Palmer v Talijancich

This is a dispute about whether a lender (Pleiades) had an equitable interest in land formerly owned by the first defendant; and whether it has a continuing interest in the proceeds of sale of the land. The plaintiff is the controlling trustee of the first defendant’s regulated estate pursuant to an authority executed under s188 of the Bankruptcy Act 1966 (Cth) dated 16 May 2017 and a personal insolvency agreement dated 13 July 2017.

The land has been sold and the plaintiff disputes the claimed entitlement of Pleiades to a secured interest in the proceeds of sale. The contest is effectively between Pleiades and the unsecured creditors of the first defendant.

The plaintiff has raised several issues in response to Pleiades’ claimed interest. The first issue relates to the proper construction of the documents from which the creation of an equitable interest is said to be inferred. I will deal with that issue first. I am satisfied that, despite their infelicity and occasional drafting confusion, those documents adequately reveal a contractual intention that Pleiades have an equitable interest in the land to secure the repayment of its loans. The sequence of events was as follows.

On 11 September 2014, Pleiades’ solicitor sent a letter of offer to the first defendant. The offer was for $500,000. The letter included the statement:

It seems obvious, without more, that the parties contemplated by that language that in consideration for the proposed advance, the first defendant would be required to grant to Pleiades an equitable interest described as a ‘caveatable interest’ in the land to secure the ‘Repayment sum’. The letter of offer stipulated that the caveat recording the interest granted to Pleiades would only be ‘discharged’ upon repayment or in accordance with Clause C of the letter of offer.

The parties then negotiated a minor variation to the language of Clause C and the first defendant signed the letter of offer on 12 September. The letter contained the following provisions under the heading ‘ACCEPTANCE’:

A final version of the letter of offer for a sum of $550,000 was formally signed on 17 September 2014 – by Pleiades pursuant to a power of attorney and by the first defendant attested by her solicitor, Judy Swan. Apart from the increased loan amount, the terms were materially identical to those in the first letter of offer.

Also on 17 September, the parties executed a loan agreement. It is not a shining example of legal professionalism, but the commercial intention is clear. The loan agreement did not contain an entire agreement clause and should be construed in its context, including to the extent necessary, by reference to the letter of offer, which is expressly referred to in the agreement. The Recitals provided as follows:

‘Caveat’ was defined to mean ‘the preparation and lodgement of a caveat over the Property with the Land and Property Information office in Sydney…’. ‘Letter of Offer’ was defined to mean ‘the letter of offer in respect of the Loan executed by the Lender and Borrower on 17 September 2014’. ‘Loan’ was defined to mean the sum of $612,000 made up of the Loan amount of $550,000, a 10 per cent line fee of $55,000 and legal fees of $7,000.

The loan agreement contains no specific charging clause, save possibly for Clause 2(b). It is sloppy, but in the search for intention in a commercial arrangement, ‘no narrow or pedantic approach is warranted’: Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1967-68) 118 CLR 429 at 437 (Barwick CJ). Clause 2(b) provides:

Clause 8 is headed ‘UNDERTAKINGS BY BORROWER’. Clause 8(a) provides:

On 6 November 2014, the first defendant signed a second letter of offer relating to a further advance of $250,000 for a term of six months. The letter contains the following statement:

A second loan agreement was executed by the parties on 14 November 2014. The Recitals refer to the previous loan and the security purportedly provided in support of it. They state:

‘Caveat’ is defined differently to the way which it is described in the first loan agreement. In this instance, it refers to, and effectively incorporates, the registered caveat numbered AI12170 that was lodged in connection with the first loan. (The actual number is AI12170L but the mistake is obvious and can be disregarded). The ‘Repayment sum’ was $325,845 made up of the Loan Amount, line fee, legal fees and interest for the six month term.

Once again, the loan agreement contains no specific charging clause, save possibly for Clause 2(b), which provides as follows:

Clause 8 contains undertakings by the first defendant as borrower. They include in Clause 8(a) an undertaking not ‘to create or allow to exist any Encumbrance to secure any indebtedness’ on the property ‘save for the Caveat existing’ with the consent of Pleiades. (emphasis added)

The caveat itself describes the claimed estate or interest in the land by stating that the property ‘has been put as security for the repayment of a loan agreement’. (emphasis added) This is a somewhat woolly way of describing the equitable interest created in favour of Pleiades by the grant of an equitable mortgage or charge over the land to secure the repayment of the loan. But the key concept is ‘security for the repayment of a loan agreement’. Those words make adequately clear in the context what the intention was, notwithstanding the unconventional language. It was that the borrower grant an interest in the land to Pleiades as security for the loans advanced by it.

The language of the caveat becomes more obscure when describing the source of the claimed estate or interest. However, I do not think any legal consequence results from it. The caveat states that the interest arises by virtue of ‘clause 1.1 of the Loan Agreement’. This could not be correct. If anything, it should possibly be Clause 2(b) or the loan agreement taken as a whole and construed in its context.

I accept the following principles and adopt the following submissions in relation to the correct approach to contractual construction that should be taken:

Bryson AJ emphasised this approach in connection with a caveat dispute in Taleb v National Australia Bank Ltd [2011] NSWSC 1562 at [60-[61]:

In Ta Lee Investment Pty Ltd v Antonios [2019] NSWCA 24, the Court of Appeal (at [98]) agreed with the observation made by Bryson AJ in Taleb at [60]. See also Aged Care Services Pty Ltd v Kanning Services Pty Ltd (2013) 86 NSWLR 174; [2013] NSWCA 393 at [82]-[83] per Gleeson JA (Meagher and Leeming JJA agreeing).

The question in this case is whether the language and circumstances reveal a contractual intention by the parties, objectively ascertained, to create an equitable interest in the land as security for the repayment of the loans. The circumstances in relation to the first loan may be summarised as follows: There was a loan; a caveat; an intention that the caveat be ‘discharged’ on repayment of the loan; an intention that the loan be secured; and an intention that the borrower sign the caveat ‘in support of’ the loan.

In connection with the second loan, the circumstances may be summarised as follows: There was an acknowledgement that the borrower had ‘previously granted Pleiades a caveatable interest in respect of the property’; that the borrower had provided security for the first loan; and that the borrower agreed to provide security for the second loan. In addition, the circumstances included the incorporation by reference of the registered caveat in respect of the first loan; an agreement to extend the caveat created for the first loan so that it would be ‘valid and enforceable’ for the second loan; and an undertaking not, without the consent of Pleiades, to create or allow any encumbrance ‘to secure any indebtedness’ on the property ‘save for’ the existing registered caveat.

Whether or not the documents have been poorly drafted, the root question is whether expressly or by necessary implication the property has been ‘made liable or specifically appropriated to the discharge of [the] debt’: Swiss Bank Corporation v Lloyds Bank Limited [1982] AC 584 at 594-5 (Buckley LJ). It is not necessary that particular words of charge be used. Cradock v The Scottish Provident Institution (1893) 69 LT 380 at 382; Peters v Lithgow Forge Pty Ltd [2010] NSWSC 283 at [46].

The following passage from the judgment of Buckley LJ in Swiss Bank Corporation at 594-5 is helpful and I adopt it:

I am satisfied that in this case, unlike in Ta Lee Investment at [103]-[104], there are sufficient references in the contractual language to concepts such as ‘secured’ and ‘caveatable interest’, as well as other language, that taken as a whole, adequately demonstrate a contractual intention that Pleiades have an equitable interest in the land as security for the repayment of its loans.

Having regard to the language used in the documents that I have explained and extracted, and the inferences that flow from that language, I am satisfied that the contractual intention was that an equitable interest in the land would be created to secure the repayment of the loans to Pleiades. The caveat, however imperfectly expressed, was recognised by the parties as evidencing the creation of that interest. I therefore find against the plaintiff on the first ground.

The property has been sold. The second question is whether Pleiades’ interest in the land has been converted to an interest in the proceeds of sale. This would follow in the case of a sale by a mortgagee: see Re Miles; Ex parte National Australia Bank Ltd (1988) 20 FCR 194 at 200; AVCO Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679; La Trobe Capital & Mortgage Corporation Ltd (No 2) [2009] NSWSC 1372 at [33].

It would also generally follow, in my view, in the case of a sale by the registered proprietor rather than by the mortgagee, unless the particular circumstances dictate a different conclusion. See Aircon Heating & Airconditioning Pty Ltd (in liquidation) v Crane Distribution Ltd [2006] VSC 76 esp at [47]-[51] and Cheetham v 805 Archer Road Pty Ltd (in liq) [2015] VSC 96 at [63].

In this case, the plaintiff contends that the circumstances dictate a different conclusion and that Pleiades has forfeited its equitable interest because the land was sold by the borrower as registered proprietor pursuant to terms of settlement in earlier debt recovery proceedings (2015/321848) between Pleiades as plaintiff and the borrower as first defendant.

The terms of settlement were agreed on 22 June 2016. They provided for the borrower to pay $1.25 million to Pleiades within six months, subject to certain qualifications. Clause 7 stipulated:

Clause 10 of the terms of settlement was added in handwriting. It provides:

It is apparent in my view, that when the document is read as a whole, Clause 10 should be read subject to the reservation of rights in Clause 7. I do not think it was intended, in the particular circumstances, that the effect of Clause 10 should be to deprive Pleiades of the rights that were recognised and preserved by Clause 7. Such a conclusion is neither compelling nor likely as a matter of construction of the document.

Nor do I think that this is the sort of case, such as that described by Emmett AJA in Lum v MV Developments Pty Ltd (in liquidation) [2018] NSWSC 247 at [87], where it should be inferred that the authorisation of the right to retain a caveat on the title to the land by Clause 7 was for solely pragmatic commercial reasons, rather than in recognition of a subsisting equitable interest in the land. I do not think that such a construction is consistent, in this case, with the context, including the course of events preceding the terms of settlement and the contractual intention of the parties that I have concluded was formed in 2014.

Another consideration advanced by the plaintiff is that when he commenced these proceedings, seeking orders among others, that Pleiades’ caveat was invalid, Pleiades lodged a submitting appearance. I would not necessarily have regarded that as a concession, if that were all there was to it. But in any event, Darke J permitted Pleiades to withdraw its submitting appearance after receiving evidence and being satisfied that it was filed in error.

All of these matters constitute the context in which the plaintiff contends that Pleiades has lost the rights or the interest that it would otherwise have had in the proceeds of sale. Counsel for the plaintiff said ‘Effectively, it is a waiver or abandonment’. I do not think so. An inference of abandonment of a right (whether a contractual right or an equitable interest) is not lightly made. It requires ‘an unequivocal expression of an intention to abandon those rights or that interest (or conduct inconsistent with or repayment to those rights)’: Shaw v Minsden Pty Ltd [2011] NSWSC 764. There must be an intentional act done with knowledge, indicating an intention to act as if the right did not exist: Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305 at 326.

In the particular circumstances, Pleiades’ consent to the withdrawal of its caveat cannot, without more, amount to waiver or abandonment of its equitable interest. It is equally consistent with Pleiades relying on its equitable rights in relation to the proceeds of sale. The reasoning in Cheetham at [65], [67] and [68] in respect of the lapsing of a caveat is analogous. In my view, it applies with equal force:

Given the above, the failure by Pleiades to obtain an undertaking or agreement from the plaintiff to preserve the sale proceeds for its benefit, as suggested by counsel for the plaintiff, is not enough, in my view, to amount to waiver or abandonment. It was not necessary for Pleiades to obtain such an undertaking or agreement – because, in the circumstances of this case, Pleiades’ charge over the land converted to a charge over the proceeds of sale.

In my view, Clause 7 of the terms of settlement preserved the equitable interest in the land that was protected by the caveat. This is clear from the operative words of the clause which I have italicised in paragraph [31] above. Clause 10 did not, in my view, override Clause 7. It dealt with a different question.

Pleiades was therefore entitled to an equitable charge in relation to the proceeds of sale. Its equitable interest in the land attached to the proceeds of sale or was converted to an equivalent interest in the proceeds. As Hansen J recognised in Aircon Heating & Airconditioning at [50], there is a ‘more general principle that after sale of the secured property, an equitable mortgage is converted to a charge on the proceeds of sale for the interest of the mortgagee’. That principle is subject, of course, to the particular circumstances of a given case. But I see no reason on the facts of this case why the general principle should not apply.

The fifth defendant’s position does not arise. It was agreed that if Pleiades succeeded, no monies would be available to the fifth defendant even if it had a secured interest in the proceeds of sale. It conceded in submissions that if Pleiades’ claim is upheld ‘there will not be sufficient funds available to meet any claim pursuant to the caveats lodged by the fifth defendant, which then become nugatory’. The claims against the second, fourth and sixth defendants also do not arise or were not pursued. The plaintiff did not address submissions in relation to them.

I dismiss the further amended summons. I order the plaintiff to pay the costs of the third and fifth defendants.