Bofinger v Kingsway Group [2009] HCA 44

In this case the guarantors sold their house (which was mortgaged) and used the proceeds to pay down the first mortgage on the construction site. This meant that when the construction site was sold by the first mortgagee there was a surplus. The first mortgagee proposed to pay the surplus money to the second mortgagee. The guarantor sued, arguing that it was subrogated to the first mortgage and was entitled to the surplus. The trial judge and the Court of Appeal held that the money could be paid to the second mortgagee because it had also held security over the house and the guarantors owed it the money anyway. This was based on the argument that there was nothing unconscionable in the second mortgagee taking the money. The High Court disagreed, holding that the correct test was whether there was anything unconscionable in the first mortgagee paying over the money:

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.

The High Court, therefore, left open the question of whether the monies should be paid to the guarantor or the second mortgagee, only deciding that the first mortgagee had no business making the decision. Ironically, if it transpires that the guarantors are not entitled to the money then the first mortgagee will not have to pay the money to the guarantors.

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