Cassegrain case page

Tolstoy famously starts Anna Karenina with the line: “All happy families are alike; each unhappy family is unhappy in its own way.” There is nothing quite so unhappy as a dispute between family members which ends up in court. In Cassegrain v Gerard Cassegrain & Co Pty Ltd, the dispute was between siblings who all had interests in the family company, Gerard Cassegrain & Co. The dispute before the High Court was the latest in a long line which began when the family patriarch, Gerard Cassegrain, died in 1993. Gerard and his wife had six children. Gerard’s second child, Claude, was the appellant in this case. The dispute involved certain land which Claude had registered in his and his wife’s name, and then solely in his wife’s name.

In Australia, we have Torrens title. Torrens title is often said to have the benefit of indefeasibility, which means that when a person becomes the registered proprietor of land, that title is not subject to any unregistered interests which may have existed before registration. This means that a person who becomes the registered proprietor of a Torrens interest can be secure about their transaction; they will not be subject to any unknown pre-existing interests. However, it may operate unfairly to those who have pre-existing interests in the land. Consequently, there are a number of limited exceptions to indefeasibility, including the fraud exception. This was the exception which was considered in Cassegrain.

How did the issue of indefeasibility of title arise?

Claude had been one of the two directors of Gerard Cassegrain & Co, along with his sister Anne-Marie. In 1993, Gerard Cassegrain & Co received $9.5M in the settlement of a legal claim against CSIRO for a joint venture which went sour. In the company’s books, it was stated that Gerard Cassegrain & Co owed Claude a debt of $4.25M. This was false. Claude then transferred title to a dairy farm to himself and his wife Felicity as joint tenants, for the expressed consideration of $1M. In fact, $1M was simply debited from the “loan” said to be owing to Claude. In a related judgment, the NSWCA had found that Claude had breached his fiduciary duties to the company by using its loan account to buy a dairy farm for himself. There was no allegation that Felicity knew of Claude’s fraud in using the loan account to purchase the farm. In 2000, after legal proceedings had been commenced against him, Claude arranged for the title to be transferred to his wife’s name solely for consideration of $1.

Certain other children of Gerard sought to argue on behalf of the company that the transfer to Claude should be rescinded, as it arose from Claude’s fraudulent actions. However, the problem they faced was that any interest arising out of an exercised right to rescind could be defeated by the Torrens indefeasibility mechanisms, as the right to rescind arose before the property was transferred. Consequently, they raised three arguments as to why indefeasibility did not apply in the present case so that the company could get the property back:

1. Claude was acting as Felicity’s agent, and thus she was tainted with his fraud;
2. The fraud exceptions contained in s 42(1) and s 118(d) of the Real Property Act 1900 (NSW) applied so as to render Felicity’s title defeasible, and because she was a joint title holder with Claude, it was as if she and Claude were one person, so the whole title was infected; or
3. Felicity’s title was defeasible because it was a proceeding brought by a person deprived of land by fraud within the meaning of s 118(d) of the Real Property Act, and because she was a person who derived her title from fraud within the meaning of s 118(d)(ii).

Was Claude acting as Felicity’s agent?

The High Court unanimously decided that Claude was not acting as Felicity’s agent. This was in contrast to the earlier decision of the NSWCA, in which Beazley P had said Claude was acting as Felicity’s agent in both transfers, and in which Macfarlan JA had agreed that Claude was acting as Felicity’s agent in the first transfer into their joint names. The argument that Claude’s agency tainted Felicity’s title was derived from the decision of the Privy Council in Assets Company Ltd v Mere Roihi, in which Lord Lindley said that:

“the fraud which must be proved in order to invalidate the title of a registered purchaser for value … must be brought home to the person whose registered title is impeached or to his agents. Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents.” (emphasis added)

The Court held (at [37] – [42] per French CJ, Hayne, Bell and Gageler JJ and at [101] – [102] per Keane J) that an allegation of agency required more than an allegation of fact that one person had carried out a task which was to the advantage of another. The deeper question was whether Claude’s actions were in the scope of his authority, and whether any of his knowledge should be imputed to Felicity in the circumstances. The Court found that no such knowledge could be imputed to Felicity.

Because Claude and Felicity were joint title holders, was Felicity automatically affected by Claude’s fraud?

Gerard Cassegrain & Co sought to rely on s 100(1) of the Real Property Act 1900 (NSW), which holds as follows:

Two or more persons who may be registered as joint proprietors of an estate or interest in land under the provisions of this Act, shall be deemed to be entitled to the same as joint tenants.

This argument presumed that joint tenants are to be treated in law as one person, as Macfarlan JA had presumed in the NSWCA at [156]. However, a majority of the High Court (French CJ, Hayne, Bell and Gageler JJ) held that Felicity was not automatically affected by Claude’s fraud simply because she was a joint title holder with Claude, overturning the reasoning of Macfarlan JA in the NSWCA. The majority noted that the original maxims which applied to joint title holders had arisen in the context of general law land. They continued at [50]:

But in the present case, particular care must be exercised in applying maxims of the kind described. The issue in this case arises, and can only arise, in the context of a statutory system for title by registration. Questions of indefeasibility of registered title simply do not arise in the general law of real property. And no analogy can usefully be drawn between the issue that must be decided in this case and any issue that can arise in the general law of real property.

As the High Court has so often emphasised in recent decisions, judge-made law must be amended and interpreted in the context of its statutory overlay. (For another discussion of this phenomenon in a different private law context, see Elise Bant’s post on Legal Services Board v Gillespie-Jones [2013] HCA 35).

The majority continued at [53] to emphasise the statutory context when it said that “[t]he question here is whether a title acquired by registration is defeasible,” and that the notion of fraud and other aspects of the statute must be interpreted in the light of the fact that fraud must be brought home to the person whose title was impeached.

Consequently, when Felicity obtained joint title under the first transfer, her half of the title was treated as separable from Claude’s and she was not infected by his fraud.

Keane J dissented on this issue, agreeing instead with the analysis of Macfarlan JA from the NSWCA. He held at [110] that fraud was “sheeted home” to Felicity not because of any agency relationship, but because as joint tenants they had one title, and joint tenants do not have a separate and distinct title. (I note in passing that part of the reason why a joint tenant may be presumed not to have a separate and distinct title in the ordinary sense is because of the right of survivorship which applies to joint tenants as opposed to tenants-in-common. For example, if joint title is held by three people and one dies, then the two surviving owners are held to own it 50:50. And if one of those two owners dies, then the surviving owner holds the entire title to herself.)

Had Felicity derived her title by fraud within the meaning of s 118(1)(d)(ii) of the Real Property Act 1900 (NSW)?

Both the majority and Keane J held that when Felicity received the entirety of the jointly owned property in 2000, she derived that portion of her title obtained from Claude by reason of Claude’s fraud, and she was not a “transferee bona fide for valuable consideration” within the meaning of s 118(1)(d)(ii). Thus, half of the title obtained in 2000 was tainted by Claude’s original fraud, notwithstanding that Felicity was unaware of the fraud.

The sequence of events can be illustrated as follows. I have depicted Gerard Cassegrain & Co’s title in green and Felicity’s title in blue. Claude’s fraudulently infected title is depicted in yellow. When his half of the title was transferred to Felicity in the second transfer, it was infected by his original fraud.

Is this a case of deferred indefeasibility?

There is a constant tension in Torrens fraud cases between security of transactions on the one hand, and individual justice and security of property rights on the other. One can see that it is beneficial thing for a purchaser, for example, to know that if she registers her title, she has an interest even if it turns out that one of the other parties forged a signature. On the other hand, if you are the person whose signature is forged, you may feel that your property rights have been sacrificed in the interests of broader security of transactions.

Historically, Torrens systems have had two ways in which they could approach the difficult task of balancing competing interests: by instituting immediate indefeasibility (which prioritises security of transactions) or deferred indefeasibility (which gives greater play to security of property interests).

Immediate indefeasibility means that a title holder will have indefeasible title notwithstanding that the title document has been forged, for example. This can have unfortunate effects in cases where a previous registered proprietor is deprived of her title by fraud, or where one title holder takes out a mortgage by forging the other party’s signature and the mortgagee then sells the property to someone else (as in Frazer v Walker (1967) 1 AC 569). Indeed, immediate indefeasibility has been enshrined in NSW legislation, as s 45 of the Real Property Act 1900 (NSW) states:

(1) Except to the extent to which this Act otherwise expressly provides, nothing in this Act is to be construed so as to deprive any purchaser or mortgagee bona fide for valuable consideration of any estate or interest in land under the provisions of this Act in respect of which the person is the registered proprietor.

(2) Despite any other provision of this Act, proceedings for the recovery of damages, or for the possession or recovery of land, do not lie against a purchaser or mortgagee bona fide for valuable consideration of land under the provisions of this Act merely because the vendor or mortgagor of the land:

(a) may have been registered as proprietor through fraud or error, or by means of a void or voidable instrument, or

(b) may have procured the registration of the relevant transfer or mortgage to the purchaser or mortgagee through fraud or error, or by means of a void or voidable instrument, or

(c) may have derived his or her right to registration as proprietor from or through a person who has been registered as proprietor through fraud or error, or by means of a void or voidable instrument.

(3) Subsection (2) applies whether the fraud or error consists of a misdescription of the land or its boundaries or otherwise.

It is worth noting that the Act expressly leaves open the possibility that other provisions may provide for deferred indefeasibility.

The other option is deferred indefeasibility. Deferred indefeasibility means that the first registered titleholder’s title procured by registration of a void or forged instrument will be defeasible and the original registered proprietor may seek to have it set aside. However, if the first new registered proprietor transfers her title to a second new registered proprietor who is bona fide and gives valuable consideration, the second new registered proprietor’s title becomes indefeasible.

One can see how Cassegrain v Gerard Cassegrain & Co can be thought to be a case of deferred indefeasibility. Prima facie, given that the court found that Felicity herself did not participate in any fraud and no knowledge of fraud could be imputed to her, it could be thought that when she obtained sole legal title, she should get indefeasible title. However, the provisions of s 118(1)(d)(ii) have been interpreted in such a way as to give her deferred indefeasibility in relation to that part of the title which was derived from her husband’s fraud, notwithstanding s 45(2) of the Real Property Act. Because Felicity was not a purchaser who gave valuable consideration, her title was defeasible. If she had transferred it to another bona fide title holder for good consideration, however, that person’s title would have been indefeasible, notwithstanding Gerard’s fraud.

Interestingly in Frazer v Walker, there was a provision analogous to the one in Cassegrain: s 63(1)(c) of the Land Transfer Act 1952 (NZ). Section 63(1)(c) provided that no action for possession or recovery of land is available against a registered proprietor except in “the case of a person deprived of any land by fraud…as against a person deriving otherwise than as a transferee bona fide for value from or through a person so registered through fraud.” However, the facts in Frazer v Walker differed importantly from Cassegrain. In Frazer v Walker, the mortgagees exercised a power to repossess under a forged mortgage and sold the property to a bona fide purchaser for value who later became the registered proprietor. Accordingly, Mr Frazer was not entitled to rescind the sale on the basis of his wife’s fraud in executing the mortgage. Indefeasibility operated to immediately defeat his claim. Here, Felicity was not a bona fide purchaser for value and thus she was vulnerable to an action for recovery of land pursuant to s 118(1)(d)(ii). It is interesting to consider that she would have received entirely indefeasible title had she given value for the half of the title transferred in 2000.

The High Court’s discussion of s 118 will be of interest not only to New South Wales, but to those other Australian jurisdictions which have an equivalent provision: Western Australia, Tasmania and the ACT.

Was it relevant that Felicity was a volunteer?

The outcome of this case would have been different in my home state of Victoria because of the approach taken towards volunteers. Felicity would not have had the benefit of indefeasible title after the second transfer in any case because she was a volunteer. In fact, the approaches taken between different states on this issue differ. Both the Northern Territory and Queensland have provisions which expressly confer indefeasibility upon volunteers: Land Title Act 2000 (NT), s 183; Land Title Act 1994 (Qld), s 180. It has been held that volunteers in New South Wales are still entitled to the benefit of indefeasibility in Bogdanovic v Koteff (1988) 12 NSWLR 472 which was subsequently approved in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 at [198].  By contrast, in both Victoria and South Australia, it has been held as a matter of statutory interpretation that indefeasibility is only given to purchasers for value, and that volunteers are not given protection: see Biggs v McEllister (1880) 14 SALR 86; King v Smail [1958] VR 273; Rasmussen v Rasmussen [1995] 1 VR 613.

However, as Elise Bant has recently noted, in an apparent move away from Bogdanovic and Farah, Cassegrain seems to contemplate that as a matter of interpretation, and in light of s 118, the protection for given to purchasers for value differs from that given to volunteers under the New South Wales Act: see [59]–[62] (French CJ, Hayne, Bell and Gageler JJ), [105]–[119] (Keane J). It will be interesting to see if this is taken further.

The broader context: statutory weakening of the strictness of immediate indefeasibility

Cassegrain must be seen also in a broader context: a general weakening of a strictness of immediate indefeasibility in certain cases. Such a trend can be seen in State legislative responses to perceived unfairness in mortgage cases. There have been a string of cases where relatives forged signatures on mortgages and bound the unsuspecting mortgagor to a mortgage to which they never agreed: see, for example, Grgic v Australian and New Zealand Banking Group Ltd (1994) 33 NSWLR 202; Russo v Bendigo Bank Ltd & Reichman [1999] VSCA 108 and Vassos v State Bank of South Australia [1993] 2 VR 316. The mortgagor first discovered the existence of the forged mortgage when the mortgagee attempted to repossess. Because of immediate indefeasibility, the mortgagee often had indefeasible title, and it could be difficult to sheet home any fraud to the mortgagee, even if the mortgagee’s employees or agents had acted in a way that was less than ideal or even downright negligent (as arguably occurred in both Grgic and Russo). Therefore the mortgage was valid, and the mortgagor was sometimes left in an invidious position where his or her house was repossessed and the money gained was not enough to cover the loan (as in Grgic, although the court said Mr Grgic did not have to pay more than the value of the house). In an effort to mitigate the harshness of these decisions, a number of jurisdictions have changed legislation to ensure that indefeasibility operates less punishingly in those cases.

I will use our legislation in my home state of Victoria as an example. Section 87A requires a mortgagee to take reasonable steps to verify the identity of the mortgagor (perhaps in response to the extraordinary facts in Grgic, where the son and daughter-in-law of Mr Grgic persuaded a friend to impersonate him at the bank in order to gain a forged mortgage). If those steps are not followed, the Registrar may refuse to register a mortgage, or remove it from the Register, effectively rendering it void and unenforceable. Section 87B applies the same requirements as to verification of the mortgagor to transfers of mortgages. Thirdly, s 87C provides that no variation, creation or surrender of lease, easement or restrictive covenant applies to a mortgagee unless the mortgagee consents in writing. Importantly, s 87D provides that where a mortgage is fraudulently obtained, a mortgagee can only claim from the mortgagor the same amount as the mortgagor could claim from the indemnity fund pursuant to s 110(4)(c). Section 87E applies where the mortgaged land has been sold off pursuant to s 77. This ensures that the mortgagor is fully covered for any out-of-pocket losses caused by the fraudulent mortgage.

Conclusion

Cassegrain is an interesting case. Specifically, it provides guidance for private lawyers more generally on the nature and requirements of an agency relationship and it highlights the special statutory nature of Torrens title and its divergence from general law land in respect of joint title. It provides an interesting example of how statutory deferred indefeasibility within s 118 of the Real Property Act should be interpreted. Moreover, because of the way in which s 118 is interpreted, it could be seen to result in a widening of the volunteer exception in New South Wales, moving New South Wales more in the direction of Victoria and South Australia. Finally, it can perhaps be seen in a broader context where legislatures and courts are moving further in the direction of mitigating the harsh effects of immediate indefeasibility in the Torrens system to allow parties set aside certain transactions more easily.

AGLC3 Citation: Katy Barnett, ‘A Statutory Exception to Immediate Indefeasibility Explained: Cassegrain v Gerard Cassegrain & Co Pty Ltd’ on Opinions on High (4 May 2015) <https://blogs.unimelb.edu.au/opinionsonhigh/2015/05/04/a-statutory-exception-to-immediate-indefeasibility-cassegrain-v-gerard-cassegrain-co-pty-ltd/>.