F M Custodians Limited v McKenzie, McKenzie and North harbour Trustee Company Limited
[2010] NZHC 1374
•26 July 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2009-404-3285
BETWEEN F M CUSTODIANS LIMITED Plaintiff
ANDNOEL RAYMOND MCKENZIE MAUREEN JEAN MCKENZIE AND NORTH HARBOUR TRUSTEE COMPANY LIMITED AS TRUSTEES OF THE MCKENZIE TRUST
First Defendants
ANDNOEL RAYMOND MCKENZIE Second Defendant
ANDMAUREEN JEAN MCKENZIE Third Defendant
ANDMUSTANG MARINE LIMITED Fourth Defendant
ANDMOREPORK PROPERTIES LIMITED Fifth Defendant
ANDLAURIE COLLINS MARINE GROUP LIMITED (IN LIQUIDATION)
Sixth Defendant
ANDANTIPODEAN GROWERS LIMITED Seventh Defendant
ANDMUSTANG MARINE LIMITED Eighth Defendant
ANDG E FINANCE & INSURANCE Ninth Defendant
Hearing: 25 May 2010
Counsel: Michael Sharp and Michele Paddison for Plaintiff to oppose
No appearance 1st-8th Defendants
Justin Toebes for 9th Defendant
Judgment: 26 July 2010 at 4:00pm
F M CUSTODIANS LIMITED V NOEL RAYMOND MCKENZIE AND ORS HC AK CIV-2009-404-3285 26
July 2010
RESERVED JUDGMENT OF HUGH WILLIAMS J.
This judgment was delivered by The Hon. Justice Hugh Williams on
26 July 2010 at 4:00pm
pursuant to Rule 11.5 of the High Court Rules
……………………………………………..
Registrar/Deputy Registrar
A.Claim by way of subrogation by company A whose funds were wrongly used by company B and paid to company C who utilised them in payment to company D considered and claim dismissed.
B. Costs to be dealt with pursuant to paragraphs [70]-[72].
TABLE OF CONTENTS
Paragraph
Issue [1] Facts [3] Legal Principles [11] Submissions [27] Discussion [47] Result [69] Costs [70]
Issue
[1] The issue in this case is which of the plaintiff, F M Custodians Limited, or the ninth defendant, G E Finance & Insurance, is entitled to the whole or part of a fund[1] retained pending determination of this case from the proceeds of the sale by F M Custodians of a property at 6 Scott Road, Hobsonville, Auckland, owned by the first defendants, the McKenzie Trust.
F M CUSTODIANS LIMITED V NOEL RAYMOND MCKENZIE AND ORS HC AK CIV-2009-404-3285 26
July 2010
[1] The amount retained was said to be $360,000 in the amended statement of claim and $340,000 in the agreed chronology but the amount claimed was limited to $197,238.63 during the hearing.
[2] Although the facts on which this hearing proceeded were agreed, the case raises equitable issues of subrogation and tracing which are not the subject of a deal of authority in New Zealand.
Facts
[3] On 31 October 2006 F M Custodians lent McKenzie Trust $4.2m under a term loan contract secured by first mortgage over the property at Scott Road. The mortgage was flat, not table. The loan contract was renewed on 19 November 2007. The advance fell due on the earlier of demand or 10 February 2008. Both contracts and the mortgage were guaranteed by the 2nd-8th Defendants. Mr McKenzie of McKenzie Trust was a director of all of them.
[4] Repayments fell into arrears and by 3 March 2009 nearly $4.2m was owing. Notices of Default were served on the 1st-8th Defendants. On 1 May 2009 McKenzie Trust contracted to sell the property to a third party for $5m. On 4 June 2009
F M Custodians elected to adopt that agreement in accordance with s 179 of the
Property Law Act 2007 and settled the contract on 31 July 2009, receiving almost
$4.4m in settlement (after a $120,000 reduction for work requiring to be done on the property and a $500,000 deposit). The proceeds plus the balance of the deposit were utilised in part-repayment of F M Custodian’s mortgage.
[5] After deductions and adjustments, there remained a deficit of over $900,000 on sale. F M Custodians obtained summary judgment against the 1st-8th Defendants jointly on 19 May 2010 for $977,822.48, together with costs on a solicitor/client basis including disbursements in an agreed amount of $6441.09 plus further costs of
$500 for the appearance on 19 May 2010 – making a total judgment of $984,763.57.
[6] The 6th Defendant, Laurie Collins Marine Group Limited (In Liquidation)
was at relevant times a boat broker operating under a bailment agreement dated
26 September 2007, pursuant to which the boats it sold were in fact owned by G E Finance. Collins Marine accordingly sold the boats on behalf of G E Finance and was under an obligation on sale to pay the proceeds to it.
[7] Two boats were sold by Collins Marine, one in February 2008 for $565,000 (with a trade-in worth $445,000 and later sold for $395,000) and a second in June
2008 for $335,000 (with a trade-in valued at $75,000, and later sold for $63,000).
[8] However, Collins Marine did not pay the funds it received from those two sales to G E Finance. Instead, it paid the funds into its bank account whence they – or part of them - were transferred to the McKenzie Trust’s bank account and were, at least partially, utilised by McKenzie Trust in paying its mortgage interest to
F M Custodians. It is agreed the following payments were made:
Date
Collins Marine boat sale proceeds deposits
Collins Marine transfers to McKenzie Trust
McKenzie Trust transfers to
FM Custodians interest instalment payments
8/4/2008
$125,574.66
9/4/2008 $40,000.00
10/4/2008
$39,060.00 8/5/2008
$40,000.00
12/5/2008
$37,800.00 13/6/2008
$232,001.00
17/6/2008 $40,000.00
20/6/2008 $355,000.00
10/7/2008 $40,000.00
$39,526.00
11/8/2008
$29,500.00
$40,000.00
$40,843.56
27/8/2008
$33,500.00
10/9/2008 $40,000.00
$41,742.75
10/10/2008
$5,000.00
$40,401.86
19/12/2008
$22,000.00
9/1/2009
$40,437.02
[9] It is pertinent to note the following additional agreed matters:
a) All bank accounts of all parties were in credit at all relevant times, though no bank statements were put in evidence and the number of accounts each party held and the extent of the credits and any movements in the bank balances were unproven.
b)Collins Marine remains indebted to G E Finance for the boat sale proceeds.
c) Of the boat sale proceeds, the amount claimed at the hearing,
$197,238.63, could be traced from Collins Marine’s account to McKenzie Trust’s account. Notwithstanding the Collins Marine transfers to McKenzie Trust totalled $227,000 and the McKenzie Trust payments to F M Custodians totalled $279,811.19, the way in which the $197,283.63 was made up was said to be the total of the interest instalments paid on 10 April, 8 May and 10 July 2008;
$40,000 of the interest paid on 11 August and 10 September 2008;
and the balance of $852.63 being part of the interest paid on 10
October 2008.
d)Importantly, F M Custodians had no actual or constructive knowledge at the time any of the listed interest payments were received that any part of those payments may have belonged to G E Finance, may have been subject to a trust or other obligation in G E Finance’s favour, or may have been paid by McKenzie Trust using funds at least partially sourced from Collins Marine.
[10] On 22 May 2009 G E Finance lodged a caveat against F M Custodians’ mortgage over Scott Road, claiming that because of the foregoing facts it was entitled to some of the funds paid on settlement. It followed that with an application for an order preserving the caveat lodged in the Wellington Registry.[2] The way in which G E Finance pleaded its entitlement was not put in evidence in this case. On 21 July 2009 F M Custodians and G E Finance agreed the latter would withdraw
[2] CIV-2009-485-1128 High Court Wellington.
the caveat and allow settlement of the sale of the mortgaged property to be
completed on F M Custodians’ solicitors’ undertaking to hold the portion of the sale proceeds previously mentioned on interest-bearing deposit pending agreement as to entitlement or this Court’s order.
Legal Principles
[11] Although, as will be seen, the juridical basis of G E Finance’s claim varied, the main thrust appeared to be that it was entitled by virtue of subrogation to an interest in the Scott Road mortgage settlement proceeds. It makes analysis of counsel’s submissions more intelligible to discuss the principles of subrogation and the cases on which counsel relied before dealing with the submissions themselves.
[12] Butler: Equity and Trusts in New Zealand[3] contains an interesting discussion of the general topic of subrogation, including drawing together the proposition, to be found principally in English cases. After discussing the traditional uses of subrogation, Dr Butler turns to the general subject of subrogation which is described in the following terms:
The legal concept of subrogation embraces those situations in which equity, in order to prevent unjust enrichment, appears to substitute (in whole or in part, and on such terms and conditions as are just in the circumstances) one party (A) for another party (B) in order to allow A to have the benefit of rights similar to (though not necessarily always identical to) rights which B has, or had, against a third party (C). Exceptionally, A will not be subrogated to the rights of B. Rather, by a weak fiction, A will be put in place of B (who has been paid off by C using A’s money), yet permitted to rely on a security which it (A) thought it had against C but which for some reason (such as invalidity) it did not have.[4]
[3] Butler: Equity and Trusts in New Zealand 2nd ed 2009 para 34.3.1 p987.
[4] Blackburn Building Soc v Cunliffe, Brooks & Co (1883) 22 Ch D 61 (CA), affirmed in
Cunliffe, Brooks & Co v Blackburn Building Soc (1884) 9 App Cas 857 (HL).
[13] Of interest to the present case, Dr Butler notes the observation in Banque Financière de la Cité v Parc (Battersea) Ltd[5]that “subrogation is not a right or a cause of action but an equitable remedy” and continues:[6]
[5] Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221.
[6] Para 34.3.2 p 987.
However, others have suggested that subrogation is best viewed as a mechanism for the identification of a link between money given by the
claimant and the rights of action and securities in the hands of another; operating in this way, subrogation would be an analogue of tracing.[7] In the author’s view, this is an attractive characterisation of subrogation: after all in many subrogation cases the actual “remedy” awarded was not subrogation, but one of the more familiar ones such as an equitable lien or a constructive trust.
[7] A Burrows, The Law of Restitution, London, Butterworths, 1993, ch 2, especially pp 76-93; D Friedmann “Payment by Mistake – Tracing and Subrogation” (1999) 115 LQR 195. Tracing is discussed in ch 35.
[14] The texts and authorities are properly cautious in endeavouring to categorise the circumstances in which subrogation will be allowed – it is, after all, a discretionary remedy designed to avoid or mitigate unjust enrichment - and as Meagher Gummow and Lehane: Equity Doctrines and Remedies[8] say “It is feasible for equity to permit subrogation in circumstances newly before it.”
[8] Meagher Gummow and Lehane: Equity Doctrines and Remedies 4th ed, 2002 para 9-265, p 382.
[15] That said, it is clear that subrogation will not result for payments without prior request or legal obligation (often called “officious conduct”) or where subrogation would contradict statute or contract or where the right to seek subrogation is waived.[9] Even the enquiry as to whether enrichment is “unjust” can be elusive.[10]
[9] Equity and Trusts paras 34.3.3, 34.3.4 and 34.3.5, p 988; dal Pont and Chalmers: Equity and Trusts in Australia 4th ed 2007, para 14.15, pp 382-383; Equity Doctrines and Remedies para 9-020 p 353.
[10] Equities: Doctrines and Remedies para 9-075.
[16] Turning to the cases on which those propositions rely, in Boscawen v Bajwa; Abbey National plc v Boscawen[11]Mr Bajwa mortgaged his property to the Halifax Building Society and later entered into a contract to sell the property to buyers who had obtained a mortgage offer from Abbey National. It paid the funds to the purchaser’s solicitors on terms obliging them to settle the purchase or return the funds if settlement did not occur. The purchaser’s solicitors sent almost all the funds to Mr Bajwa’s solicitors, who then paid the funds to Halifax in repayment of their client’s mortgage arrears and towards principal. A cheque for the balance over
and above Abbey National’s funds from Mr Boscawen’s solicitors was later dishonoured and the solicitor was bankrupted. Mr Bajwa’s solicitors were able to receive that small amount from another account held for him and obtained a discharge of the Halifax mortgage. However, the sale never settled and
Mr Boscawen and others who were judgment creditors of Mr Bajwa obtained a charging order on the property. An order for possession was made. On Abbey National’s counterclaim the Court at first instance held that since its money could be traced through to the payment to Halifax and was used towards the discharge of the mortgage, Abbey National was entitled to a charge on the property by way of subrogation to Halifax’s rights to the extent of the money used to redeem the charge in priority to Mr Boscawen and his fellow plaintiffs. An appeal to the Court of Appeal was dismissed.
[11] Boscawen v Bajwa; Abbey National plc v Boscawen [1995] 4 All ER 769.
[17] After setting out the facts Millett LJ, in the principal judgment, under the heading “Tracing and Subrogation”, held:[12]
[12] At 776-777.
Equity lawyers habitually use the expressions 'the tracing claim' and 'the tracing remedy' to describe the proprietary claim and the proprietary remedy which equity makes available to the beneficial owner who seeks to recover his property in specie from those into whose hands it has come. Tracing properly so-called, however, is neither a claim nor a remedy but a process. Moreover, it is not confined to the case where the plaintiff seeks a proprietary remedy; it is equally necessary where he seeks a personal remedy against the knowing recipient or knowing assistant. It is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received (and if necessary which they still retain) can properly be regarded as representing his property. He needs to do this because his claim is based on the retention by him of a beneficial interest in the property which the defendant handled or received. Unless he can prove this, he cannot (in the traditional language of equity) raise an equity against the defendant or (in the modern language of restitution) show that the defendant's unjust enrichment was at his expense.
In such a case, the defendant will either challenge the plaintiff's claim that the property in question represents his property (ie he will challenge the validity of the tracing exercise), or he will raise a priority dispute (eg by claiming to be a bona fide purchaser without notice). If all else fails, he will raise the defence of innocent change of position. ...
If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant and overcomes any defences which are put forward on the defendant's behalf, he is entitled to a remedy. The remedy will be fashioned to the circumstances. The plaintiff will generally be entitled to a personal remedy; if he seeks a proprietary remedy he must usually prove that the property to which he lays claim is still in the ownership of the defendant. If he succeeds in doing this, the court will treat the defendant as holding the property on a constructive trust for the
plaintiff and will order the defendant to transfer it in specie to the plaintiff. But this is only one of the proprietary remedies which is available to a court of equity. If the plaintiff's money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant's land has been enhanced by the use of the plaintiff's money. And if the plaintiff's money has been used to discharge a mortgage on the defendant's land, then the court may achieve a similar result by treating the land as subject to a charge by way of subrogation in favour of the plaintiff.
Subrogation, therefore, is a remedy, not a cause of action (see Goff and Jones Law of Restitution (4th edn, 1993) pp 589 ff, Orakpo v Manson Investments Ltd [1977] 3 All ER 1 at 7, [1978] AC 95 at 104 per Lord Diplock and Re TH Knitwear (Wholesale) Ltd [1988] 1 All ER 860 at 864, [1988] Ch 275 at 284 per Slade LJ). It is available in a wide variety of different factual situations in which it is required in order to reverse the defendant's unjust enrichment. Equity lawyers speak of a right of subrogation, or of an equity of subrogation, but this merely reflects the fact that it is not a remedy which the court has a general discretion to impose whenever it thinks it just to do so. The equity arises from the conduct of the parties on well-settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. A constructive trust arises in the same way. Once the equity is established the court satisfies it by declaring that the property in question is subject to a charge by way of subrogation in the one case or a constructive trust in the other.
...
It is still a prerequisite of the right to trace in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being (see Agip (Africa) Ltd v Jackson [1992] 4 All ER 451 at 466, [1991] Ch 547 at
566 per Fox LJ).
[18] The judgment then considered Abbey National’s defence to the bank’s counterclaim in the following way:[13]
[13] At 778-779.
The second way in which the Abbey National answers the appellants' submission is by reliance on equity's ability to follow money through a bank account where it has been mixed with other moneys by treating the money in the account as charged with the repayment of his money. As against a wrongdoer the claimant is not obliged to appropriate debits to credits in order to ascertain where his money has gone. Equity's power to charge a mixed fund with the repayment of trust moneys enables the claimant to follow the money, not because it is his, but because it is derived from a fund which is treated as if it were subject to a charge in his favour (see Re Hallett's Estate, Knatchbull v Hallett (1880) 13 Ch D 696, Re Oatway, Hertslet v Oatway [1903] 2 Ch 356 and El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717).
The appellants accept this, but submit that for this purpose Mr Bajwa was not a wrongdoer. He was, as I have said, not guilty of any impropriety or want of probity. He relied on his solicitors, and they acted unwisely, perhaps negligently, and certainly precipitately, but not dishonestly.
Mr Bajwa, it is submitted, was an innocent volunteer who mixed trust money with his own. As such, he was not bound to give priority to the Abbey National, but could claim parity with it. Accordingly, Mr Bajwa and the Abbey National must be treated as having contributed pari passu to the discharge of the Halifax's charge; and in the absence of the necessary evidence the amounts which were provided by Mr Bajwa and the Abbey National respectively cannot be ascertained. ...
For this proposition the appellants rely on a passage in Re Diplock's Estate, Diplock v Wintle [1948] 2 All ER 318 at 348–349, [1948] Ch 465 at 524 as follows:
'Where an innocent volunteer (as distinct from a purchaser for value without notice) mixes “money” of his own with “money” which in equity belongs to another person, or is found in possession of such a mixture, although that other person cannot claim a charge on the mass superior to the claim of the volunteer, he is entitled, nevertheless, to a charge ranking pari passu with the claim of the volunteer … But this burden on the conscience of the volunteer is not such as to compel him to treat the claim of the equitable owner as paramount. That would be to treat the volunteer as strictly as if he himself stood in a fiduciary relationship to the equitable owner which ex hypothesi he does not. The volunteer is under no greater duty of conscience to recognise the interest of the equitable owner than that which lies on a person having an equitable interest in one of two trust funds of “money” which have become mixed towards the equitable owner of the other. Such a person is not in conscience bound to give precedence to the equitable owner of the other of the two funds.'
This would be highly relevant if the distinction which the court was there making was between the honest and the dishonest recipient. But it was not. The distinction was between the innocent recipient who had no reason to suspect that the money was not his own to dispose of as he pleased, and the recipient who knew or ought to have known that the money belonged to another. ...
[19] The judgment then held Mr Bajwa and his solicitors were not innocent volunteers as they knew the money was to be held in trust pending settlement and to be used to discharge Halifax’s mortgage.
[20] Then, turning to Subrogation, the judgment observed:[14]
[14] At 780-781.
The appellants submit that the mere fact that the claimant's money is used to discharge someone else's debt does not entitle him to be subrogated to the creditor whose debt is paid. There must be 'something more': Paul v Speirway Ltd (in liq) [1976] 2 All ER 587 at 597, [1976] Ch 220 at 230 per Oliver J; and see Orakpo v Manson Investments Ltd [1977] 3 All ER 1 at 7, [1978] AC 95 at 105, where Lord Diplock said—
'The mere fact that money lent has been expended on discharging a secured liability of the borrower does not give rise to any implication of subrogation unless the contract under which the money was borrowed provides that the money is to be applied for this purpose: Wylie v Carlyon [1922] 1 Ch 51.'
From this the appellants derive the proposition that in order to be subrogated to the creditor's security the claimant must prove (i) that the claimant intended that his money should be used to discharge the security in question (that being the 'something more' required by Oliver J) and (ii) that he intended to obtain the benefit of the security by subrogation.
I cannot accept that formulation as a rule of general application regardless of the circumstances in which the remedy of subrogation is sought. The cases relied on were all cases where the claimant intended to make an unsecured loan to a borrower who used the money to discharge a secured debt. In such a case the claimant is not entitled to be subrogated to the creditor's security since this would put him in a better position than he had bargained for. Oliver J was not prepared to say more than:
'It is always dangerous to try to lay down general principles unnecessarily, but it does seem to me to be safe to say that where on all the facts the court is satisfied that the true nature of the transaction between the payer of the money and the person at whose instigation it is paid is simply the creation of an unsecured loan, this in itself will be sufficient to dispose of any question of subrogation. That really, as it seems to me, is to say no more than that the question of subrogation or no subrogation cannot be divorced from a review of the rights proved or presumed to be intended to be created between the payer of the money and the person requiring its payment.' (See [1976] 2 All ER 587 at 597, [1976] Ch 220 at 230.)
In that passage Oliver J was plainly limiting his observations to a claim to be subrogated to the creditor's security. ...
In Orakpo v Manson Investments Ltd [1977] 3 All ER 1 at 7, [1978] AC 95 at 107 Lord Diplock pointed out that the remedy of subrogation was available in a whole variety of widely different circumstances, and that this made—
'particularly perilous any attempt to rely on analogy to justify applying to one set of circumstances which would otherwise result in unjust enrichment a remedy of subrogation which has been held to be available for that purpose in another and different set of circumstances.'
The converse is equally true. It is perilous to extrapolate from one set of circumstances, where the court has required a particular precondition to be
satisfied before the remedy of subrogation can be granted, a general rule which makes that requirement a precondition which must be satisfied in other and different circumstances.
[21] The next case to be considered is the decision of the House of Lords in Banque Financière. The facts were complicated but, in brief, funds lent by Banque Financière de la Cité (BFC) through an intermediary to Parc were used to pay off part of the first mortgage on Parc’s land. The security for BFC’s loan was a letter purporting to be on behalf of all the companies in the group to which Parc belonged that they would not demand payment for their loans to Parc until BFC had been repaid. However, one of the companies in the group, Omnicorp Overseas Limited, which was Parc’s second mortgagee, was ignorant of the letter and the person negotiating it had no authority to bind Omnicorp. The House of Lords held that, as against Omnicorp, BFC was entitled to be subrogated to the first mortgagee to the extent its money was used to repay part of that debt.
[22] Lord Steyn held[15] the question which arose was whether Omnicorp had benefited or been enriched; was the enrichment at BFC’s expense; was the enrichment unjust; and were there any defences? Lord Hoffmann discussed the principles of subrogation in the following passage:[16]
[15] At 227.
[16] At 231-232.
My Lords, the subject of subrogation is bedevilled by problems of terminology and classification which are calculated to cause confusion. For example, it is often said that subrogation may arise either from the express or implied agreement of the parties or by operation of law in a number of different situations: see, for example, Lord Keith of Kinkel in Orakpo v. Manson Investments Ltd. [1978] A.C. 95, 119. As a matter of current terminology, this is true. Lord Diplock, for example, was of the view that the doctrine of subrogation in contracts of insurance operated entirely by virtue of an implied term of the contract of insurance (Hobbs v. Marlowe [1978] A.C. 16, 39) and although in Lord Napier and Ettrick v. Hunter [1993] A.C. 713 your Lordships rejected the exclusivity of this claim for the common law and assigned a larger role to equitable principles, there was no dispute that the doctrine of subrogation in insurance rests upon the common intention of the parties and gives effect to the principle of indemnity embodied in the contract. Furthermore, your Lordships drew attention to the fact that it is customary for the assured, on payment of the loss, to provide the insurer with a letter of subrogation, being no more nor less than an express assignment of his rights of recovery against any third party. Subrogation in this sense is a contractual arrangement for the transfer of rights against third parties and is founded upon the common intention of the
parties. But the term is also used to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived. The fact that contractual subrogation and subrogation to prevent unjust enrichment both involve transfers of rights or something resembling transfers of rights should not be allowed to obscure the fact that one is dealing with radically different institutions. One is part of the law of contract and the other part of the law of restitution. Unless this distinction is borne clearly in mind, there is a danger that the contractual requirement of mutual consent will be imported into the conditions for the grant of the restitutionary remedy or that the absence of such a requirement will be disguised by references to a presumed intention which is wholly fictitious. ...
[23] His Lordship then discussed five precedent cases including Boscawen and concluded:[17]
[17] At 234.
These cases seem to me to show that it is a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely upon the question of intention, whether common or unilateral. Such an analysis has inevitably to be propped up by presumptions which can verge upon outright fictions, more appropriate to a less developed legal system than we now have. I would venture to suggest that the reason why intention has played so prominent a part in the earlier cases is because of the influence of cases on contractual subrogation. But I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff's expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy. An example of a case which failed on the third ground is Orakpo v Manson Investments Ltd [1978] A.C. 95, in which it was considered that restitution would be contrary to the terms and policy of the Moneylenders Acts.
This does not of course mean that questions of intention may not be highly relevant to the question of whether or not enrichment has been unjust. ... However, if it is recognised that the use of the plaintiff's money to pay off a secured debt and the intentions of the parties about whether or not the plaintiff should have security are only materials upon which a court may decide that the defendant's enrichment would be unjust, it could be argued that on general principles it is for the plaintiff to make out a case of unjust enrichment.
[24] To similar effect, Lord Hutton held:[18]
[18] At 241.
I agree with the view of my noble and learned friend, Lord Hoffmann, that the concept of mutual intention, whether actual or presumed, can be artificial in a case such as the present one, where the claim to subrogation arises
because the security intended by the lender has proved to be defective. In my opinion in such circumstances the doctrine of subrogation is to be applied unless its application will produce an unjust result.
[25] The third of the English cases discussed in the texts and by counsel was the House of Lords decision in Foskett v McKeown[19]. Of the facts, it is only necessary to note that funds held by one M in trust for a group of land purchasers were mixed by M with his own funds and used to pay premiums on a life assurance policy held on trust for M’s children. On his death the question arose as to the ownership of the insurance proceeds. For present purposes the main guidance given by the case is in the speech of Lord Millett where the following appears:[20]
[19] Foskett v McKeown [2001] 1 AC 102 at 127-128.
[20] At 127-128.
Tracing and following
The process of ascertaining what happened to the plaintiffs' money involves both tracing and following. These are both exercises in locating assets which are or may be taken to represent an asset belonging to the plaintiffs and to which they assert ownership. The processes of following and tracing are, however, distinct. Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old. Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner. In practice his choice is often dictated by the circumstances. In the present case the plaintiffs do not seek to follow the money any further once it reached the bank or insurance company, since its identity was lost in the hands of the recipient (which in any case obtained an unassailable title as a bona fide purchaser for value without notice of the plaintiffs' beneficial interest). ...
... The transmission of a claimant's property rights from one asset to its traceable proceeds is part of our law of property, not of the law of unjust enrichment. There is no "unjust factor" to justify restitution (unless "want of title" be one, which makes the point). The claimant succeeds if at all by virtue of his own title, not to reverse unjust enrichment. Property rights are determined by fixed rules and settled principles. They are not discretionary. They do not depend upon ideas of what is "fair, just and reasonable". Such concepts, which in reality mask decisions of legal policy, have no place in the law of property.
A beneficiary of a trust is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also, and his interest binds everyone who takes the property or its traceable proceeds except a bona fide purchaser for value without notice. ...
Tracing
We speak of money at the bank, and of money passing into and out of a bank account. But of course the account holder has no money at the bank.
Money paid into a bank account belongs legally and beneficially to the bank and not to the account holder. The bank gives value for it, and it is accordingly not usually possible to make the money itself the subject of an adverse claim. Instead a claimant normally sues the account holder rather than the bank and lays claim to the proceeds of the money in his hands. These consist of the debt or part of the debt due to him from the bank. We speak of tracing money into and out of the account, but there is no money in the account. There is merely a single debt of an amount equal to the final balance standing to the credit of the account holder. No money passes from paying bank to receiving bank or through the clearing system (where the money flows may be in the opposite direction). There is simply a series of debits and credits which are causally and transactionally linked. We also speak of tracing one asset into another, but this too is inaccurate. The original asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new asset because it was acquired in whole or in part with the original asset. What he traces, therefore, is not the physical asset itself but the value inherent in it.
Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant's property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim. That will depend on a number of factors including the nature of his interest in the original asset. He will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset. If he held only a security interest in the original asset, he cannot claim more than a security interest in its proceeds. But his claim may also be exposed to potential defences as a result of intervening transactions. Even if the plaintiffs could demonstrate what the bank had done with their money, for example, and could thus identify its traceable proceeds in the hands of the bank, any claim by them to assert ownership of those proceeds would be defeated by the bona fide purchaser defence. The successful completion of a tracing exercise may be preliminary to a personal claim (as in El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717) or a proprietary one, to the enforcement of a legal right (as in Trustees of the Property of F C Jones & Sons v Jones [1997] Ch 159) or an equitable one.
Given its nature, there is nothing inherently legal or equitable about the tracing exercise. There is thus no sense in maintaining different rules for tracing at law and in equity. One set of tracing rules is enough. ... There is certainly no logical justification for allowing any distinction between them to produce capricious results in cases of mixed substitutions by insisting on the existence of a fiduciary relationship as a precondition for applying equity's tracing rules. The existence of such a relationship may be relevant to the nature of the claim which the plaintiff can maintain, whether personal or proprietary, but that is a different matter. ...
Lord Steyn, though dissenting, observed that “in truth tracing is a process of identifying assets: it belongs to the realm of evidence. It tells us nothing about legal or equitable rights to the assets traced.” [21]
[21] At 113.
[26] Bofinger v Kingsway Group Limited,[22] a case on which Mr Toebes particularly relied, is a decision affecting the laws of guarantees and mortgages. Three separate loans, each secured by mortgage, were made to a company with the appellants being guarantors of each. They sold personal properties and used the proceeds to reduce the first loan following which the first mortgagee sold the company’s property under its power of sale. A surplus above the balance of the first mortgage resulted which the first mortgagee paid to the second mortgagee. The question was whether the appellants had the right of subrogation to the first mortgage and thus to the surplus. They were held entitled so to do. The case is therefore factually distinct from the present. No citation is necessary as the judgments are mainly fact-specific or rely on the English cases already discussed.
Submissions
[22] Bofinger v Kingsway Group Limited [2009] HCA 44 at 90.
[27] As already mentioned, Mr Toebes’ submissions as to the juridical basis of G E Finance’s claim was somewhat indiscriminate – subrogation, tracing, misappropriation, constructive trust, unjust enrichment and “hard-nosed property rights” were all mentioned – but subrogation appeared to be the principal basis on which recovery was sought. Mr Toebes submitted that in the circumstances of this case G E Finance was subrogated to the position of F M Custodians and stood beside it in its role as first mortgagee. The Court will accordingly proceed on that basis.
[28] Mr Toebes said the boats were owned by G E Finance and their sale proceeds were misappropriated and utilised in payment of interest under the mortgage to F M Custodians and that as a matter of “hard-nosed property rights”[23] G E Finance should therefore be able to trace its money into the mortgage funds. As a corollary, McKenzie Trust should not be permitted to benefit and obtain discharge of its
mortgage without paying G E Finance. That was particularly the case when F M Custodians adopted the agreement for sale and purchase effected between McKenzie Trust and the buyer in order for F M Custodians to settle. Prior to settlement G E Finance claimed its debt was required to be satisfied on settlement. That gave rise to the caveat proceedings.
[23] Foskett v McKeown at 102.
[29] He noted F M Custodians’ stance that once the interest payments were made by McKenzie Trust, the traceability of G E Finance’s money disappeared, but said that was not accepted by G E Finance or that, if the Court accepted that proposition, G E Finance was still entitled to be paid from the retained monies by application of the doctrine of subrogation.
[30] Fundamentally, Mr Toebes submitted, McKenzie Trust as mortgagor should not benefit from the misappropriation by Collins Marine of G E Finance’s money. He submitted that if his clients were not entitled to subrogate to the position of first mortgagee, McKenzie Trust would benefit in that the amount paid under the mortgage would be reduced by a credit that had been obtained from the misappropriation of G E Finance’s money. That would amount to unjust enrichment and “would mean that McKenzie Trust benefited from their own misappropriation”. Therefore, under subrogation, and relying on Boscawen, the McKenzie Trust mortgage to F M Custodians should be regarded as securing both the residual indebtedness of the Trust following utilization of G E Finance’s money and the repayment of those monies.
[31] Mr Toebes submitted G E Finance was not claiming against F M Custodians. That company was innocent in the circumstances and unaware of the misappropriation of G E Finance’s money. Thus G E Finance did not argue F M Custodians was a constructive trustee.
[32] G E Finance, too, was innocent and only found out after its money was misappropriated of the action taken with its funds – but that did not disentitle it to a share in the mortgage settlement proceeds.
[33] He emphasised this was not a case of equitable tracing but a claim by G E Finance for payment of its money by way of “hard-nosed property rights”. Mr Toebes said there were insufficient residual funds in Collins Marine’s bank to fund the transfer of $5000 on 10 October 2008 but funds were carried forward in that bank immediately before the transfer of $852.63. Thus the payment of the $5000 represented G E Finance’s money credited to Collins Marine’s bank account plus other funds already in the bank account less the payments out, according to the rule
in Re Hallett’s Estate.[24]The rule in that case applied so that the credit funds in
Collins Marine’s bank account could be seen as G E Finance’s money rather than sourced from other funds belonging to the company. He submitted the statement of account between F M Custodians and the McKenzie Trust was simply a book of accounts rather than representing actual money paid which might give rise to a tracing claim. He said G E Finance was therefore content to proceed on the basis of subrogation. Relying again on Boscawen, he submitted subrogation was the correct remedy where the beneficial owner of property could trace it to wrongdoer’s hands but where, if subrogation did not apply, the wrongdoers would benefit in that the amount required to be paid by McKenzie Trust to F M Custodians was reduced by the credit obtained from the misappropriation of G E Finance’s money, relying on Bofinger.
[24] Re Hallett’s Estate (1880) 12 ChD 727.
[34] Subrogation applied in this case because the mortgagor had sold the secured property, it was represented by the sale proceeds and F M Custodians as mortgagee was entitled to the whole of the sale proceeds up to the maximum of the mortgagor’s debt in the statement of account between those parties, but because of what had occurred G E Finance’s remedy was that it was subrogated to the position of the first mortgagee and stood beside F M Custodians in that role.
[35] For F M Custodians, its leading counsel, Mr Sharp, however, submitted that what G E Finance was actually endeavouring to do in this case, by subrogation, was to be granted priority to F M Custodians in respect of the retained funds because those funds were misappropriated. He stressed the application was for the repayment by F M Custodians of money paid to it by the purchaser of the McKenzie
Trust property. Subrogation, he submitted, did not entitle G E Finance to be ranked ahead of F M Custodians. Such approach was not supported by precedent and the best G E Finance could hope for was to be subrogated to F M Custodians’ rights as first mortgagee but only once the debt to F M Custodians had been fully paid. That did not occur – hence the summary judgment obtained by F M Custodians against all other defendants for the deficiency.
[36] He dealt with the background noting that, even now, the amounts and dates of the various payments in the recounted schedule did not precisely correlate. It had therefore be agreed that this hearing would proceed on the basis that if judgment were to be given for G E Finance, further verification would be required. F M Custodians opposed any further hearing to deal with tracing, as G E Finance had full details and nothing further would be disclosed by further investigation.
[37] Accepting that the parties’ discussions to date led to an agreement that the traceable amount of G E Finance’s funds used by McKenzie Trust towards repayment of the F M Custodians’ loan was $197,238.63, Mr Sharp also recorded his understanding that the hearing would proceed on the basis that G E Finance was not only abandoning any claim to constructive trust but also abandoning its claim for “hard-nosed property rights”. As mentioned, that did not seem to be the case.
[38] Acknowledging that tracing is a process by which a claimant demonstrates what has become of its property and its proceeds by payment or transfer to persons who have handled or received them, Mr Sharp submitted the overriding principle, once G E Finance’s money was mixed with Collins Marine’s funds, was that withdrawals be attributed in the manner most favourable to the claimant.[25]
[25] Butler: Equity and Trusts in New Zealand 2nd ed. 2009 para 35.3.5(3)(a) and Re Hallett’s Estate
(1879) 13 Ch D 696.
[39] As Equity and Trusts says, the claimant may treat the wrongdoer as spending their money first and resorting to the claimant’s funds on exhaustion so that once the balance of the account falls below the amount of the claimant’s funds the claimant’s claim is reduced accordingly.
[40] F M Custodians agreed that to be appropriate. Thus some but not all of the payments from Collins Marine to McKenzie Trust could be traced to G E Finance’s funds. This provided the basis for the schedule earlier recounted. However, the total funds paid to McKenzie Trust’s bank and subsequently applied in interest to F M Custodians could not be traced to the plaintiff because once traceable funds were used for the repayment of debt because the recipient was a bona fide purchaser without notice of the claimant’s equitable claim to the funds, the funds were
dissipated and left no traceable asset.[26]
[26] Butler: 35.3.6(2) re Diplock [1948] Ch 465.
[41] Mr Sharp then suggested that the “hard-nosed property rights” dictum in Foskett was wholly defeated by F M Custodians being agreed to be a bona fide purchaser without notice. The distinction between this case and Foskett was that in the latter the recipients of the traced funds were volunteers which allowed tracing. F M Custodians’ position, he submitted, was similar to that bank in Stronge v ANZ
Banking Group (NZ) Limited[27]where the bank was held not liable although it
accepted money charged in favour of a third party in repayment of an overdraft.
[27] Stronge v ANZ Banking Group (N Z) Limited High Court Wellington CP716/89, 11 October 1994, McGechan J.
[42] Assuming subrogation was the only remedy pursued by G E Finance, Mr Sharp submitted that a thread running through the various circumstances in which subrogation had been held to arise had the common factors of express or implied agreement between parties that subrogation would occur or where subrogation was permitted to prevent unjust enrichment, relying on Banque Financière.[28] Subrogation’s availability in those circumstances did not, however, he submitted, affect the facts of this case where it was agreed F M Custodians were unaware that any part of the funds paid to it by McKenzie
Trust were other than the latter’s money. It would not be unjust for F M Custodians to retain the funds in the circumstances.
[28] Banque Financière de la Cité v Parc (Battersea) Limited [1998] 1 All ER 737 (HL).
[43] Mr Sharp distinguished Boscawen by saying the remedy was imposed there because monies paid on one security were used to satisfy another. The payer bank failed in that case as its claim was tantamount to a claim for monies paid to the payee
bank in discharge of its security. G E Finance’s claim in this case, Mr Sharp submitted, was contrary to Boscawen as, in effect, it sought payment from an innocent recipient of money, money which had been paid to it in breach of duty by the recipient of its money, McKenzie Trust, which was the payer to the innocent party, F M Custodians.
[44] Mr Sharp then dealt with the passage from Equity and Trusts suggesting subrogation can arise where A is the beneficial owner of funds traced to B who used them to discharge a security owed to C,[29] relying on Boscawen but suggested subrogation would only apply in those circumstances to prevent unjust enrichment whereas here the funds were paid by McKenzie Trust pursuant to legal obligation. The provenance of the funds to the payer was irrelevant.
[29] Butler: para 35.3.6(2).
[45] Even if the creation of a subsequent charge in the circumstances discussed in Boscawen might have been appropriate in that case, what G E Finance was seeking in this case was some of the funds paid to F M Custodians under its security, that is to say it was seeking to be treated as a secured creditor ranking at least equally with F M Custodians in relation to funds received by the latter on settlement of sale of the McKenzie Trust property.
[46] He therefore submitted G E Finance’s claim fitted none of the recognised categories where subrogation had been ordered. The interest payments to F M Custodians did not enrich it unjustly as it was contractually entitled to the funds. To allow this claim, he submitted, would mean that at any time a mortgagor used funds beneficially owned by another to meet payments due under their loan, the owner of the funds could obtain orders giving them security.
Discussion
[47] What is to be drawn from the texts and authorities is that subrogation is an equitable remedy applying to forestall unjust enrichment by admitting one party to rights enjoyed by another despite the fact that it is not, in law, entitled to those rights.
Tracing provides the mechanism by which the movement of funds is identified, and subrogation is the means equity adopts to prevent the recipient of those funds being unjustly enriched, though, as Dr Butler says, seen in that light there is little difference between tracing and subrogation.[30]
[30] Butler: para 34.3.2.
[48] Further than that, at least in the circumstances of this case, it seems undesirable to attempt to define the remedy. As Meagher, Gummow and Lehane say, courts may permit subrogation in novel circumstances,[31] and it is “perilous to extrapolate from one set of circumstances ... a general rule”.[32] And, apart from the
absence of intention in non-contractual circumstances,[33] it is a common feature of
the cases discussed that they all stem from unusual factual situations and subrogation and the remedies granted all appear to be instances of Courts being alert to find means of avoiding one party being unjustly enriched at the expense of another in those unusual situations. As was said in Boscawen,[34] the remedy is “fashioned to the circumstances”.
[31] Meagher Gummow & Lehane: at p 382.
[32] Boscawen at 780-781.
[33] Banque du Financiére at 234
[34] At 776-777.
[49] As to defences, which may, in essence, be the corollary of an absence of indicia of unjust enrichment, a common thread running through the decisions is that a party who, bona fide and without notice of the claim of any other party to funds has received them in good faith, can defeat a claimant to those funds. This may be no more than saying tracing ends where the funds are innocently received or that, in equity, Courts hold enrichment by the recipient by such payments cannot be unjust if the recipient is an innocent receiver.
[50] What is common to all the authorities, however, are the questions whether the defendant has been enriched and, secondly, whether the enrichment was at the claimant’s expenses and, thirdly, whether the enrichment was unjust with a defence to that third question being whether the funds received were received bona fide for
value and without notice so that it is unconscionable for the defendant to deny the claim.[35]
[35] Boscawen at 778-779; Banque Financiére at 227, 234, 241.
[51] Before considering those questions, it is instructive to record – to the extent possible – the basis on which G E Finance brings its claim.
[52] As earlier noted, the phrasing of G E Finance’s caveat and its application to preserve the caveat were not in evidence but it is noteworthy that, in the Agreed Statement of Facts the parties acknowledged that the arrangements between Collins Marine and G E Finance were unrelated to the loan agreements between F M Custodians and McKenzie Trust. Further, although G E Finance did not appear to have filed a defence or counterclaim in this proceeding, as a result of correspondence between solicitors F M Custodians’ amended claim pleaded:
45.GE [Finance] maintains that it is entitled to the retained funds upon the basis that:
(a) GE has an interest in the estate of FMC[ustodians]’ mortgage by virtue of payments to FMC of interest instalment payments which were misappropriated from GE and paid to FMC on account of payments due under the mortgage either:
(i)As a matter of hard nosed property rights because GE can trace its money to FMC as first mortgagee under the mortgage; and/or
(ii) by virtue of the doctrine of subrogation arising from the circumstances; and/or
(iii) by virtue of a constructive trust arising from the circumstances.
[53] F M Custodians justified its entitlement to the funds on a number of footings which were ultimately reflected in the Agreed Statement of Facts but also pleaded that it had regularly received interest payments from McKenzie Trust by direct debit until December 2008, received those with no notice of G E Finance’s entitlement to any of those funds, and that they were “payment in extinguishment of the debt for interest” in return for which F M Custodians “allowed its advance to [McKenzie Trust] to remain outstanding”.
[54] When the texts, the authorities, and those observations are applied to G E Finance’s claim against F M Custodians, the pivotal agreed fact is that F M Custodians was wholly unaware at the time McKenzie Trust made each of the interest payments appearing in the Schedule that the funds from which McKenzie Trust made the payments were wholly or partly comprised of G E Finance’s money.
[55] Had there been an indication F M Custodians may have had the slightest inkling of the provenance of the funds McKenzie Trust was utilising in paying its interest, it may have had a significant outcome on this case. F M Custodians’ retention of the funds may more readily have been seen as unjust. But it is agreed F M Custodians was wholly unaware at the time of the wrongful actions of Collins Marine and the McKenzie Trust. The case accordingly has echoes of the opening
remarks of Lord Browne-Wilkinson in Foskett:[36]
... there are many cases in which the court has to decide which of two innocent parties is to suffer from the activities of a fraudster. This case, unusually, raises the converse question: which of two innocent parties is to benefit from the activities of the fraudster. In my judgment, in the context of this case the two types of case fall to be decided on exactly the same principles, viz, by determining who enjoys the ownership of the property in which the loss or the unexpected benefit is reflected.
[36] At 106.
[56] It is important to recognise that G E Finance’s money was paid, in default of
Collins Marine’s obligation to G E Finance, to McKenzie Trust, utilised in payment
– in whole or in part - of the latter’s interest obligation and presumably mixed, on receipt by F M Custodians, with other funds in its account. This is to be contrasted with the fact that the fund retained by agreement on settlement by F M Custodians of the McKenzie Trust’s sale of its property was purchase money paid by the buyer and appropriated to the mortgage. It had nothing to do with the payments by Collins Marine and McKenzie Trust to F M Custodians and bore none of the characteristics of those payments. It was payment of the purchase price which was appropriated in partial payment of principal due under the mortgage. It was therefore different in character in relation to this flat mortgage from payment of interest.
[57] To elaborate on those observations, looking first at what happened as if F M Custodians had not adopted the agreement for sale and purchase and the transaction settled in the normal way, the funds received on 31 July 2009 would have been monies received on sale of a capital asset with those funds being impressed by an obligation to use such part of them as was required – in the event, the entire payment – to meet the seller’s obligation to its buyer to obtain an unencumbered title.
[58] As it turned out, F M Custodians adopted the agreement for sale and purchase under s 179 of the Property Law Act 2007, but that does not alter the fundamental nature of the transaction: it was still receipt of a capital sum payable on sale of an asset impressed with the obligation to account to the mortgagee to provide clear title.
[59] As a gloss on what has just been said, in fact the parties utilised solicitors throughout the matter and accordingly the funds paid by the buyer would have gone to McKenzie Trust’s solicitors trust account had the agreement for sale and purchase not been adopted and went to F M Custodians’ solicitors’ trust account in the factual circumstances that occurred. Either way, though the solicitors were, of course, under an obligation to account to their clients, the fact remains that in any event the sale proceeds would not have been credited to McKenzie Trust’s bank account and were only credited to F M Custodians’ bank as surrogate seller and on account of its mortgage.
[60] What is important in relation to this case is that, however the sale was settled, the funds received by F M Custodians were funds of a different character – first mortgage interest and then mortgage principal - from the Collins Marine and McKenzie Trust’s receipts and payments in breach of their obligation to G E Finance. The former were funds paid by a wholly unrelated third party which were subject to obligations which had nothing to do with G E Finance. Given the evidence does not disclose the state of the bank accounts of the various parties – especially F M Custodians – during the relevant period and further investigation was foreshadowed, it is by no means certain that, had it endeavoured to trace its funds to F M Custodians, G E Finance would have been able to demonstrate that $197,238.63
or any other sum in F M Custodians’ account after settlement of the Scott Road sale continued to include any part of G E Finance’s money.
[61] All of that militates against allowing subrogation in this case.
[62] The only possible link between the various transactions discussed is that, had McKenzie Trust not paid F M Custodians from funds in its account, including those derived from Collins Marine or had McKenzie Trust not had sufficient other funds from which it could have met its interest obligations to F M Custodians on the listed dates, F M Custodians could have issued its notice of default earlier and probably would have done so. However, withholding its hand for value received pursuant to a contractual obligation scarcely justifies subrogating a party whose money may have been used in fulfilling that contractual obligation to be subrogated to the recipients’ mortgage settlement proceeds.
[63] However, there is a further and temporal factor to be taken into account. It is to be recalled that the boats which provided the funds paid by Collins Marine to McKenzie Trust were sold in February and June 2008 whereas the interest paid by McKenzie Trust to F M Custodians the subject of this claim was in the period
10 April 2008-9 January 2009. There is thus little overlap between Collins Marine’s receipt of the boat sale proceeds (and its payments to McKenzie Trust) and McKenzie Trust’s interest payments to F M Custodians. Between two and 11 months elapsed between the interest payments by the mortgagor and enforcement action by the mortgagee. While the receipts and payments schedule earlier detailed was agreed, without the parties’ bank statements and a detailed analysis in terms of Re Hallett’s Estate, having regard to the dates of payment, there is no proof any part of the interest payments by McKenzie Trust to F M Custodians were still in F M Custodians’ bank account when the Scott Road settlement proceeds were received. True, the mortgage account F M Custodians held for McKenzie Trust would have shown the earlier receipt of the interest and the later receipt on account of the principal, but, as already mentioned, the respective payments were in different categories.
[64] All that impacts markedly on the justice of holding that G E Finance as, at most, a creditor of the McKenzie Trust ought to be subrogated to share in funds paid to F M Custodians as a secured creditor of that Trust at a different time by an unrelated party pursuant to an entirely unrelated transaction.
[65] Further, in this case there was no link or expectation between F M Custodians’ receipt of the interest payments and the misuse by Collins Marine of G E Finance’s funds. At most, it could be said the second boat was sold during the period of the interest payments. The case is therefore unlike Boscawen where the funds were advanced on condition they be utilised in discharge of the mortgage and purchase of the property; and unlike Banque Financière where, as ultimately posited, the claim was that the funds were advanced in order partially to repay a mortgage on the security of the letter (though ultimately discovered the letter was not authorised by Omnicorp nor known about). McKenzie Trust did not receive Collins Marine’s payments with any obligation to deal with them other than by payment to G E Finance. McKenzie Trust’s contractual interest obligation was entirely separate. Although the authorities demonstrate that contractual rights and obligations or “keeping the charge alive” by the payments can be an important aspect in assessing unjust enrichment, the complete absence of any knowledge or link in this case again militates against the justice of G E Finance’s claim.
[66] This case is not unlike Wylie v Carlyon[37] mentioned in Boscawen. There, funds lent by members of the Junior Carlton Club to the club were used in repayment of an existing mortgage on the club’s premises. Some members claimed to be entitled to be subrogated to the mortgagee to the extent their monies were used in repayment of the mortgage debt. However, their claim was rejected by Eve J who held:[38]
[37] Wylie v Carlyon [1922] 1 Ch. 51.
[38] At 63.
An individual who advances money to another for the purpose of enabling that other to pay specific debts does not in the absence of a special bargain thereby acquire the rights of the persons whose debts are discharged out of his moneys against the property of the debtor. No case has been cited to show that even in circumstances in which the doctrine of subrogation is properly applicable the subrogated lender has been held to be entitled to the
benefit of the security held by the creditor to whose rights he is subrogated, and even assuming it to be established that the moneys raised upon some of these debentures were in fact applied in the discharge pro tanto of the mortgage debt I am quite unable to adopt the view that the debenture holders were by subrogation or otherwise placed in the position of mortgagees the extent of the sum so applied.
[67] Finally, what determines the claim against G E Finance is to pose the question: given subrogation is a process not a cause of action, what conventional cause of action against F M Custodians might G E Finance have pleaded, and what defences might have been raised by the former? F M Custodians’ formulation in its amended claim of what it understood to be the basis of G E Finance’s claim to entitlement to share in those funds was uninformative. There was no contract between them. Quantum meruit would be unavailable as the Collins Marine and McKenzie Trust payments could not have been payments under mistake or fact or law or both. No tortious claim would lie. Unjust enrichment is not a cause of action. Some other equitable claim, not identified by Mr Toebes, may well have been able to be launched but it – and any other claim - would inevitably have been defeated by F M Custodians’ defence that it received McKenzie Trust’s interest payments in good faith, pursuant to a contractual obligation, in its normal course of business and entirely without notice that some part of those payments may have been made with funds deposited in its bank account by McKenzie Trust to which the Trust was not entitled.
[68] Returning to the three fundamental questions appearing in the authorities, there can be no doubt F M Custodians benefited from McKenzie Trust’s interest payments, but was entitled so to do and could not be said to have been enriched in the sense of receiving more than its entitlement. The benefit to F M Custodians was, at least partially, at G E Finance’s expense but resulted from breaches of McKenzie Trust and Collins Marine’s obligations to G E Finance, not to anything done or known by F M Custodians. As a wholly innocent receiver, F M Custodians’ retention of the funds could not therefore be termed unjust. And the defence of being a bona fide recipient of the interest payments for full value and without notice of any obligation affecting those funds other than McKenzie Trust’s obligations to pay its interest would inevitably have provided a complete defence to F M Custodians against G E Finance’s claim.
Result
[69] For all those reasons, no basis has been made out to find for G E Finance against F M Custodians and it is dismissed accordingly.
Costs
[70] As to the costs of this proceeding, the claim was one capable handled by counsel with the skill and experience considered average in the High Court and accordingly should be classified as category 2 under r 14.3(1) but the complexity of the legal issues raised warrant it being placed in band C under r 14.5(2)(c). F M Custodians is accordingly entitled to the costs of this proceeding on a category
2 band C basis against G E Finance, with the usual disbursements and expenses.
[71] As far as the caveat proceedings are concerned, perceptive analysis at the time it was lodged should have demonstrated the lack of a nexus between the funds derived by the secured creditor on sale of the mortgaged property as distinct from funds paid earlier by way of interest under the mortgage as further distinct from the funds paid by Collins Marine to McKenzie Trust. It should have been realised that there was therefore no reasonable basis for the lodging of the caveat against the Scott Road title. F M Custodians is accordingly additionally entitled to the costs of the caveat proceedings but assessed on a 2B basis, again with the usual expenses and disbursements.
[72] Leave is reserved to the parties to file memoranda on the issue of costs should quantification of the Court’s orders prove elusive.
..........................................................
HUGH WILLIAMS J.
Solicitors:
Holland Beckett, Private Bag 12011 Tauranga Mail Centre, Tauranga 3143, for F M Custodians. J T Law (G J Toebes), P O Box 25443 Wellington 6146 for G E Finance.
Case Officer: Wendy[email protected]