When is a trust not a trust?

By Legal Eagle

Via the Restitution Discussion Group (yes, there really is such a thing), I hear that the Australian High Court has indulged in yet another snark at unjust enrichment. Is it just me, or are these self-righteous little rants getting boring?

The case is Bofinger v Kingsway Group Limited [2009] HCA 44. The issue raised is an interesting one for this ex-banking litigator. The facts are as follows. B & B Holdings Limited (‘B & B’) was a company which owned certain real property. On the security of that property, it granted three mortgages to three different mortgagees. Mr Bofinger was the director of B & B. Mr and Mrs Bofinger also gave guarantees to the three mortgagees. The guarantees were secured by property owned by Mr and Mrs Bofinger. B & B went into liquidation. The first mortgagee exercised its power of sale over B & B’s real property. Meanwhile, Mr and Mrs Bofinger sold their real property which was security for the guarantee, and used the proceeds to reduce the debt of B & B to the first mortgagee.

The debt to the first mortgagee was satisfied in full. In fact, there was money left over from the sale of B & B’s real property.

The first mortgagee gave the left-over money and two unsold properties belonging to B & B to the second mortgagee. However, Mr & Mrs Bofinger argued that the first mortgagee should have given the left-over money to them first, so that they could recoup their losses in respect of paying off the debts of B & B. They argued that this was the case because of the doctrine of subrogation.

The High Court quotes the English case of  Liberty Mutual Insurance Co (UK) Ltd v HSBC Bank plc [2001] Lloyd’s Rep Bank 224 (affirmed [2002] EWCA Civ 691) where, at 225,  Sir Andrew Morritt V-C described the right of subrogation in favour of a surety:

The right operates so as to confer on the surety who has paid the debt in full the rights against the debtor formerly enjoyed by the creditor or by imposing on the creditor the obligation to account to the surety for any recovery in excess of the full amount of his debt. (emphasis added)

So essentially, once the debt is ended, the surety steps into the shoes of the debtor, and has the same rights and obligations the debtor had.

Given that the first mortgagee had already paid the moneys to the second mortgagees, the Bofingers argued that the second mortgagees held this money on constructive trust for them.

The High Court accepted that the money was held on constructive trust for the Bofingers. However, the nature of this constructive trust is not proprietary. The Court referred to the equitable estoppel case of Giumelli v Giumelli (1999) 196 CLR 101 where a “constructive trust” was used to identify the imposition of a personal liability to account. They quote from Crennan J’s judgment in Jones v Southall & Bourke Pty Ltd (2004) 3 ABC (NS) 1, 17, where she said that the Australian authorities:

make plain [that] the term ‘constructive trust’ covers both trusts arising by operation of law and remedial trusts. Furthermore, a constructive trust may give rise to either an equitable proprietary remedy based on tracing or, whether based on or independently of tracing, an equitable personal remedy to redress unconscionable conduct. The equitable personal remedies include equitable lien or charge or a liability to account.

They also note that Crennan J said that the term “constructive trust” included the obligation of a defaulting fiduciary to make restitution by a personal rather than a proprietary remedy.

I tend to agree with Megarry V-C when he said the word “constructive” is ‘an unhappy word in the law’ because it ‘seems to mean ‘it isn’t, but has to be treated as if it were,’ and the less of this in the law, the better.”

(See ‘Historical Development’ in Special Lectures of The Law Society of Upper Canada 1990–Fiduciary Duties, 1, 5)

“Constructive trust” in the way the High Court is using it seems to mean ‘it isn’t even a trust, but we’re going to call it one, even though we’re not treating it as if it were’. Now I know the trust is malleable, but in my opinion, Giumelli and this case just take it a little too far.

The High Court concludes at [49] – [51]:

On 8 February 2006 the first mortgagee was obliged in good conscience both to account to the appellants for surplus moneys and securities it held and not to undertake or perform any competing engagement in that respect without prior release by the appellants. These obligations were fiduciary in character. …

In respect of its misapplication of the surplus moneys and securities and the consequent loss to the appellants the first mortgagee is to be treated as a constructive trustee to the extent that it must account to the appellants as a defaulting fiduciary. It is unnecessary to seek to determine upon the agreed facts whether the first mortgagee was a trustee in a fuller sense which afforded the appellants a beneficial interest in the assets in question.

It further found that the terms of the second guarantee did not constitute a waiver of the rights to the left-over money, nor did the terms of the second guarantee give priority to the second mortgagee.

Finally, the High Court rejected the line of English authority which had linked the doctrine of subrogation to unjust enrichment. At [86] – [89], the court rejected the notion of an overarching doctrine of restitution:

In a passage in their reasons in David Securities Pty Ltd v Commonwealth Bank of Australia, Mason CJ, Deane, Toohey, Gaudron and McHugh JJ rejected the submissions that in Australian law unjust enrichment was more than “just a concept” and that it was “a definitive legal principle according to its own terms”. The use of the phrase “unifying legal concept” earlier in the joint reasons must be understood with what was said in that later passage. In the years which have followed the Court has reaffirmed this position and all other Australian courts are bound accordingly.

A not dissimilar fate met the attempt to adopt “proximity” as the “unifying theme” of the categories of case recognising a duty to take reasonable care to avoid a reasonably foreseeable risk of injury to another.

The concept of unjust enrichment may provide a means for comparing and contrasting various categories of liability. Reference has been made to Cochrane v Cochrane and this provides an example. Subrogation may be seen as preventing the unjust enrichment of the principal debtor who otherwise might escape carriage of ultimate liability and contribution prevents one of equal obligors bearing more than its share of the burden. The two doctrines do not let matters lie where they would fall if the carriage of risk between the various actors involved were to be left entirely to be worked out within the limits of their contractual obligations. But as Cochrane shows, and as explained above, the two doctrines have different foundations in equity and operate with different results.

The concept of unjust enrichment also may assist in the determination by the ordinary processes of legal reasoning of the recognition of obligations in a new or developing category of case. An example is the conclusion reached in David Securities itself, that the vitiating factors which enliven the action for money had and received include mistakes of fact or law. But this appeal is not in that category. The principles of equity which govern the outcome are well developed and have the vitality to permit further development in an orthodox fashion.

…But that is not to say that subrogation is a “tangled web” in need of the imposition of the “top-down” reasoning which is a characteristic of some all-embracing theories of unjust enrichment

Okay, okay, you’ve said it all before in Farah and Roxborough, enough already. Unjust enrichment is not a unifying concept. No “top-down reasoning”. All lower courts must toe the High Court’s anti-restitutionary line or face being overruled in a nasty fashion (see Farah). Blah blah blah. Yawn!

I’d be happier if they actually reasoned as to why they believe this is so rather than just indulging in knee-jerk responses. Are there benefits to having a unified concept of unjust enrichment? Are there detriments? Are all restitution scholars necessarily indulging in “top-down reasoning”? Is top-down reasoning necessarily a bad thing? Should the law evolve? I mean, they’re the High Court — within reason, the law is what they say it is. Why have the English courts made the changes they have? How have these changes worked? Have they made private law more manageable or less? I don’t mind so much what position the High Court takes on these questions as long as it actually thinks about it rather than just snarks.

And then, of course, they have to get the boot into taxonomy and the late Peter Birks, at [92] – [96]. The High Court insists at [94] that ‘the relevant principles of equity do not operate at large and in an idiosyncratic fashion.’ Well, in that case, I’m not sure what all that stuff about a constructive trust-which-is-not-a-trust-but-actually-a-personal-remedy is about, then. When is a trust not a trust? It’s true that the “constructive trust” imposed pursuant to Barnes v Addy is a personal remedy, but in my opinion, it’s highly arguable that the remedy is not really a trust for this reason.

I really wish the High Court would either (a) engage in reasoned criticism of unjust enrichment scholars or (b) desist from snarking.

In any case, the High Court goes on to reject the English developments of the law of subrogation, specifically Lord Hoffman in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, who argued that the question in a case of subrogation was whether or not the defendant was unjustly enriched at the plaintiff’s expense. To give the High Court credit where credit is due, it gives reasoned arguments for rejecting the Banque Financiere decision. It would sound quite reasonable if it weren’t for the usual snark beforehand.

Returning to the result of the case, it will be interesting to see what the consequences of this decision are for subsequent mortgagees. Clearly, subsequent mortgagees cannot presume that any surplus proceeds from the first mortgagee’s sale of the mortgaged assets belong to them. If I still acted for mortgagees, I’d be taking very careful note of this case…

13 Comments

  1. Posted October 19, 2009 at 9:04 pm | Permalink

    Boy, was this NOT the first post for a non-lawyer to read on a Monday morning {shuffles off looking for caffeine}…

  2. HeathG
    Posted October 20, 2009 at 7:37 am | Permalink

    @DEM (1) I’m with you. This kind of stuff reminds me why I never finished my law degree.

  3. AJ
    Posted October 20, 2009 at 1:06 pm | Permalink

    I still know the rules of tracing and I did equity 5ish years ago. I often wonder what important facts (or even useless song lyrics) I could remember if it weren’t for equity.

  4. jc
    Posted October 20, 2009 at 8:16 pm | Permalink

    This is one of the few times I don’t really have an opinion.

  5. Posted October 21, 2009 at 12:53 am | Permalink

    It occurs to me that High Court is doing the legal equivalent of those bad writers who use two or three words where one would do. They’ve had to turn the law of trusts into a pretzel to get this result, instead of just using unjust enrichment and be done with it.

  6. Posted October 21, 2009 at 3:13 pm | Permalink

    Some time ago – let’s just say it was last century – those of us who didn’t care for unjust enrichment had a similar problem of tone, namely that Peter Birks had taken to comparing those who disgreed with him to Nazis – both in print and at conferences. We, too, didn’t care for his snarky tone (though I don’t think even the Australians amongst us used that precise word), and we protested to anyone who would listen. And a fat lot of good it did us. Of course, if we’d known what we know now, that Peter was suffering from a serious brain disease that would soon kill him, we might have reacted differently.

    As for Bofinger, I think you are overreacting. Both earlier Australian case law, and the current English cases, suggest a major role for unjust enrichment here – the High Court really had to state a view on that point, unless they were going to take an absurdly narrow view of their function. I agree that their arguments look a little tired the 9th time round the block, but where is the counter-argument that should make them change their minds? The main reaction from Australian commentators has been either that UE is more progressive (which is pure snark) or more modern (not only snarky, but inaccurate as well). I completely agree that someone should do some joined-up writing on the theme “Are there benefits to having a unified concept of unjust enrichment? Are there detriments?”, but that’s an academic project if ever I heard one … and anyway I’m busy this week.

  7. Posted October 22, 2009 at 10:14 pm | Permalink

    Nick Sherry has just announced a discussion paper on family trusts
    http://www.alp.org.au/media/1009/msat221.php

2 Trackbacks

  1. […] Bofinger v Kingsway Group Limited [2009] HCA 44 (13 October 2009), Legal Eagle on SkepticLawyer characterises the judgment as “yet another snark at unjust enrichment”. True, but reaffirming a light approach to […]

  2. By skepticlawyer » O Mistress Mine! on November 9, 2009 at 8:05 pm

    […] I’m tempted to think you should reach for your metaphorical gun… As I said just the other day, I do think Megarry-VC got it right when he said the word “constructive” is ‘an unhappy […]

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*