Australia & New Zealand Banking Group Ltd v Evans [1991] QSC 303 [1992] 2 Qd R 230

IN THE SUPREME COURT OF QUEENSLAND No. 723 of 1991 Before the Honourable Mr. Justice de Jersey BETWEEN: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED Plaintiff AND: BRUCE BIELBY EVANS, AND MICHELE ANNE EVANS Defendants JUDGMENT - de JERSEY J. Delivered the 21st day of October, 1991 CATCHWORDS: Section 88(1) Property Law Act; s. 109(1) Trusts Act; whether a mortgagee, distributing proceeds. of sale, is bound by the priorities agreed between mortgagees, or obliged to distribute in accordance with the order of registration. Counsel: T. North for plainti~f P. McHugh for defendants Hearing date: 18th October, 1991 -- 1 of 8 -- IN THE SUPREME COURT OF QUEENSLAND BETWEEN: AND: No. 723 of 1991 AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED Plaintiff BRUCE BIELBY EVANS AND MICHELE ANNE EVANS Defendants JUDGMENT - de JERSEY J. Delivered the day of 1991 The plaintiff sues to recover possession of the defendants' land, over which the plaintiff has a registered bill of mortgage. The defend~nts defaulted in payments due. under the mortgage, and the plaintiff demanded ·possession, but the defendants remai~ in possession!· At relevant times, the defendants conducted business in partnership ~ith persons named Lathouras ahd Baker. The plaintiff lent money to the partners, for which the partners were jointly and severally liable. 'Each gave mortgages-to the plaintiff over their house properties. Mr. and Mrs. Lathouras gave two mortgages over their land. -The first in time was given on 18th June, 1985 in favour of Australia and New Zealand Savings Bank ("the Savings Bank") . They gave the plaintiff its mortgage · on 15th July, 1986, but the plaintiff's mortgage was nevertheless registered first, on 2nd September, 1986. The Savings Bank mortgage was not registered until 14th October, -1986. Unt~l a few months -- 2 of 8 -- 2 before then, Mr. Lathouras had been an ANZ employee, and in accordance with the bank's policy, the employee's mortgage was not registered while he remained an employee. The plaintiff and the Savings Bank .conducted their affairs at all material times on the basis that because first in time, the Savings Bank mortgage took priority (para. 7 ex. 1). On 8th September, 1986, the plaintiff and the Savings Bank agreed in writing that notwithstanding the sequence of registration, the Savings Bank mortgage should take priority over the plaintiff's mortgage. (ex. C to court ex. 4). On 14th December, 1990, the plaintiff sold the Lathouras land, exercising power of saie as mortgagee. It applied the proceeds of sale in satisfaction of the indebtedness of Mr. and Mrs Lathouras to the Savings Bank. That accorded with the priority agreement. The defendants- contend that the plaint:i,ff should have applied those moneys consistently with the priorities established by registration - that is, in satisfaction of the defendants'· mortgage. The defendants contend that had the , plaintiff done that, there ~ould have remained due only some $27,000, a sum which the defendants paid out in May, 1991 entitling them, they contend, to the discharge of their mortgage. The defendants concede now that their arithmetic was wrong and that some $3,000 would on that assumption still remain due, so that they would not be entitled to the discharge of the mortgage. They nevertheless seek an account. As between themselves, the plaintiff and the Savings Bank effectively modified the priorities which would otherwise be -- 3 of 8 -- 3 established by the sequence of registration. They effectively ag~eed that notwithstanding that registration, the Savings Bank mortgage should take priority over the plaintiff's mortgage. Such an agreement is clearly vali_d inter partes: Francis: Torrens Title in Australasia (1972) p. 302; Megarry and Wade: The Law of Real Property (eth ed.) p. 982. But the defendants submit that the plaintiff could not, by implementing that agreement, prejudice them. Mr. McHugh, who appe~red for the defendants, referred first to s. 88(1) of the Property Law Act: "(1) Subject to this section, the money arising from sale, and which is in fact received by the mortgagee, shall be held by him in trust to. be applied by him - (a) firstly, in payment of all_ costs, · charges and expenses properly incurred by him as incident to the sale, or any attempted sale, or otherwise; and ( b) secondly, in discharge of the mortgage money, interest and costs·, and other money, if any, due under the mortgage; and (c) thirdly, in payment of any subsequent mortgages or encumbrances; and the residue, if any, of the money so received shall be paid to the person entitled thereto or · entitl·ed to give receipts for the proceeds of -sale of the mortgaged property." He submitted that by paying the proceeds of sale to the Savings Bank, rather than itself, the plaintiff breached the trust set up by the section. He then went to s. 109(1) of the Trusts Act: "(1) In any case where a trustee has wrongfully distributed trust property any person who has suffered loss by that distribution may enforce the same remedies against the trustee and against any. person to whom the distribution has been made as in the case where a personal representative · has -- 4 of 8 -- 4 wrongfully distributed the estate of a deceased person." He submitted that the plaintiff as trustee wrongfully distributed the proceeds of sale, which were trust property, to the Savings Bank, and that that caused loss to the defendants, who had been entitled to have the money applied in diminution of their mortgage debt because of s. 88 ( 1 ) (b) of the Property Law Act. Hence the claim for the account, and opposition to the plaintiff's claim for possession. Naturally Mr. McHugh urged that I adopt a perfectly literal construction of s. 88. ·He contrasted it with s. 112 of the New .South Wales Conveyancing Act, pointing out that had the legislatur~ here intended that the section operate subject to other agreements, it could easily have said so. Mri North, who appeared f6r the plaintiff, described the section · as a "machinery provision". He instanced situations in ~hich ciourts have declined·to apply comparable provisions literally,. and submitted th~t the section should not be construed so· as to defeat . an otherwise effectual agreement varying priorities. It may be that the draftsman of s. 88 did not advert to the situation where registered mortgagees have varied the order of priority otherwise established by registration. It is difficult to identify any objection in principle to the application of sale proceeds, as between mortgagees, in accordance with such agreed priority. That would not ordinarily affect a mortgagor. The point does however take on possible significance in a case like this, where a third party could stand to benefit from application of the proceeds in -- 5 of 8 -- 5 accordance with the sequence of registration. In that regard, I cannot however help observing that the Savings Bank_mortgage was the first in time, albeit registered second because of the mortgagor's status as an employee of the mortgagee. There is no suggestion of the plaintiff's adopting this course deliberately to thwart the defendants. Mr. North referred me to three cases in which courts have pointed to the difficulty, in certain situations, of applying comparable provisions literally. In Bank of New Zealand v. Development Finance Corporation of New Zealand (1988) 1 N. Z. L. W. 49 5, the New Zealand Court of Appeal was concerned with s. 104 of the Land Transfer Act, in materially similar terms to s . 8 8 . Somers J. said, with reference to the New Zealand provision corresponding to s. 88(1)(c) (p. 503): nso · far as s. 1 04 ( 1) ( c) is concerned we think Mr. Fogarty was right when he suggested that the words 'subsequent registered mortgages'. cannot be read literally. Thus a·· prior registered mortgage may become 'subsequent'. by an agreed memorandum of priority under s. 1 03. So too effect would, we consider, have to be given to an unregistered agreement for priority of which the selling mortgagee has notice - the reference in s. 1 05 to priorities consented to by the selling mortgagee reinforces this." The second case is Mercantile Credits Ltd. v. Australia and New Zealand Banking Group Ltd. {1988) 48 S.A.S.R. 407, where the South Australian Full Court was concerned with s. 135 of the Real Property Act, which corresponds with s. 88. King C.J. said, with the agreement of Millhouse J. {p. 410): "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 -- 6 of 8 -- 6 not to establish priorities machinery for giving effect otherwise legally established." butto to provide the the priori ties Finally, in re Murrell 57 A.L.R. 85, Smithers J. construed s. 77(3) of the Victorian Transfer of Land Act, also corresponding to s. 88. Against a contention that the provisions should be applied literally, and regarded as mandatory, the Judge·said (p. 90): "On their face the provisions of s. 77(3) are mandatory. Nevertheless where there were in fact subsisting equities in. the proceeds of sale .which a Court of Equity would recognise and enforce it is difficult to contemplate that, while the surplus proceeds are in the hands of a mortgagee, a Court· of Equity would not give the equitable owners access to it, II And later (p. 92): "To give to s. 7 7 ( 3) a mandatory_ force according to its literal terms would create difficulties where, for, instance, the mortgagor had assigned for value his interest in the surplus arising from the mortgagee I s sale. An assignee could surely step into the.shoes of the mortgagor although.riot within contemplation of the lite?="al terms of the sectiqn. 11 I agree with King C.J. 1 s description of the provision ·as one intended "to' provide the machinery for giving effect to the priori ties otherwise legally established". I would read the reference to II the mortgage II in s. 88 (1 )( b) as meaning the . mortgage first in priority. The reference in (c) to "subsequent mortgages" clearly assumes that the mortgage earlier referred to is the one with the dominant priority. I do not consider that the priority to which the section relates is the priority prima facie established by the order of registration, achieved. but the true priority, however lawfully -- 7 of 8 -- 7 The parties conducted the case on the basis that if I were against the defendants' contentions, I would give judgment for the plaintiff. There will therefore be judgment for the plaintiff against the defendants for recovery of possession of the land referred to in the writ. I dismiss the defendants' counterclaim. The defendants will pay the plaintiff's costs of and incidental to the action including any reserved costs to be taxed. -- 8 of 8 --