continued
Official Receiver v Schultz
Note:
Bankruptcy means you cannot repay your debts. An official receiver
takes charge of your affairs (to repay creditors etc). However, after a
certain period, the law says it is unreasonable to keep you enslaved
forever, and you are discharged. After that, creditors cannot come back
at you for more money (even if they have only received 40 cents in the
dollar).
Facts: Mrs Schultz became bankrupt but was
discharged after a few years. During the term of her bankruptcy, her
friend died and left her an interest in her estate (i.e. Mrs Schultz
became a residuary beneficiary of her friend’s estate). She is
discharged from bankruptcy and then the estate’s administration is
complete and she receives property. The official receiver in bankruptcy
claims the property to pay back her former creditors.
Held:
The HCA said that as soon as she became a beneficiary under the will,
she had a chose in action (a property right) against the trustee. As a
piece of property, the chose in action could be transferred to someone
else. Here, it was transferred by the operation of the law. Bankruptcy
laws say that when a bankrupt acquires property during the term of the
bankruptcy, the property is transferred to the receiver. The chose in
action arose during this time, so the chose in action belonged to the
official receiver. When the chose in action finally bears fruit (when
administration is complete), it belongs automatically to the official
receiver.
“When a beneficiary transmits a chose in action (or
part thereof) or that chose in action passes by operation of law, such
as under the Bankruptcy Act, that transmission naturally encompasses
not only the chose in action but also the expected fruits of that chose
in action”
“Mere equities” and “personal equities”
• A “personal equity” is a right to seek the assistance of a court of equity that is personal to a plaintiff
• It is not a chose in action which may be assigned to another, nor does it attach to any specific assets of the defendant
• Consider the concept of a “personal equity” in National Provincial Bank v Ainsworth
National Provincial Bank v Ainsworth
Facts:
A deserted wife, living in a house owned by her husband, was
threatened with eviction by a bank, when the husband defaulted on a
loan secured by mortgage over the home. She claimed she had an
equitable interest in the home (a personal equity against the husband
who is obliged to provide her with a home).
Held: The House
of Lords held that she had a personal equity against her husband. He
had an obligation to continue to support her and provide her with a
home. However, that personal equity did not attach to any particular
piece of the husband’s real estate. This personal equity did not touch
and concern the land.
This was a personal equity (a conscience
obligation of the husband), but it did not attach to the house. Hence,
someone else (the bank) could come and claim an interest in the house
without being affected by the personal equity against the property
owner.
The House of Lords said possession (enjoyment of
property) does not give you an ownership (proprietary) interest in the
property.
Hence, the Bank is not affected by that personal
equity. The equity did not touch and concern the land that the Bank was
interested in. The wife can sue the husband, but the Bank’s property
rights ought not to be affected by a personal equity between the wife
and the husband.
• It is necessary to distinguish between
an equity that touches an concerns land (confers a proprietary
interest) and a personal equity
• Consider the distinction between an equitable interest and a “mere equity” described in Latec Investments v Hotel Terrigal
•
A “mere equity” is a right in equity that is ancillary to an interest
in land and is binding on a third party who has notice of its existence
or is a volunteer
• A mere equity usually takes the form of the
right to have a transaction set aside for fraud or mistake (Latec
Investments v Hotel Terrigal)
Latec Investments v Hotel Terrigal
Facts:
Latec takes a registered mortgage over a hotel owned by X. X defaults
on the loan, and Latec exercises the power of sale. It should be noted
that a mortgagee must exercise their power of sale properly (they
cannot exercise that power fraudulently). Here, Latec sold the property
at a very significant undervalue to A (a wholly owned subsidiary of
Latec). A then charges the land to T (trustees for debenture holders)
so that T holds an equitable interest. Five years later, X asserts an
equity to have the sale set aside as fraudulent.
X was
claiming that they had an equitable interest. X argued that they used
to have the legal title, and that legal title was taken by a fraud on
the power of sale. Since Latec had acquired the legal title, X had an
equity of redemption (which entitled X to redeem that property by
paying the loan). X argued that they had an earlier equitable interest
that prevailed over T’s later equitable interest. Under the general
priority principles, where the equities are equal, the first in time
prevails.
Held: The court decided not to grant what X was asking for in this case.
Kitto
J: Argued that the rule about competing interests applies only
to full equitable property interests. The right to set aside title for
fraud (or improper purpose) is a “mere equity”. X only has a “mere
equity” (not a full equitable property interest). A mere equity is less
than a full equitable interest, so if there is a competition between a
mere equity and a later full equitable interest, the full equitable
interest prevails.
Meagher, Gummow & Lehane argue that
this is not a satisfactory explanation. They prefer adopting the
reasoning of Menzies J. He argues that X potentially has a full
equitable interest, and that interest is proprietary in nature because
it can be bequeathed to someone else (e.g. if X had been a natural
person and had died, X’s estate would have acquired the same interest
that X had against Latec). Hence, X’s interest is proprietary because
it can be transferred.
However, in these circumstances, it is
a proprietary interest that has to be acknowledged by a court of
equity. X must go to a court of equity to recognise their interest. A
court of equity must take into account all relevant factors, and here,
that factor is the innocent intervention of a third party who, without
any notice, has acquired their interest in good faith and for value.
The result is that the later interest prevails. Since equitable
remedies are discretionary, the court will take into consideration any
other important factor which makes the remedy inequitable.
Hence,
X’s right against Latec remains, but will be subject to T’s equitable
interest. X has an entitlement to redeem the property but subject to
T’s equitable charge (i.e. X has an entitlement to redeem the property,
but they have to pay out both Latec and T). X could also abandon any
claim over the property and sue Latec for breach of their power of
sale.
Competing equitable claims
• Where the equities are equal, “the first in time prevails”, but consider: Breskvar v Wall, Heid v Reliance Finance
• First in time prevails only where the equities are equal after balancing the competing equitable interests
•
These cases introduce the idea of postponing conduct - in deciding
whether the equities are equal, we examine the conduct of the person
who has the prior equitable interest
• We must consider whether
the conduct or inaction of the earlier interest holder ought to be
regarded as postponing, so as to deprive the earlier interest holder
the advantage that he would otherwise have
What is the basis for postponing a prior equitable interest?
• Estoppel?
o
The idea that if one person makes a representation that induces
someone else to act to their detriment, that person can be estopped
from asserting their own claim
o Where a prior equitable interest
holder has engaged in some conduct that has allowed the creation of
other equitable interests, that earlier interest holder can be estopped
from asserting their title against them
• Agency?
o By handing over the signed transfer, the rogue was put in a position of being the agent of the owner
o
Under principles of agency, if you give an agent authority and power,
you can be responsible for the exercise of that power, so long as what
the agent did was within the scope of that power
o The principal can be bound by any transaction that the agent enters into
•
In Heid v Reliance Finance, Mason and Deane JJ argue that it is
artificial to use estoppel or agency to resolve these scenarios. What
we have to do is weigh the options and decide which equity is better
•
“A more general and flexible principle that preference should be given
to what is the better equity in an examination of the relevant
circumstances” (Mason & Deane JJ in Heid v Reliance Finance)
• The agency argument is particularly strange, since the owner never appointed the rogue as agent
•
Equitable property interests are always vulnerable to someone coming
in and taking the legal estate (bona fide purchaser of the legal estate
for value without notice)