Vidovic v MKM Capital Pty Ltd - [2010] SASC 164

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
VIDOVIC v MKM CAPITAL PTY LTD & ANOR
[2010] SASC 164
Reasons of Judge Withers a Master of the Supreme Court
31 May 2010
PROCEDURE
Mortgagee sale - payment of surplus funds.
Real Property Act 1886 (SA) s 135, referred to.
Bofinger & Anor v Kingsway Group Limited & Ors (2009) 239 CLR 269; Mercantile Credits Ltd v Australia and New Zealand Banking Group Ltd (1988) 48 SASR 407; Fisher & Lightwood's Law of Mortgage par 20.48, applied.
Commonwealth of Australia v BIS Cleanaway Limited [2007] NSWSC 1075; Sabah Yazgi v Permanent Custodians Ltd [2007] NSWCA 240; Angas Securities Ltd & KWS Capital (No 2) Pty Ltd v Williams (unreported, Judge Chivell, 26 April 2007, [2007] SADC 41), considered.

VIDOVIC v MKM CAPITAL PTY LTD & ANOR
[2010] SASC 164

JUDGE WITHERS.   The plaintiff initiated these proceedings by summons filed on 15 January 2010. At the same time the plaintiff filed an interlocutory application seeking summary judgment in the following terms:
2.That summary judgment be granted to the plaintiff against the defendant with Orders that the defendant comply with Section 135 of the Real Property Act 1886 (SA) and:
2.1    the defendant advise the plaintiff in writing prior to settlement the balance of funds to be paid to the plaintiff in her capacity as the second mortgagee;
2.2    the defendant provide adjusted cheque details with respect to the amount to be paid to the defendant’s solicitors (Fisher Jeffries Trust Account) after allowing for the amount to be paid to the plaintiff as the second mortgagee, from the balance of the funds constituted by the purchase price (as adjusted);
2.3    the defendant be liable for the costs of this application and not deduct its costs from the settlement proceeds due to the plaintiff as the second mortgagee, and/or the mortgagor;
2.4    the defendant refrain from charging additional interest after 13 January 2010; and
2.5    the defendant’s legal costs in this action and any costs paid by it be borne by it and the defendant not seek [sic] recover those from the plaintiff or the mortgagor.
That interlocutory application was supported by an affidavit of the plaintiff filed on that date (FDN 3) setting out the background to the matter. In addition an affidavit of a Mr Paul Short, who is a conveyancer, was filed on 18 January 2010 (FDN 4) setting out his views as to what would normally happen on a property settlement. An affidavit of John Birnie Bulman was also filed on 18 January 2010 (FDN 5) in support of the plaintiff’s application. On 20 January 2010 the plaintiff filed a further affidavit exhibiting correspondence between the solicitors from the parties and verifying the facts alleged in a statement of claim filed on 19 January 2010 (FDN 6).
In that statement of claim the plaintiff pleads that the defendant holds a first registered mortgage over property located at Lady Gowrie Drive, Largs North (“the property”). The plaintiff asserts that she holds a second registered mortgage over the property stamped to the value of $380,000.00 plus interest and costs. It is pleaded that the defendant obtained possession of the property and exercised its power of sale as mortgagee selling same at auction on 29 November 2009 for the sum of $1,210,000.00. The plaintiff asserts that she purchased the property. However it appears to have been purchased at auction by Mr David Starke and/or his nominee. Mr Starke is the solicitor for the plaintiff. He subsequently nominated the plaintiff as purchaser pursuant to the contract of sale.
The plaintiff pleads that she had paid the deposit of $20,000.00 on the day of purchase and that settlement was due on 13 January 2010. It is pleaded that from the proceeds of sale there will be sufficient money to pay the expenses of sale, the amount due to the defendant under the first mortgage and some monies to the plaintiff as second mortgagee.
It is pleaded that the plaintiff and MKM both executed a Memorandum of Transfer in preparation for settlement. However, the plaintiff alleges that the defendant has failed or refused to tell the plaintiff the amount payable to her as second mortgagee at settlement. By its solicitors the defendant advised the plaintiff’s solicitors that it intended at settlement that the disposition of the funds would be to itself the sum of $1,002,431.42 and to its solicitors’ trust account the balance sum of $189,743.67. There was no provision in a settlement statement for payment to the plaintiff as second mortgagee of the balance of the proceeds of sale.
The plaintiff asserted that pursuant to s 135 of the Real Property Act 1886 the defendant was obliged to pay to the plaintiff the balance of the purchase price after payment of expenses occasioned by the sale and deducting the monies due to it. This was because the defendant is the registered proprietor of a second mortgage on the property and therefore has priority over any other claimant. It was pleaded that the settlement was delayed because of the defendant’s failure to provide details of the balance to be paid to the plaintiff and to allow the plaintiff a credit at settlement as purchaser for the amount that was due to her pursuant to the second mortgage.
The remedies sought in the statement of claim are as follows:
1.that the defendant complies with Section 135 of the Real Property Act 1886 (SA).
2.the defendant:
2.1 provide the plaintiff with the amount payable to the plaintiff as second mortgagee at settlement (‘the second mortgage payment’); and
2.2 give the plaintiff, as the purchaser, a credit at settlement for the second mortgage payment.
3.That MKM pay the plaintiff’s costs of this action, on an indemnity basis;
4.That the defendant be precluded from making any claim for interest on the MKM entitlement from 13 January 2010.
5.That MKM is precluded from making any claim or adjusting the payments to be made at settlement for any legal costs incurred by MKM on account of MKM’s failure; and
4.[sic]Such other orders as deemed fit by this Honourable Court.
When the matter first came before the Court on 19 January 2010 a solicitor appeared for Assist Funding Pty Ltd and intimated that company would seek permission to intervene in these proceedings. Directions were given about the filing of any answering affidavits by the defendant, as to any application for permission to intervene with supporting affidavit, as to the filing of written submissions, and the matter was listed for argument on 9 February 2010.
On 27 January 2010 an affidavit was filed by the solicitor for the defendant (FDN 8) setting out documents evidencing the loan agreement between the defendant and Mr & Mrs Bulman and the mortgage securing that loan. Further exhibited was a copy of a caveat lodged by Assist Funding Pty Ltd. The defendant exhibited a contract for the sale and purchase of the property signed on 29 November 2009 with the defendant as vendor and David Ashley Starke and/or nominees as purchaser.
The defendant’s solicitor attested that on 8 December 2009 she had a telephone conversation with the solicitor for Assist Funding in which that solicitor notified her that her client might challenge the plaintiff’s right to receive surplus funds. She exhibited a letter from the solicitors for Assist Funding to the solicitors for the plaintiff of 18 January 2010 as “MFM7”. In that letter it was asserted on behalf of Assist Funding that there was a challenge to the validity of the plaintiff’s second mortgage by reason of assertions made in other actions by Mr Bulman that he was unable to manage his own financial affairs during the period of time of the plaintiff’s loans and second mortgage. Exhibit “MFM7” also included a copy letter from the solicitors for Assist Funding to the solicitors for the plaintiff, also dated 18 January 2010, in which those solicitors had sought documentary proof as to the loan arrangement. It was noted therein that a loan of $130,000.00 made subsequent to Assist Funding’s caveat, and being part of the funds allegedly advanced by the plaintiff to Mr Bulman, was provided after the plaintiff had notice of Assist Funding’s interest and accordingly any priority in respect of that particular loan was challenged. The letter from the solicitors for Assist Funding to the solicitors for the defendant suggested that it would be prudent for the defendant to pay any surplus monies from the sale into the Supreme Court Suitor’s Fund pending the resolution of the dispute between Assist Funding and the plaintiff.
On 28 January 2010 the solicitors for Assist Funding filed an interlocutory application (FDN 10) seeking permission to intervene in these proceedings and the following further orders:
3.That the defendant pay the balance of the proceeds of sale (‘Surplus Funds’) of the property comprised and described in Certificate of Title Register Book Volume 5577 Folio 439 (Property) into the Supreme Court Suitor’s Fund following payment to the defendant of the amounts due to it in respect of Memorandum of Mortgage number 10748097.
4.That the plaintiff’s Memorandum of Mortgage number 11039378 lodged in the Lands Titles Office in respect of the Property be set-aside.
5.Assist Funding Pty Ltd be paid the Surplus Funds from the Supreme Court Suitor’s Fund.
6.Costs against the plaintiff.
That application was supported by a lengthy affidavit of Jason Di Iulio (FDN 11), who is the chief executive officer of Assist Funding. Mr Di Iulio attested to various matters relating to the capacity of Mr Bulman to enter into any agreement (which capacity was subject to a challenge in another matter in this Court involving Assist Funding and Mr Bulman). He set out Assist Funding’s concern as to the involvement of Autopawn Australia Pty Ltd, a company in which the plaintiff is involved as sole director and secretary and which Assist Funding alleged was the source of funds in whole or in part for any monies advanced to Mr Bulman. Exhibit “JD12” to Mr Di Iulio’s affidavit is a copy of the ASIC search of Autopawn Australia Pty Ltd, which records the plaintiff to be the director, secretary and sole shareholder in that company. Based on the facts alleged in his affidavit Mr Di Iulio asserted that Assist Funding ought to be given permission to intervene in these proceedings. He indicated its intention to challenge the plaintiff’s mortgage.
On 5 February 2010 the defendant filed an outline of submissions (FDN 12) and a list of authorities (FDN 13). On the same day submissions were filed on behalf of the applicant intervenor (FDN 14) in support of its application to intervene. The plaintiff filed an outline of submissions on that day as well (FDN 15). A further affidavit of the solicitor for Assist Funding was filed on 5 February 2010 (FDN 16). That affidavit addressed the late filing of the application to intervene and a correction to exhibits to the affidavit of Mr Di Iulio.
On 9 February 2010 with the consent of the plaintiff an order was made granting permission to Assist Funding Pty Ltd to intervene. The costs of the application for intervention were reserved. The defendant, which had filed its submissions on the substantive issues, sought and was granted leave to withdraw from the balance of the argument as the defendant asserted that as a matter of law the plaintiff could not obtain the orders that she sought and that there was no further point in it being involved. Further directions were given in relation to the filing of any affidavit upon which the intervenor wished to rely in opposition to the plaintiff’s application for summary judgment and directions generally given to the progressing of the matter to argument. The matter was adjourned for argument to 1 March 2010. Notice was given that the intervenor wished to cross-examine both the plaintiff and Mr Bulman on affidavits that had been filed on their behalf on 9 February 2010 in support of the application.
On 9 February 2010 Mr Bulman had filed an affidavit (FDN 17) in which he attested that the loan repayments due to Ms Vidovic should have been better described as due to V Vidovic and Autopawn Australia Pty Ltd because that is how it had been treated by him and her. He confirmed that he had received $250,000.00 advanced by Ms Vidovic and that he instructed her to pay out monies in accordance with a disbursement authority exhibited to his affidavit – Document 17A.
Ms Vidovic filed an affidavit on the same day (FDN 18) in which she set out more detail as to the monies that she had advanced to Mr Bulman over a period of time prior to the first loan. The repayment of these monies formed part of the disbursement of the $250,000.00 advance to him secured by the second mortgage over the subject property. She attested that she had personally borrowed $250,000.00 from Modern Industries Pty Ltd in September 2008 secured by a mortgage over her own home and that she had then advanced this money to Mr Bulman to pay for his indebtedness as detailed in the disbursement authority (Document 17A). She attested that she had used a cheque account of Autopawn Australia Pty Ltd with Bank SA to deposit the monies received from Modern Industries and to make the payments out in accordance with the disbursement authority. She attested that she did not operate her own cheque account at the time with Bank SA or any other financial institution. She attested that she liaised with the plaintiff for the production of the original duplicate certificate of title for the purpose of registering her second mortgage and in relation to a payment to be made to Golden Gate Funding Pty Ltd of $50,000.00 to have a caveat discharged. The bank cheque drawn for that amount was to Assist Finance in accordance with Golden Gate’s instructions.
Ms Vidovic attested as to a meeting on 4 November 2009 with representatives of the intervenor with a view to endeavouring to resolve issues between them. The meeting was unsuccessful.
On 15 February 2010 an affidavit of Lorraine Bulman (FDN 21) was filed attesting that she was married to Mr John Bulman and that the property had been purchased as a family home in April 2007. She attested that repayments on the loan from the first defendant had fallen into arrears and in July 2008 it had obtained a possession order. She attested that Mr Bulman had obtained a loan from the plaintiff or her company to pay the arrears which enabled them to regain possession. She attested as to various loans she had made to Mr Bulman.
An affidavit was filed by Mr Simmons (FDN 22) as to the conference involving him, Mr Di Iulio and the plaintiff on 4 November 2009. He attested that it was a without prejudice conference held in an effort to resolve the matter.
On that date an affidavit of a further solicitor representing the intervenor was filed (FDN 23) as to a telephone conversation in relation to one of the payments referred to in the disbursement authority (Document 17A).
A further affidavit was filed on behalf of the intervenor by Mr Di Iulio (FDN 24) responding to the earlier affidavits of Ms Vidovic and Mr Bulman filed in support of the application. That affidavit is largely in the nature of a series of assertions setting out the intervenor’s position in relation to the plaintiff’s claim. It can be best described as a document giving notice of a defence to what the intervenor anticipates would be the assertions in any statement of claim directed in part to it. The affidavit was objected to by counsel for the plaintiff but I receive it only as evidence of what the intervenor would seek to plead in this matter in the event that the plaintiff is unsuccessful at this stage with her application for summary judgment and is obliged to pursue the action against the defendant and intervenor.
There was then an application by Mr Starke for leave to intervene in the matter (FDN 26). That was supported by his affidavit filed on 24 February 2010 (FDN 27) in which he attested that he had been served with a Notice to Complete by the defendant. The notice required him to complete settlement pursuant to the contract of sale and purchase at 11.30 am on 24 February 2010. That application was refused at argument. In my view the issues in relation to Mr Starke are sufficiently detached from the case presently before the Court that his intervention is not justified. Beyond that there was a serious issue as to whether or not his intervention in this matter would mean almost inevitably that he would have to cease acting for Ms Vidovic because of a potential conflict of interest which would have considerably disrupted the progress of the application.
In any event on 26 February 2010 an affidavit (FDN 30) was filed by a solicitor from the solicitors for the defendant attesting that she had attended the Lands Titles Office on 24 February 2010 at 11.30 am for the purpose of settlement. She attested that Mr Starke had attended and had presented to an employee of Fisher Jeffries two bank cheques in the amounts of $34,431.75 and $968,000.00. She attested that she had informed him that the defendant would not accept those two bank cheques in any event because they fell short of the full purchase price. She exhibited correspondence forwarded to Mr Starke, being the Notice to Complete leading to the settlement attendance at the Lands Titles Office, and on 24 February 2010 a Notice of Determination of the contract which had been given to terminate the contract – see Document 30B.
A further affidavit of Ms Vidovic was filed on 26 February 2010 (FDN 31) which exhibited documents referable to the failed settlement and other correspondence in relation to the substantive action. The matter came before the Court for argument on 1 March 2010. Despite being granted permission to withdraw on the occasion that it was last before the Court the defendant remained represented at the hearing.
At the hearing there was substantial cross-examination of the plaintiff by counsel for the intervenor. It was quite clear from that cross-examination that Autopawn Australia Pty Ltd had been the vehicle used to advance much of the money to Mr Bulman. It was also clear that the plaintiff regarded herself and Autopawn as one and the same when it came to financial matters. In many ways she saw it as her alter ego.
I found Ms Vidovic’s evidence to be consistent and I am satisfied that she was providing to the Court evidence that was truthful to the best of her recollection. She seemed to have a good understanding of the monies that had been loaned to Mr Bulman and of the arrangements made.
Ms Vidovic produced a number of documents pursuant to subpoena. Those documents related to the first loan. She had not brought any documents relating to the second loan of $130,000.00 because she had been advised that this was of little relevance as there would be insufficient surplus monies to pay out the first loan in any event. The records of Autopawn Australia Pty Ltd had not been disclosed at an earlier time to the solicitors for the intervenor. The intervenor had requested same and argued that it was arguable at the very least that it was Autopawn Australia Pty Ltd that advanced monies to Mr Bulman and not Ms Vidovic and that in those circumstances her mortgage was liable to challenge.
I generally accept the evidence of Ms Vidovic.
Mr Bulman was also cross-examined. It quickly became apparent that Mr Bulman has little recollection of any detail. He was somewhat aggressive in his responses to counsel’s questions. He was cross-examined as to whether or not the monies advanced came from both Ms Vidovic and Autopawn. He maintained the position that the monies came from “Vicki”, namely Ms Vidovic, despite having attested in his affidavit (FDN 17) in paragraph 1 that the loan monies should in fact have been recorded as coming from V Vidovic (“Vicki”) and Autopawn Australia Pty Ltd. Mr Bulman was unimpressive in cross-examination and I would have considerable reservations about relying on his uncorroborated evidence.

Counsel for the plaintiff challenged the admissibility of much of the affidavit of Mr Di Iulio of 16 February 2010 – FDN 24. I have already indicated that I only regard that as an intimation of a likely intended plea of Assist Funding. He challenged some aspects of the affidavit of Mr Simmons which I regard as of no great relevance to the dispute before me in any event – FDN 22. He objected to the affidavit of Ms Hooftallen as not being relevant to the issue before me – FDN 23. In my view if relevant it is only of the most marginal relevance. The plaintiff relied on her affidavits and those of Mr Bulman and relied on her outlines of submissions.
Plaintiff’s counsel argued that it was apparent that the intervenor had a belief that the loan from Ms Vidovic to Mr Bulman secured by mortgage was a sham but that there was no evidence presented to support that belief. He argued that the intervenor’s contention that the plaintiff’s case under the second mortgage was a money claim overlooked the fact that the details of the loan and its repayment were included within the second mortgage document itself. The express language of the mortgage referred to the advance. It was argued that there was no prospect of the mortgage being declared void and not a scintilla of evidence to sustain any challenge to it pursuant to s 69 of the Real Property Act. There was therefore an indefeasible title and the plaintiff was entitled to the orders that she sought.
Counsel for the intervenor submitted that the application for summary judgment called into question the underlying debt secured by the mortgage. However, he argued that the most recent affidavits disclosed that the contract of sale had in any event been terminated or at least purported to be terminated and accordingly there was a question in any event as to whether the Court had any role in determining a dispute at all at this stage. He submitted, correctly, that the Court does not give advisory decisions. He noted that the orders sought by the plaintiff were all orders in futuro perhaps best described as being in the nature of mandatory injunctions. It was argued that because the contract had been terminated the orders sought are in any event futile. The orders might otherwise be described as applications for declaratory relief sought pursuant to s 31 of the Supreme Court Act 1935. In any event it was argued that the Court does not have the jurisdiction to provide the relief sought because there is no factual matrix within which issues arise for resolution.
The intervenor relied on the decision of the Commonwealth of Australia v BIS Cleanaway Limited [2007] NSWSC 1075 wherein at [29] Brereton J, sitting in the Equity jurisdiction of the Supreme Court of New South Wales, said:
[29] That a suit for a declaration should not be in substance the determination of a question anterior to a further suit for substantive relief is authoritatively illustrated by Neeta (Epping) Pty Ltd v Phillips [1974] HCA 18; (1974) 131 CLR 286. At first instance, Holland J had refused to declare that the vendor had not validly terminated a contract for sale of land. The High Court allowed an appeal, deciding that the contract was on foot, but concluding that – as the parties were not in agreement as to the consequences and in particular whether specific performance was available – it was inappropriate to grant the declaration sought. …
Citing Barwick CJ and Jacobs J in the Neeta (Epping) case, Brereton J said:
Unless the parties are agreed on the consequences which flow from a declaration that such a contract has or has not been validly rescinded it is generally undesirable that a court should so declare without any orders for consequential relief. If a party to such a contract claims that a contract has not been validly rescinded such a judicial declaration is proper if that party continues ready and willing at the conclusion of the litigation to perform the contract. …
Further in the decision at [31], Brereton J said in relation to declarations:
Where substantive remedies can be sought, the Supreme Court should insist on their being sought in addition to declarations. Where money is owing, a mere declaration is of less utility than a judgment. For example, it does not carry interest, as does a judgment, and will have to be followed by further proceedings to enable the remedies available to a judgment [creditor] to be obtained. ...
The Supreme Court, in my opinion, should refuse to entertain proceedings for declarations in a case of this kind, unless the appropriate substantive remedies are sought in the proceedings.
Counsel for the intervenor argued that the present case is similar to that considered in [29] of the Commonwealth of Australia v BIS Cleanaway case in that there is first a question that will need to be determined as to whether there still is a contract on foot between the plaintiff and the defendant in respect of which a settlement can be enforced. Accordingly there was no basis for a grant of summary judgment in this case.
Counsel for the intervenor submitted that there was a fairly arguable case that had been put forward by the intervenor. Reference was made to the decision of his Honour Judge Chivell in Angas Securities Ltd & KWS Capital (No 2) Pty Ltd v Williams [2007] SADC 41, where his Honour, in the District Court, found that the defendant had a clearly arguable case and that summary judgment was therefore not justified. His Honour at [17] said:
Mr Morcombe referred to the judgment of Olsson J in Leasefin Corporation v Clarke & Ors Supreme Court Judgment No S3660 delivered 16 October 1992. At [36], his Honour said:
The whole concept of the summary judgment procedure is that, once it appears that a plaintiff has a strong prima facie case for seeking relief, a defendant must, with reasonable particularity, clearly and unequivocally demonstrate that there is a ground of defence which is more than ephemeral, and is patently clearly arguable.
Counsel for the intervenor argued that the intervenor had in this case demonstrated a case that was clearly arguable. He argued that the facts in this matter indicated that $250,000.00 had been borrowed from Modern Industries which had been banked into the account of Autopawn Australia Pty Ltd. Autopawn Australia Pty Ltd had paid out large sums of money. Both the plaintiff and Mr Bulman conceded in their latter affidavits that the loan came from Autopawn Australia Pty Ltd and Ms Vidovic. Accordingly there was at least an arguable case that the plaintiff was not entitled to recover the whole of any monies advanced to Mr Bulman and that the amounts advanced by Autopawn Australia Pty Ltd should not be recoverable by her.
The intervenor’s counsel relied on the decision of Sabah Yazgi v Permanent Custodians Ltd [2007] NSWCA 240, where the Court of Appeal in New South Wales, in considering indefeasibility in terms of a registered mortgage, said at [23] and [24]:
[23] In Perpetual Trustees Victoria Limited v Tsai, Young CJ in Eq was dealing with an appeal from a Master who had entered summary judgment for a mortgagee against a mortgagor. In the course of determining whether summary judgment should have been entered, his Honour reviewed the authorities dealing with the effect of a forged mortgage. His Honour at [13] referred first to the undoubted principle that by virtue of s 42 of the Real Property Act 1900 (NSW) a forged mortgage, when registered without fraud on the part of the mortgagee, conferred an indefeasible title on the mortgagee in respect of the interest in land described in the mortgage.
[24] His Honour then dealt with the question of the extent of that indefeasibility, adopting the question posed by Campbell J in Small v Tomassetti: “indefeasibility for what?” Young CJ in Eq pointed out that the answer to that question depended upon the wording of the covenants in the particular mortgage. He said that under the “old fashioned form of mortgage” there was a statement of the sum that had been lent and an acknowledgement that the moneys had been so lent. Thus, when those matters were stated in the body of the mortgage document, the production of the mortgage document itself constituted prima facie evidence of the existence of the debt. However, where there was no statement of the amount lent in the mortgage, proof of the indebtedness and that the indebtedness was secured by the mortgage had to be established in some other way.
I note that the Court there said that the statement of the amount loaned in the mortgage and an acknowledgement of same only amounts to “prima facie evidence of the existence of the debt”.
The intervenor submitted in conclusion that it was fairly arguable that while a mortgage is indefeasible the debt covenant which it secures is not and that the intervenor had raised sufficient grounds for the Court to find that a challenge to that underlying debt was arguable. Therefore there was a serious question to be tried both on the facts and the law.
Counsel for the defendant relied on the outline of submissions filed by it on 5 February 2010, being FDN 12. He noted that settlement had not occurred pursuant to the contract of sale between the plaintiff and David Starke and/or nominee and that a Notice of Determination had been given. Accordingly, there was a first issue to be determined as to the enforceability of that contract before there could be any determination of the entitlement or otherwise of the plaintiff, and indeed the intervenor, to surplus funds from a settlement.
Defendant’s counsel acknowledged that the material before the Court may not be entirely hypothetical in the sense that the Court could predict with a reasonable degree of certainty that these issues are likely to be subjects of a future dispute. It was also the case that it was not beyond the ability of the parties to reinstate the contract or in any event the plaintiff might sell the property to somebody else.
It was submitted that the relief sought by the plaintiff in its interlocutory application was not legally available to it in any event and that it was a futile application. There was no challenge to the defendant’s right as first mortgagee in possession to sell the property, to take for itself what it was owed under the mortgage and to then deal with the surplus. His submission was that unless and until there was a surplus the defendant was not put in the position of being a trustee for anybody. Once there was a surplus then the defendant did become a trustee of the surplus monies but it was not for it to determine competing claims.
Reference was made to the discussion on the rights and liabilities of subsequent encumbrances in Tyler, Young & Croft’s edition of Fisher & Lightwood’s Law of Mortgage, 2nd Aust ed, at paragraphs 20.44 and 20.45. In paragraph 20.45, the learned authors say:
If there is a dispute as to whether or not there is a subsequent encumbrance (for example where the mortgagor contests the validity of the second mortgage), the surplus should be paid into court, or, if so requested, put on deposit pending a settlement of the dispute. …
If there is no dispute then it was appropriate that surplus monies should be paid to the second mortgagee.
However, even in the circumstances where there is no dispute counsel for the defendant argued that the plaintiff was not entitled to the relief sought in the interlocutory application. Further, it was argued that the plaintiff in any event had no right to demand a set-off of any alleged surplus against the purchase price. No authority was provided by the plaintiff for the assertion that this was an entitlement at law. I find that it is not.
Counsel for the defendant relied on the decision of Bofinger & Anor v Kingsway Group Limited & Ors (2009) 239 CLR 269, where at [35] the High Court said:
[35] Adams v Bank of New South Wales [[1984] 1 NSWLR 285 at 299, 302] is authority that s 58 [of the Real Property Act 1900 (NSW)] is to be read in a manner consistent with the equitable duty of the first mortgagee to account to puisne mortgagees as a trustee for any surplus. The position in equity was described as follows by Kay J in Charles v Jones [(1887) 35 Ch D 544 at 549-550] as follows:
I have never heard it doubted that where a mortgagee sells, and has a balance in his hands, he is a trustee of that balance for the persons beneficially interested. He takes his mortgage as a security for his debt, but, so soon as he has paid himself what is due, he has no right to be in possession of the estate, or of the balance of the purchase-money. He then holds them, to say the least, for the benefit of somebody else, of a second mortgagee, if there be one, or, if not, of the mortgagor. What, then, is he to do? Surely he has a duty cast upon him. His duty is to say, ‘I have paid my debt: this property which is pledged to me, and in respect of which I now hold this surplus in my hands, is not my property. I desire to get rid of this surplus, and hand it back to the person to whom it belongs.’ … The duty of this mortgagee was at least to set this money apart in such a way as to be fruitful for the benefit of the persons beneficially entitled to it. To that extent and in that manner he was, according to my understanding of the law, in a fiduciary relation to the persons entitled to the money. It was so held in the case of Quarrell v Beckford [(1816) 1 Madd 269 [56 ER 100]], and so far as I know has always been so held, and although I quite agree that the Court is very reluctant to treat a mortgagee as being a trustee in any sense while any money is due to him, still when he has paid himself, and has money remaining in his hands which is no longer his property, how can he be treated as other than a trustee of such money?
(Emphasis added.)
Defendant’s counsel correctly, in my view, submitted that as trustee of the surplus the defendant was obliged to hold same for the benefit of any persons who might be entitled to it. If it paid the surplus to any one who was not so entitled then it would be liable as trustee to the person to whom payment was not made and who was ultimately found to be entitled – see Bofinger at [49] and [50].
As to the time in which this process must take place Fisher & Lightwood’s Law of Mortgage, at paragraph 20.48, said as follows:
The mortgagee is then [upon sale being completed] allowed a reasonable time to calculate any surplus. The appropriate searches should have been made previously and the amount due under the mortgage easily obtainable, since details will have been required for any demand or proceedings. Usually the only outstanding matters will be the fees and disbursements of the sale itself. A period of 28 days will generally be adequate for this purpose. Thereafter interest will run on the surplus.
The plaintiff relied on s 135 of the Real Property Act. Section 135 provides:
Appropriation of proceeds
135. The purchase-money to arise from the sale of any such land shall be applied: First—In payment of the expenses occasioned by such sale: Secondly—In payment of the moneys which may then be due or owing to the mortgagee or encumbrancee: Thirdly—In payment of subsequent mortgages or encumbrances, if any, in the order of priority; and the surplus, if any, shall be paid to the mortgagor or encumbrancer, as the case may be.
The plaintiff as the holder of the second registered mortgage argued that she was entitled as of right pursuant to s 135 to payment of the surplus. However, the decision of the Full Court in the matter of Mercantile Credits Ltd v Australia and New Zealand Banking Group Ltd (1988) 48 SASR 407 suggests to the contrary. King CJ, at 410, said in dealing with an argument that sought to rely on s 135 as directing payment of surplus:
I do not think that the language of that section is apt to create a priority which would not otherwise exist. Its broad effect is to provide that the moneys are to be applied in payment of the mortgages according to the priorities established by law, the balance being paid to the mortgagor. Its purpose is not to establish priorities but to provide the machinery for giving effect to the priorities otherwise legally established.
In considering the New South Wales legislation in the Bofinger matter the High Court said, noting the statutory provision for the application of the purchase money from the sale of land by a mortgagee, at [34]:
… Section 58(3) states that the purchase money from the sale of land by a mortgagee in exercise of power of sale “shall be applied”, first in payment of the expenses of the sale, secondly in payment of the first mortgagee, thirdly in payment of subsequent mortgagees in order of priority and that any surplus is to be paid to the mortgagor. However, upon that first mortgagee equity may place requirements as to the disposition of the surplus purchase moneys.
It is not the role of the defendant once it is in a position as trustee of surplus monies from the sale of the property pursuant to its power of sale to determine competing claims to that money. That is the role of the Court. The proper course for the defendant to follow in circumstances where it is aware of competing claims is to pay the money into Court. The payment of money into Court can be done pursuant to s 47 of the Trustee Act 1936 (SA) in the event that there are no proceedings on foot or if there are proceedings on foot can be paid into the Suitor’s Fund for those particular proceedings with notice being given to those persons who may claim a beneficial entitlement thereto.
In my view the defendant has correctly stated the position. Upon a completed sale of the property pursuant to its power of sale under the mortgage the defendant is entitled to, firstly, attend to payment of the expenses associated with the sale; secondly, to apply the funds received to the amount due to it; and, thirdly, in the event of a dispute as to the balance funds to pay the same into Court. In the event that there is no dispute then the balance funds would normally be paid to the person next with priority or in the event that there is no other lender claiming payment, to the mortgagor.
In those circumstances the plaintiff’s interlocutory application must be refused. The orders sought are in any event futile. There is arguably no contract on foot between the plaintiff and the defendant in respect of the sale of the property. If there is such a contract in any event it has not settled. The defendant’s duties are as I have earlier described them in these reasons and no more. The defendant will be liable to account for its disposition of the funds but that circumstance has not yet occurred. That decision can be made without considering the evidence that has been provided as to the arguability of the intervenor’s claim or not.
In any event on the material to date I have formed the view that the intervenor has raised sufficient matters in respect of the payment of the funds to Mr Bulman to find that it has or is likely to have an arguable case as to the proper disposition of any surplus funds. The provision of further information as to the financial accounts of Autopawn Australia Pty Ltd and its treatment of the $250,000.00 could well affect that view. But at this stage the dispute between the plaintiff and the intervenor is not before the Court for determination. The only dispute that the Court is asked to determine is one between the plaintiff and the defendant. In my view that dispute must be determined in the defendant’s favour.
For the foregoing reasons the orders of the Court will be:
1.That the plaintiff’s application for summary judgment (FDN 2) be refused and that the orders sought in paragraphs 2.1 to 2.5 of that application be refused.
2.That the plaintiff is to pay the defendant’s costs of and incidental to the said application.
3.I will hear the parties as to the costs of and incidental to the dispute to date between the plaintiff and the intervenor.
4.That the orders sought in paragraphs 3, 4, 5 and 6 of the intervenor’s application FDN 10 be adjourned.
5.I certify fit for counsel