toohey JJ.

31 In Vassos v State Bank of South Australia [1993] 2 VR 316 at 327 Hayne J held that Chasfild Pty Limited v Taranto [1991] 1 VR 225 was wrongly decided, and that the word “fraud” in section 44(1) of the Victoria legislation refers only to fraud engaged in by or on behalf of the party who seeks and obtains the relevant amendment to the register.

32 In the instant case the assertion that the First Defendant knew that the transfer of Clyde Street to the Third Defendant was procured by the fraud of the Third Defendant is not supported by any facts pleaded in the amended statement of claim. The assertion that the First Defendant should have known that the transfer of Clyde Street to the Third Defendant was procured by the fraud of the Third Defendant is without relevance to any cause of action asserted by he Plaintiffs.

33 The assertion that the first and second mortgages were procured by the fraud of the First Defendant within the meaning of section 42 of the Real Property Act is contrary to law in the context of the facts which are pleaded in the amended statement of claim. Unless the Plaintiffs plead express facts which support actual fraud on the part of the First Defendant, they cannot substantiate a cause of action in fraud against that Defendant merely by pointing to the fraud of the Third Defendant. The assertion that the First Defendant should have known that the transfer was procured by fraud is not sufficient (even if the Plaintiffs can establish that the First Defendant should have known that fact).

34 Accordingly, I am satisfied that there is no reasonable cause of action in fraud disclosed against the First Defendant in the amended statement of claim.

35 However, in Koorootang Hansen J, at pages 74 to 76, considered what are described as in personam claims against the holder of a registered title. In Frazer v Walker at 585 the Privy Council emphasised that the principle of indefeasibility of title

…in no way denies the right of a plaintiff to bring against a registered proprietor a claim in personam, founded in law or in equity, for such relief as a court acting in personam may grant.

36 This confirmed the long held view that the Torrens System, while conferring certainty of title, does not undermine the fundamental doctrines by which courts of equity enforce conscientious obligations entered into by land owners (see Barry v Heider (1914) 19 CLR 197 at 213).

37 In Koorootang Hansen J, at 74-75 reviewed all the authorities concerning such an in personam claim (or a “personal equity”) relevant to the matter before him. It is unnecessary for me to repeat the views expressed by His Honour I would confine myself to referring to the judgment of Lord Selborne LC in Barnes v Addy (1874) LR 9 ChApp 244 at 251-252, where His Lordship said,

But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.

38 In this regard it is apposite to observe that the provisions of section 45(1) of the Real Property Act expressly address the situation of a mortgagee bona fide for valuable consideration of any estate or interest in land under the provisions of that Act in respect of which the person is the registered proprietor. Subsection (2) of that section expressly precludes proceedings for the recovery of damages or for the possession or recovery of land against such a mortgagee merely because, relevantly, the mortgagor (as is pleaded in the instant case) may have been registered as proprietor through fraud.

39 The facts pleaded in the amended statement of claim are not capable of sustaining an in personam action against the First Defendant. But it should be emphasised that no such in personam action is, in fact, pleaded against the First Defendant in the amended statement of claim.

40 I summarise, therefore, as follows my foregoing views concerning any asserted cause of action against the First Defendant grounded upon fraud. There is no basis for a claim against the First Defendant grounded upon actual fraud on the part of that Defendant. In the absence of actual fraud the Plaintiffs cannot sustain any cause of action, by way of impugning the mortgages of the Clyde Street property, based upon some imputed fraud against the First Defendant. But, in any event, the matters pleaded in the amended statement of claim cannot sustain such an allegation of imputed fraud.

41 Further, although the Plaintiffs do not plead an in personam claim against the First Defendant entitling them to relief by way of damages or, for example, by way of a declaration of a constructive trust in their favour over the Clyde Street property, the facts alleged in the amended statement of claim do not, in any event, support such a cause of action.

42 I turn to the asserted cause of action in negligence.

43 I am in agreement with the submission of the First Defendant that the matters alleged in paragraphs 26 to 28 are incapable of establishing a duty of care owed by the bank at a time when the Third Defendant entered into the mortgage on 18 September 1997.

44 I am also in agreement that such a cause of action would not ground relief of the nature sought in prayers 5B or 6 of the amended statement of claim. Such a cause of action in negligence, if successful, could result only in an award of damages. No such award is claimed in the amended statement of claim. In this regard, however, I would observe that the prayers for relief in a pleading do not, strictly, constitute part of the pleading, and that a pleading is not necessarily defective in consequence of the nature of the relief which is claimed therein.

45 As to unconscionable conduct, the conduct of the bank in intimating an intention to exercise its rights pursuant to a valid registered mortgage unless the indebtedness secured by that mortgage is paid does not constitute unconscionable conduct. I am in agreement with the submission on behalf of the First Defendant that by stating such an intention the bank was giving to the First and Second Plaintiffs an opportunity to prevent the sale of their residence, and that the conduct of the First Defendant in that regard was far from being unconscionable.

46 In respect to undue influence (paragraphs 46 to 50), the facts pleaded do not in any way constitute undue influence or any other form of misconduct against the bank. There is no material in the pleading sufficient to support the assertion in paragraph 38 that the First Defendant knew or ought to have known that the Clyde Street loan contract was signed by the Second and Third Plaintiffs as a result of the undue influence of the Third Defendant.

47 As to special disability (paragraphs 51-53) the only basis of the claim against the First Defendant is that the First Defendant “knew or should have known” of the alleged special disability of the Plaintiffs, and that in entering into the Clyde Street loan with the Second and Third Plaintiffs the First Defendant took advantage of their special disability, such that to rely on that loan contract against those Plaintiffs “would be unconscionable”. There are no facts alleged or particulars provided to support this allegation, and the affidavits of the Plaintiffs do not provide such evidence.

48 The Plaintiffs assert an entitlement to relief under the Contracts Review Act 1980. However, they merely assert that the Clyde Street loan contract was unjust as regards the Second and Third Plaintiffs in the circumstances relating to the contract at the time it was made. No particulars whatsoever are given of that allegation. There is no material in the pleading which would support a conclusion that it was even arguable that the Clyde Street loan contract was unjust.

49 I turn to the allegations relating to the judgment in proceedings 11552 of 1999 in respect to the Adams Street loan. The assertion in paragraph 45 that the Plaintiffs were unaware of those proceedings and were informed of them in July 2002 (I assume that by paragraph 45 the pleader means that they were informed of those proceedings for the first time in July 2002) cannot be sustained. The First and Second Plaintiffs filed a notice of appearance in those proceedings on 26 July 1999. There is evidence that the Plaintiffs were all served in the proceedings. The Third Plaintiff in her affidavit of 18 November 2002 expressly states that a person whom she describes as “the Sheriff” served her with papers “which I think were in relation to Adams Street”.

50 Quite apart from the principles of issue estoppel (see Blair v Curran (1939) 62 CLR 464 at 531-532 per Dixon J) and the principles enunciated by the High Court of Australia in Port of Melbourne Authority v Anshun Pty Limited (1981) 147 CLR 589, which in my conclusion preclude in the circumstances of this case the setting aside of that judgment, it is totally inappropriate for the Plaintiffs in the present proceedings, being proceedings in the Equity Division of the Supreme Court, to seek relief my way of setting aside a judgment entered in entirely separate proceedings, being proceedings 11552 of 1999 in the Common Law Division of the Court, which were proceedings for possession of land as well as for the payment of a liquidated sum.

51 For the foregoing reasons I am satisfied that the amended statement of claim does not disclose a cause of action against the First Defendant. In consequence, therefore, I propose to strike out the amended statement of claim as against the First Defendant.

52 I make the following orders:

(1). I order that the amended statement of claim be struck out as against the First Defendant.

(2). I order that the Plaintiffs pay the costs of the First Defendant of the notice of motion filed by the First Defendant on 27 November 2002 and of the proceedings.

(3). The exhibits may be returned.

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Last Modified: 12/05/2003