Bank of New South Wales v Adams and Anor

[1982] 2 NSWLR 659

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(Decision by: Helsham CJ in Eq)

Between: Bank of New South Wales
And: Adams and Anor

Court:

Judge:
Helsham CJ in Eq

Subject References:
TORRENS SYSTEM
MORTGAGES
Power of sale
Power exercised
Receipt of moneys
Notice of second mortgage held
Mortgagee trustee
Solicitor acting for mortgagee constructive trustee
TRUSTS
Constructive trusts
Solicitor client relationship
Mortgagee sale by client
Statutory power
Notice of second mortgage held
Solicitor constructive trustee
Liability for breach of trust
LEGAL PRACTITIONERS
SOLICITOR
Client's money
Disbursement of
Client mortgagee vendor under statutory power of sale
Notice of second mortgage held
Moneys paid to client at client's direction
Solicitor constructive trustee
Solicitor liable for breach of trust

Legislative References:
Real Property Act, 1900 - s 58(3)
Legal Practitioners Act, 1898 - s 41(1)

Case References:
Bank of New South Wales v Vale Corporation (Management) Ltd (In Liq) - (Court of Appeal, 21st October, 1981, unreported)
Banner v Berridge - (1881) 18 Ch D 254
Barnes v Addy - (1874) 9 Ch App 244
Bell, Re - (1886) 34 Ch D 462
Carl-Zeiss-Stiftung v Herbert Smith & Co (No 2) - [1969] 2 Ch 276
Consul Development Pty Ltd v DPC Estates Pty Ltd - (1975) 132 CLR 373
Eyre-Williams, Re - [1923] 2 Ch 533
Gray v Johnston - (1868) LR 3 HL 1
Lee v Sankey - (1873) LR 15 Eq 204
Morrison, Re: Bennell v Smith - [1962] Tas SR 337
Selangor United Rubber Estates Ltd v Cradock (No 3) - [1968] 1 WLR 1555; [1968] 2 All ER 1073
Stewart v Strevens - [1976] 2 NSWLR 321
Thomson's Mortgage Trusts, Re - [1920] 1 Ch 508
West London Commercial Bank v Reliance Permanent Building Society - (1885) 29 Ch D 954

Hearing date: 15-16 June 1982
Judgment date: 13 December 1982

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Decision by:
Helsham CJ in Eq

Held:

(1)

Where a mortgagee of land under the provisions of the Real Property Act, 1900, exercises the power of sale conferred by s 58 of the Act, a trust arises over moneys received by the mortgagee/vendor who holds any purchase money in excess of that required to pay the expenses occasioned by the sale and that due and owing to him, in trust for any subsequent mortgagees of whose interest he has notice.

(2)

Where a solicitor receives money as agent for a person (client) who is required to hold that money upon a statutory trust, and, being fully aware of the statutory requirement and of the right and the claim of a beneficiary to have it, and knowing that if he pays it over to the person (client) it will be applied in breach of trust, and that the money is sought by the person (client) as trustee in order to defeat the claim of the beneficiary, he holds the money as constructive trustee.

(3)

Where a solicitor receives money as constructive trustee thereof, the Legal Practitioners Act, 1898, s 41, does not exonerate him from any breach of trust in respect of a payment thereout to the client or at his direction.

(4)

Accordingly, where a mortgagee vendor instructed his solicitor to pay the purchase moneys received on sale to him, which the solicitor did, and both the mortgagee vendor and the solicitor had notice of a second mortgage, both were liable for breach of trust.

SUMMONS

These were proceedings in which the plaintiff sought a declaration that the defendants held a sum of money (being money owing under a second mortgage of property sold by the defendant as mortgagee vendor) in trust for it and orders for the recovery thereof.

B W Collins, for the plaintiff.

W G Hodgekiss, for the first defendant.

C A Porter QC and G Moore, for the second defendant.

Cur adv vult

Dec 13

Helsham J in EQ. When reduced to their essentials, the facts in this case are very simple. But they raise some difficult questions of law. In 1973 one Douglas Campbell Logan was the registered proprietor of certain land under the provisions of the Real Property Act, 1900 (the property). By 1975 it was subject to a first registered mortgage to a building society and a second registered mortgage to the Bank of New South Wales (the plaintiff - the bank). By contract date 21st February, 1975, Mr Logan agreed to sell the property to Kenneth Walter Adams, and a woman who must have subsequently become his wife, for $53,240. For reasons which do not now matter, in September 1975 Mr Adams (the first defendant) took a transfer of the first mortgage of the building society to himself alone for $30,269.13. He borrowed the money from his employer in Western Australia to do so. The transfer of mortgage to him was registered. His employer took the title deeds. (I suppose he obtained the certificate of title on transfer of the first mortgage as security.) The contract of sale with Mr Logan was never settled, although the purchasers were ready to do so after the transfer of mortgage to Mr Adams.

In late 1979 Mr Adams wished to sell the property; he decided to sell as first mortgagee exercising his power of sale (Mr Logan had left Australia with the abnormally large deposit he had received on exchange of contracts - the sale had never been completed). On 30th January, 1980, he entered into a contract to sell to one Mr Calkin and his wife for $130,000. There had been some correspondence with the solicitors for the bank both before and after this contract as to the bank's interest under its second mortgage, how much was owing ($42,111.92 as at 31st May, 1980) and whether that amount out of the purchase money should be placed in an interest bearing account. The reason for this is that there had been proceedings brought by the bank back in 1978 against Mr Adams and Mr Logan (and the building society) for the purpose of quantifying the amount owed to the bank under its second mortgage. Those proceedings had been heard by me in March 1980, after Mr Adams had contracted to sell the property, but judgment had not been given at the time it was desired to settle the sale in April 1980.

Hence the bank's concern over the destination of that part of the purchase money necessary to discharge its second mortgage. In a letter from the bank's solicitors of 10th March, 1980, it was indicated that the bank was prepared to consent to the sale and discharge the second mortgage if $42,000 odd was placed into an account to await my decision.

I should make it clear that I accept what was said about this by the solicitor acting for Mr Adams, the solicitor is the second defendant in these proceedings, that there was no agreement with the bank that portion of the proceeds of sale would be dealt with in this way. The case does not turn on any agreement with the bank as to how to proceeds of sale would be dealt with.

In fact the solicitor had express instructions from his client, Mr Adams, as to how the purchase money was to be disbursed. He was to retain a certain amount to cover his costs and disbursements, and to remit the whole of the balance to Mr Adams in Perth, where he was now living. This the solicitor did.

On 30th April the solicitor knew that I proposed to deliver judgment in the matter of the second mortgage on 2nd May. Arrangements were made to settle contract of sale later on the same day, 2nd May, but it does not matter whether they were made after or before the solicitor got his knowledge. On 2nd May judgment was delivered. I held that the bank was entitled to a declaration of the amount owing under its second mortgage, and I stood the matter over to 16th May to enable the exact amount owing to be worked out. The solicitor for Mr Adams knew that the amount would be somewhere between $30,000 and $42,000.

Later on, on 2nd May, the contract of sale was completed. The sum of $117,825.71 was received by the solicitor on settlement ($13,000 deposit was still held by the agent). It was paid into the solicitor's trust account, and on the same day $101,825.71 was sent by telegraphic transfer to Mr Adams in Western Australia and received by him. Although I do not think it adds anything, the fact is that the solicitor knew there had been no consent of the bank to this course, knew that no moneys had been paid to the bank under the second mortgage and knew that there were no arrangements for payment. He knew that the moneys would be used by Mr Adams for his own purposes, including the repayment of the loan to his employer and that they would not be used to pay to the bank what was owing under its mortgage, or any part of it. The solicitor formed the view that he had no alternative but to act on the instructions of his client to pay over the money, and believed that his client's instructions to him to retain the sum of $16,000 for his costs and disbursements was justification for retaining this sum.

Mr Adams disbursed all the money in the next few days, including paying $55,703.64 to his employer. On 8th May the agent sent to the solicitor the balance of deposit, less commission, $9406.09, which was deposited in the solicitor's trust account on 12th May. He sent $9776.94 to Mr Adams by cheque on 16th May. Between 2nd May and 16th May the solicitor had dispersed to counsel or transferred to his general account all except $500 of the proceeds of sale. On 16th May I made a declaration that the amount owing under the second mortgage to the bank was $30,090.23.

By the end of May only $200 remained in the solicitor's trust account, and all the moneys sent to Mr Adams had been withdrawn from his account. Some time on or before 2nd May the solicitor had told his client, Mr Adams, of the provisions of the Real Property Act, s 58. That section deals with a mortgagee's power of sale with respect to land under the provisions of the Act. Section 58(1) confers the power to sell and to give a valid discharge to the purchaser for the purchase money received. Section 58(2) gives protection for a purchaser. The section continues:

"(3)

The purchase money to arise from the sale of any such land, estate, or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee or chargee; thirdly, in payment of subsequent mortgages or charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor or charger, as the case may be."

The only other fact necessary to mention is that out of the proceeds of sale of $130,000 there was enough to pay the expenses of the sale, to discharge the first mortgage in full with a surplus over, which turns out to be sufficient to discharge the second mortgage. It is quite clear that the defendants realized there would be a surplus after setting aside the amounts necessary to meet those two commitments. As I have said, s 58 was explained by the solicitor to Mr Adams.

After some attempts in June 1980 to freeze the amount of $30,090.23, the amount I had declared was owing to the bank under the second mortgage (too late anyway), these proceedings were commenced in August. They seek in effect a declaration that Mr Adams held the sum of $30,090.23 out of the sum of $117,825.71 in trust for the bank, and that he misapplied it in breach of trust, and a declaration that the solicitor knowingly participated in such breach of trust. Orders are sought for the payment of the money with interest.

I should mention, although I do not believe it has any relevance, that in August 1979 Mr Adams claimed he was entitled to the whole of the proceeds of any sale of the property.

The claim of the bank in these proceedings is simple enough. It is that the terms of s 58(3) are sufficient to impose a trust upon the funds received by a mortgagee as the proceeds of a sale by him as such mortgagee when the proceeds exceed the amount necessary to meet the expenses of the sale and the amount due and owing to him; that trust is in favour of subsequent mortgagees, if any, and/or for the mortgagor. The defendants say that the section creates no trust, and only establishes an order of accounting. The second defendant says that even if a trust is created, it is not one that touches him, or, if it is, the Legal Practitioners Act 1898, s 41, overrides any trust and requires a solicitor to pay moneys received by him to his client. Section 41(1) provides:

"(1)

All moneys received in New South Wales for or on behalf of any person by any solicitor shall be held by him exclusively for such person, to be paid to such person, or to be disbursed as he directs, and until so paid or disbursed the moneys shall be paid into a bank in New South Wales to a trust account, whether general or separate."

The problem arises in very simple form in this case. There is no dispute that both defendants knew of the bank's claim as second mortgagee. The first defendant, Mr Adams, decided to ignore the provisions of s 58(3), and the second defendant ignored it by paying over to his client the purchase money and disbursing it as instructed. Some attempt was made to inject into these proceedings a suggestion that the bank's right to get paid is in some way postponed in equity. The suggestion was not supported by any evidence and can be ignored. The simple questions are: (1) does the operation of the Real Property Act, s 58(3), give rise to a trust over moneys received by a mortgagee vendor and (2) if it does, so that payment of money in contravention of the section amounts to a breach of trust, is the solicitor who makes the payment to his client and disburses it on instructions from the client, also rendered liable for the breach of trust.

Without the assistance of the views of anyone else on this matter, I would have little hesitation in reaching the conclusion that a mortgagee exercising a statutory power of sale such as that conferred by s 58 would become a trustee of the proceeds of sale of the land for a subsequent mortgagee, at least if and when he knows that there is a subsequent mortgage and that the proceeds exceed the amount necessary to pay the expenses occasioned by the sale and the amount due or owing on his own mortgage - he would become a trustee vis à vis the excess at any rate. The Act postulates that there will be a sum of money in the hands of the mortgagee exercising the power of sale; it places a duty upon him to apply it in payment to certain persons (if there is an excess) and it gives a right to such persons to be paid out of that particular sum of money. Although it is an involuntary duty and obligation imposed on a person with respect to property received by him, this does not prevent equity from placing a trust responsibility upon the person who receives the proceeds of sale. I think equity would operate in that fashion with respect to the proceeds of a mortgagee's sale in order to supplement the law for the protection of subsequent mortgages.

Although there is a reason for the operation of s 58 with respect to Real Property Act land additional to that of its counterpart in the Conveyancing Act, 1919 (s 112), they both have the same statutory origin. Lord Cranworth's Act (23 and 24 Vict c 145), s 14 eventually became the Law of Property Act, 1925 (UK), s 105, which so far as relevant is in identical terms to the Conveyancing Act, s 112(4). That section, after setting out that moneys received on a mortgagee's sale shall be held by the mortgagee in trust to be applied first in payment of the costs of sale and second in discharge of the mortgage, proceeds:

"...; and the residue of the money so received shall be paid to the person entitled to the mortgaged property or authorised to give receipts for the proceeds of the sale thereof."

Of this section the learned author of the ninth edition of Coote on Mortgages (1927), vol 2, at pp 943, 944 says:

"On a sale of the mortgaged property under an express or a statutory power, the mortgagee becomes a trustee of the surplus proceeds for the mortgagor, or for any persons interested therein under any subsequent incumbrance or other dealing with the equity of redemption of which he has notice, and is not justified in retaining it, for example, on the ground that the Statute of Limitations has run against that person; and he will accordingly be answerable if he pays the surplus to the wrong person; but in a doubtful case he can pay the money into Court, or invest it for the benefit of the persons entitled.

...

The last words of the section include a subsequent incumbrancer to whom, therefore, a mortgagee may pay any surplus."

The position in Chancery was not in doubt. In West London Commercial Bank v Reliance Permanent Building Society (1885) 29 Ch D 954 (an appeal from the Vice-Chancellor) Cotton LJ said (at p 962):

"...; but when the first mortgagee, as owner of the property and having the control over it, turns the land into money - for the owner of the equity of redemption cannot, without the concurrence of the first mortgagee, himself turn the land into money - if he, the first mortgagee, does so with knowledge that the money is not going to be applied in a proper manner, he is, in my opinion, as liable for the money as if he had received it under an express obligation to give it to the person properly entitled to it. It is conceded that if he exercises his power of sale as mortgagee, whether under the terms of the mortgage deed or by statute, he is answerable for the money he receives if he pays it to the wrong person, that is to say, if he passes over the second mortgagee and pays it to the mortgagor who has no right to receive it."

a fortiori if the first mortgagee keeps it himself. See also Re Thomson's Mortgage Trusts [1920] 1 Ch 508; Re Bell (1886) 34 Ch D 462. In a case where the statute did not apply (mortgage of a ship) Banner v Berridge (1881) 18 Ch D 254, Kay J said (at p 269):

"But I take the true result of these decisions to be this, that in this particular case, where there was no trust expressed either in writing or verbally of the proceeds of the sale, no trust can possibly arise until it is shewn there is a surplus, and then I should be disposed to hold that there is sufficient fiduciary relation between the mortgagor and mortgagee to make the mortgagee constructively a trustee of the surplus, in case it is shewn there is a surplus. But that seems to me to be a case not of express trust at all but of constructive trust, that is to say, a case of a trust which only arises on proof of the fact that there was a surplus in the hands of the mortgagee after paying himself. And, if that be so, the ordinary rule of a Court of Equity would apply,..."

Why should the ordinary rule not apply in cases where a mortgagee holds surplus funds after sale pursuant to the Real Property Act, s 58, when there is the added requirement of the law that surplus purchase money must be applied in payment of subsequent mortgages? I can see no reason. The difference in wording of the Conveyancing Act, s 112, affords none. As Mr E I Sykes put it in his work on The Law of Securities (1978), 3rd ed, at p 225:

"In short it seems to be the current view that the legislature in engrafting the power of sale on to the Torrens title mortgage did so with all the equitable raiment appropriate to such power in its general law setting."

It may be that the same view was taken in Re Morrison; Bennell v Smith [1962] Tas SR 337, and by Beckenham and Harris, The Real Property Act NSW (1929), p 149.

I hold that where a mortgagee of land under the provisions of the Real Property Act sells in pursuance of the power conferred by s 58 then he holds any purchase money in excess of that required to pay the expenses occasioned by the sale and that due and owing to him in trust for subsequent mortgagees of whose interest he has notice.

That means that the first question is to be answered yes, in the circumstances of this case.

The second question relates to the position of the solicitor. It is difficult. I think it resolves itself into two parts. The two parts are (i) whether in the circumstances the solicitor became a constructive trustee of the money paid to him and (ii) if he did, whether he is exonerated from any breach of trust by the operation of the Legal Practitioners Act, s 41. I turn to the second part first.

"The mere act of receiving trust money or acting in some transaction as agent for a trustee does not make the actor a constructive trustee" and as such liable for the loss of the trust funds arising out of the transaction: Jacobs' Law of Trusts in Australia, 4th ed (1977), p 245 - the learned authors discuss the cases of Barnes v Addy (1874) 9 Ch App 244; Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555; [1968] 2 All ER 1073; Carl-Zeiss-Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 and other cases. The proposition applies to solicitors. So that if there were nothing more, then mere receipt and payment over of trust moneys by a solicitor to his client trustee would not amount to a breach of trust. Indeed a solicitor would not require any protection from s 41 - it would merely impose an obligation.

But if the solicitor has himself become a constructive trustee of the moneys received by him, then in my view a different position obtains. As a trustee, I do not think it can be said that the trust property, the money, is received by him for or on behalf of his client; ex hypothesi it is received by him as trustee, and that means for or on behalf of whomsoever is entitled under the trust. The difference is between receiving the money as solicitor alone, and receiving it as trustee. It is a real difference; it may not occur very often that a solicitor finds himself in that position, but when it does the section does not operate to require payment to the client nor disbursement as he directs, unless in so far as such payment or disbursement is not in breach of trust; the property is not held exclusively for such client. That is my view.

I do not think that s 41 overrides the duties and obligations of a solicitor where that solicitor holds money as a trustee. If the solicitor here was a trustee, then he is not exonerated from breach of trust by the provisions of the Legal Practitioners Act, s 41.

It seems to me that where a solicitor receives money as agent for a person who is required to hold that money upon a statutory trust, and, being fully aware of the statutory requirement and of the right and the claim of the beneficiary to have it, and, knowing that if he pays it over to the trustee it will be applied in breach of the trust, and that the money is sought by the trustee in order to defeat the claim of the beneficiary, then he is in the position of a constructive trustee.

The law in this area was fairly recently examined by the High Court in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 where all the relevant cases were discussed. Stephen J, with whose reasons for judgment Barwick CJ agreed, referred (at pp 409, 410) to the Carl-Zeiss- Stiftung case, a case involving a solicitor, and of the reasons for judgment of Sachs LJ said this:

"His Lordship was careful to state that this proposition owed nothing to the fact the defendants received the moneys in question as agents or as solicitors but was applicable to any ordinary stranger receiving trust moneys. He concluded (95) that for a stranger to a trust to be made liable as constructive trustee an element of dishonesty or of consciously acting improperly must be present as opposed to an innocent, albeit negligent, failure to make proper inquiry; there must be both knowledge of the trust and of the breach of trust, or a wilful shutting of the eyes to the obvious. Edmund Davies L.J. took a like view, insisting upon the need for there to be established a '"want of probity", a feature which recurs through and seems to connect all those cases drawn to the court's attention where a constructive trust has been held to exist'. His Lordship concluded that the authorities showed that nothing short of want of probity would do, not even gross negligence sufficing, in its absence, to render a stranger liable as constructive trustee. Want of probity was, he thought, the hallmark of constructive trusts, however created."

I do not gather that his Honour was expressing any disapproval of their Lordships' views. It may be accurate to deduce from what his Honour said that possession of the trust property, coupled with a deliberate breach of trust, is itself enough to make the possessor liable as a constructive trustee.

This would seem to be a view held by Gibbs J. His Honour said (at p 398):

"I respectfully agree with what was said in Selangor United Rubber Estates Ltd. v. Cradock (No 3) ([1968] 1 W.L.R. 1555) as to the meaning of 'dishonest and fraudulent' for the purposes of the rule. This expression is to be understood by reference to equitable principles and, as I have already indicated, in my judgment it includes a breach of trust or of fiduciary duty .... On the other hand, it does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all the facts could escape liability because his own moral obtuseness prevented him from recognizing an impropriety that would have been apparent to an ordinary man.

However, for reasons that will appear, it is unnecessary for me to express any concluded view on these questions and I assume for the purposes of this case, but without finally deciding, that the formulation of principle on this point in the Selangor Case was correct."

Compare Lee v Sankey (1873) LR 15 Eq 204, at p 211; Re Eyre- Williams [1923] 2 Ch 533. Likewise I find it unnecessary for me to reach a concluded view on this aspect, because in my opinion if a person receives property impressed with a trust arising by law, and a breach of trust occurs by reason of that person's deliberate refusal to deal with that property in the way the law requires, he is guilty of such improper conduct as will cause him to be treated as a constructive trustee. As Street CJ said in Bank of New South Wales v Vale Corporation (Management) Ltd (Court of Appeal, 21st October, 1981, unreported) the extent of the equitable principle involved is not to be found by construing the various pronouncements in the cases as if they constituted the provisions of a statute. The law created a trust for the benefit and protection of second mortgages. Here the solicitor knew of the law, knew of the second mortgage and the claim of the second mortgagee, knew of the surplus and knew that the object of payment to his client was to prevent the second mortgagee from getting any of the money. In my view that is sufficient to put him into the position of a constructive trustee with respect to the money that came into his hands.

If this conclusion is right, and if my views, previously expressed, as to the Legal Practitioners Act, s 41, are also correct, then the plaintiff is entitled to a remedy against the second defendant as well as the first.

Orders accordingly.

Solicitors for the plaintiff: Henry Davis York.

Solicitors for the first and second defendants: Gordon L Beard & McDonald.

N J Haxton, Barrister.