Frank Barbaro v Donna Maree Millington
[2010] ACTSC 118
•1 OCTOBER 2010
FRANK BARBARO & ANOR v DONNA MAREE MILLINGTON & ORS
[2010] ACTSC 118 (1 OCTOBER 2010)
PRACTICE AND PROCEDURE – pleadings – statement of claim – application to strike out- claim for declaratory relief and damages for fraud – plaintiffs having previously obtained judgment against defendant for debt – subsequent bankruptcy of defendant – action bound to fail – summary judgment entered for defendant
Bankruptcy Act 1966 (Commonwealth)
Civil Law (Property) Act 2006 (ACT)
Power v Kenny [1977] WAR 87
No. SC 815 of 2009
Judge: Master Harper
Supreme Court of the ACT
Date: 1 October 2010
IN THE SUPREME COURT OF THE )
) No. SC 815 of 2009
AUSTRALIAN CAPITAL TERRITORY )
BETWEEN:FRANK BARBARO
First plaintiff
JACQUELINE BARBARO
Second plaintiff
AND:DONNA MAREE MILLINGTON AND OTHERS
Defendants
ORDER
Judge: Master Harper
Date: 1 October 2010
Place: Canberra
THE COURT ORDERS THAT:
The freezing orders made on 19 October 2009 be discharged.
The application be stood over for submissions as to further orders to be made and as to costs.
The application
The defendants make application for orders that the originating application and statement of claim be struck out, and that freezing orders which I made ex parte in October 2009 be discharged.
The claim by the plaintiffs
The action by the plaintiffs was commenced by originating claim, with statement of claim attached, in September 2009. The statement of claim runs to 24 pages and was settled by senior and junior counsel. The nature of the claim is described in the originating application in the following terms:
Other claim for declarations, damages and other relief at general law and in equity and in accordance with section 239 of the Civil Law (Property) Act 2006 (ACT) in respect of dispossession of property with the intention and/or for the purpose of defeating, delaying, hindering and defrauding creditors; and also defeating, delaying and hindering the plaintiffs’ pursuit of the lawful processes of the courts and the due execution thereof; and for associated relief as set out in the associated statement of claim herewith.
The plaintiffs seek principally declaratory relief, and in the alternative an order for payment of $85,000.00, and an order for payment of damages “and/or equitable damages” to be assessed.
In summary, the claim by the plaintiffs against the first defendant is that they held a charge over her house at Spence pursuant to a deed, to secure a debt of $85,000.00. They lodged a caveat to protect their interest. They then commenced action in this court against the first defendant. In April 2000 Miles CJ ordered that the Registrar-General not remove the caveat without the permission of the plaintiff. In March 2004, after hearing the action, Connolly J discharged the interim order of Miles CJ and found in favour of the first defendant and against the plaintiffs. On the first defendant’s application, the caveat was then removed.
In November 2005 the plaintiffs were granted an extension of time to appeal against the judgment and orders of Connolly J. Six days after the grant of leave, the first defendant contracted to sell the Spence property to the third defendant. In February 2006 the sale was completed and the property transferred to the third defendant. The first defendant continued to live in the house. The second defendant was at all material times the sole director of the third defendant.
The appeal was heard by the Court of Appeal in May 2006. A few days after the hearing of the appeal but before judgment, the third defendant sold the Spence house to (I infer) an unrelated buyer who had no notice of the dispute. The plaintiffs say that at the time of all of these events the first defendant was insolvent to the knowledge of the other two defendants. The Spence property was her only substantial asset. The first defendant did not inform the plaintiffs of the transfer of the title to the Spence property to the third defendant or of its subsequent sale, and the court determined the appeal in ignorance of these events. The plaintiffs say that the defendants orchestrated the transfer and later sale in concert, with the purpose of defeating the first defendant’s creditors.
In all of the circumstances, the plaintiffs assert that the funds received by the third defendant on the sale of the Spence property are traceable in equity as the first defendant’s funds and that they are held in trust and subject to an equitable charge in favour of the plaintiffs to the extent of the amount owing to them.
The plaintiffs then assert that the first defendant lodged a debtor’s petition for bankruptcy as a means of defeating her lawful creditors and in particular the plaintiffs.
It is then asserted that in April 2006 the first and second defendants purchased or acquired a home unit at Labrador in Queensland. The title was initially registered in the names of the first and second defendants as joint tenants but this was later changed to a tenancy in common in equal shares. The plaintiffs say that the first defendant was the beneficial owner of the unit, or in the alternative that her equity was greater than fifty percent. In May 2006 the first defendant gave the second defendant a mortgage over her interest in the unit, ostensibly to secure a debt arising under a loan agreement. The transfer of the home unit and the mortgage over it, the plaintiffs say, were sham transactions for the purpose of defeating the first defendant’s creditors and in particular the plaintiffs. The various real property transactions, they say, are voidable and should be set aside.
Factual background
The history of the original relationship between the plaintiffs and the first defendant emerges from findings of fact made by Connolly J in March 2004. In the proceedings before his Honour, the plaintiffs asked the court for declarations that the defendant was indebted to them in the sum of $85,000.00 and that the debt was secured by a charge over the plaintiff’s home. The first plaintiff met the first defendant through her then boyfriend, a man the first plaintiff had known for many years. The boyfriend had a used car business. The first plaintiff bought cars from him and resold them at a profit. In March 1999 the boyfriend invited the first plaintiff to invest money in his business. Connolly J found that the first defendant reasonably believed that the first plaintiff was a violent man, and that she had a justified fear of him. The first plaintiff placed some pressure on the boyfriend to provide security for the amount he had either lent or invested.
At the end of 1999 the first defendant and her boyfriend attended the offices of the first plaintiff’s solicitor where they signed a deed acknowledging a debt of $85,000.00, with the first defendant charging her interest in her house to secure the debt.
The first defendant’s evidence was that she signed the deed on Christmas Eve 1999, having been told by her boyfriend that the first plaintiff had given him half an hour to sign it, threatening him with harm to himself and his family if he did not do so. He told the first defendant that the first plaintiff had said that she would be eating her food through a straw for the rest of her life if she did not sign the documents that day. She was extremely distressed. She went to the offices of the first defendant’s then solicitors and was shown a document which she did not read. Ultimately she signed it and left the office in tears.
The solicitor gave evidence, confirming that the deed had been signed on 24 December 1999, and that the first defendant had signed it reluctantly. He had advised her to get independent legal advice and had explained to her the effect of the deed in creating a charge over her property and acknowledging her indebtedness in an amount of $85,000.00. She asked the solicitor what would happen if she did not sign the document. He told her that he had instructions to inform his client (the present first plaintiff) that she had not done so. She then said “Well, give me the document and I will sign it now.”.
The first defendant’s evidence before Connolly J was that she signed the document because of her fear of the first plaintiff. Connolly J accepted this. Her case was that she had signed the deed under coercion, that it would be unconscionable for the plaintiffs to rely on it, and that it should be set aside. Connolly J accepted that the first plaintiff never directly threatened the first defendant.
Connolly J found that it would be unconscionable to permit the plaintiffs to hold the first defendant to the deed, which he set aside on the basis of undue influence as well as unconscionability. He set aside the interim order made by Miles CJ in relation to the caveat and declared that the defendant was not indebted to the plaintiffs and that there was no charge in force against the property.
Higgins CJ, despite some misgivings about the explanation for the delay, granted the plaintiffs an extension of time to appeal against the decision of Connolly J in November 2005. The appeal was heard by the Court of Appeal (Higgins CJ, Crispin P and Spender J) on 3 May 2006. Their Honours delivered judgment on 2 February 2007, upholding the appeal and remitting the matter to the Supreme Court for ancillary orders. Their Honours found that there was no evidence to warrant a finding that the plaintiffs or either of them, or the solicitor as their agent, knew or ought to have known that the first defendant was executing the deed under the undue influence or coercion of her boyfriend. The court could not find that the first plaintiff had consciously caused the first defendant to fear her, nor was there any evidence that he was aware that she signed the deed by reason of any fear of him. There was no evidence that the first plaintiff had uttered or conveyed any threat of the kind which the boyfriend represented to the first defendant had been made.
Following the upholding of the appeal, the action was remitted to Connolly J who on 24 September 2007, with both parties represented by solicitor or counsel, entered judgment for the plaintiffs against the first defendant in the sum of $85,000.00 plus interest. His Honour further declared that the first defendant was indebted to the first plaintiff for that amount pursuant to the deed, and that the deed had effectively charged the first defendant’s interest in the property at Spence. The order as taken out and sealed by the court continued, not entirely intelligibly:
... and the court further orders that:
4. Possession and sale of the property (known as 59 Alpen Street in the Australian Capital Territory more particularly described as Block 9 Seciton 64 Spence) by the plaintiffs as equitable mortgagees.
5. The defendant pays the plaintiffs Costs to be taxed or agreed on ordinary basis.
6. If the judgment sum is not paid within twenty-one days then given the sale and transfer by the defendant of the real property known as 59 Alpen Street Spence in the Australian Capital Territory and as further described in the originating application, to Eurobodalla Charters and Tours Pty Limited, the defendant shall forthwith account to the court for the sum of $300,000.00 (or any other sum) received by the defendant upon said transfer and shall pay to the plaintiff forthwith and without delay (or pay into Court for payment out thereof duly to the plaintiffs) the sum of $85,000.00 plus interest in respect of which the defendant is indebted to the plaintiffs as set out in the originating application and plaintiffs’ points of claim; and together with a further sum in respect of the plaintiffs’ costs in these proceedings.
7. Leave to apply on 2 days notice.
On 21 December 2007, the first defendant was declared bankrupt, following presentation of her own petition on 19 December 2007. A partner in a Wollongong firm of accountants was appointed trustee of her bankrupt estate. She prepared and signed a statement of affairs on 19 December 2007. She gave a residential address as South Durras, New South Wales. In her statement of assets, she disclosed cash of $50.00, a bank account credit balance of $1,500.00, superannuation of $19,416.00, a car worth $8,000.00 and a half interest in the Labrador unit. In relation to that property, she said that the purchase price in March 2006 had been $220,000.00. The property was in December 2007 worth $240,000.00. She owed to secured creditors some $112,000.00, and the third defendant was a joint owner of the property, which was rented out at $240.00 per week. She further disclosed the sale of the Spence property in April 2006 at a price of $300,000.00, of which she said she received $35,000.00 net.
She listed creditors including the present plaintiffs in an amount of $85,000.00, and a debt of $112,000.00 to the third defendant secured over the Labrador property. She also disclosed an unsecured debt to the third defendant of $80,000.00 and a debt to Ford Credit relating to the lease of a motor vehicle of $7,000.00.
A search of the property at South Durras which she gave as her address shows that it is owned by the third defendant and is unencumbered.
In June 2008, the first defendant’s trustee in bankruptcy prepared a report to creditors. He reported that the plaintiff had assets of some $36,000.00 and liabilities of some $172,000.00, leaving a deficiency of $135,000.00. The trustee had conducted searches at the Land Titles Office or Land Registry of Queensland, New South Wales and this Territory and was aware of the properties in which the bankrupt had previously had an interest. He noted that the bankrupt’s daughter was living in the Labrador property and was paying rent. The rent was less than the periodic interest payments. After consideration, the trustee accepted an offer of $10,000.00 by the third defendant to purchase the interest of the bankrupt in the Labrador property. The trustee considered whether there might be any transactions void against him, or any voidable preferences, undervalued transactions or transactions to defeat creditors. He arrived at the conclusion that the December 2005 sale of the Spence property had been at a reasonable price and that he should not challenge it.
He considered whether he should take recovery action against the third defendant. He concluded that any such action would not be commercially prudent. He expressed the opinion that the majority of the debts of the bankrupt arose from the failure of her former spouse to pay his business debts. The former spouse was not able to be located. The bankrupt had not been involved in the business and had not received any benefit from loans she had made to him. He was unable to identify any offences which the bankrupt might have committed. He called a meeting of creditors for 30 June 2008, recommending that no further action be taken and noting that a dividend might be available to creditors of the order of 8 cents in the dollar. The bankrupt would be eligible for discharge in December 2010 unless an objection was filed. As creditors in the bankruptcy, the plaintiffs, I infer, were given notice of the meeting of creditors. Presuming regularity and in the absence of any evidence to the contrary, I infer that the creditors adopted the trustee’s report. I can be reasonably comfortable that if this were not so, the first plaintiff would have given evidence about it in his affidavit in response to the present application.
The freezing order
On 16 October 2009, on the application of the plaintiffs, I made ex parte orders restraining the first and second defendants from disposing of or further encumbering their interests in the Labrador unit, and against the second defendant to the same effect in relation to his property at South Durras, New South Wales. With the benefit of hindsight I should have required a title search of the Labrador unit. Such a search is now in evidence and confirms that a transfer of that property was registered in December 2008 to one Mary-Rose Smith. I assume in the absence of evidence to the contrary that Ms Smith purchased the property at market price without notice of any asserted equitable interest on the part of the plaintiffs. In the event, therefore, the freezing order in relation to that property has done no harm, the first and second defendants having no interest in the property at the time the order was made.
The freezing order in relation to the South Durras property, owned by the second defendant, remains in place. My understanding is that the first and second defendants are living at that property. I assume that I would have been informed if the freezing order was causing the second defendant any practical prejudice.
Effect of the bankruptcy
The first defendant went bankrupt on her own application on 21 December 2007, some three months after Connolly J made orders directing the entry of judgment for the plaintiffs against the first defendant for $85,000.00 plus costs. Connolly J on the same date made a declaration that the first defendant had charged her interest in the Spence property by deed to secure the debt of $85,000.00.
By that date, the first defendant had already sold the Spence property to the third defendant, and the third defendant had sold it to a purchaser without notice. The sale by the first defendant to the third defendant occurred in November 2005. At that stage the first defendant had the benefit of a judgment in her favour in this court, being the original judgment of Connolly J of 18 March 2004. His Honour had declared that she was not indebted to the plaintiffs and that there was no charge in force over the Spence property. Higgins CJ had just given the plaintiffs an extension of time to appeal, but the orders of Connolly J remained in place and were presumed to have been correctly made. Higgins CJ ordered that there be a stay of execution in relation to the judgment, which can only have related to recovery of the costs ordered by Connolly J to be paid by the plaintiffs. Higgins CJ, hardly surprisingly, did not make any order affecting the operation of the declarations Connolly J had made. It follows that when the first defendant sold the Spence property to the third defendant, a few days after Higgins CJ granted the extension of time, she was fully entitled to deal with the property as her own.
The Court of Appeal heard the appeal by the present plaintiffs in May 2006. Later in the same month, the sale of the Spence property by the third defendant at arm’s length was completed. The judgment of the Court of Appeal was reserved, and was not delivered until February 2007, nine months later. It seems to me that until that time, the first defendant retained the benefit of the orders made by Connolly J which, although subject to appeal, continued to have effect. Until the judgment of the Court of Appeal, the first defendant retained the benefit of the declarations that she was not indebted to the plaintiffs and that there was no charge over the Spence property.
The situation was, it seems to me, quite different to the position which might arise where a plaintiff sues a defendant for a debt said to be secured against property, and the defendant disposes of the property after the action has been commenced but before hearing, or between hearing and judgment. The significant difference is that Connolly J had made declarations, which must be presumed to have been correctly made until the Court of Appeal said otherwise.
It is not suggested that the first defendant took any steps to dispose of or encumber assets between the delivery of judgment by the Court of Appeal and her bankruptcy. There was a delay of some seven months after the Court of Appeal judgment before Connolly J made orders which included judgment against her for $85,000.00. Three months after those orders, the first defendant applied to be made bankrupt. It seems to me that the submission that her application for bankruptcy was impermissibly done to defeat her creditors is misconceived. After the orders made by Connolly J, it became apparent that she was insolvent. Bankruptcy is available to people in the situation in which she found herself. It should be seen as in the public interest that persons whose debts exceed their assets, and who are unable to pay their debts as they fall due, have the option of applying for bankruptcy. That is in large measure the purpose of the bankruptcy legislation.
The first defendant disclosed the judgment debt to the plaintiffs in her statement of affairs at the time she went bankrupt. My understanding is that she has not yet been discharged from bankruptcy but might expect discharge in the ordinary course of events in December this year. Section 58A(3) of the Bankruptcy Act 1966 (Commonwealth) provides:
58(3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
a) to enforce any remedy against the person or property of the bankrupt in respect of a provable debt; or
b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.
It seems to me that the plaintiffs in the present action have attempted to adopt a course proscribed by that subsection. They already have judgment against the first defendant for the debt they are seeking to recover in the present action. The debt was, it seems to me, provable in the bankruptcy and was acknowledged by the bankrupt.
Counsel for the plaintiffs submits that the debt was infected by fraud. The plaintiffs’ case seems to go so far as to plead that the first defendant’s action in applying for bankruptcy was itself fraudulent, notwithstanding that she disclosed the judgment debt to the plaintiffs in her statement of affairs.
Neither Connolly J nor the Court of Appeal found that the first defendant’s debt to the plaintiffs had been incurred fraudulently. The complaints by the plaintiffs about fraud on the part of the first defendant appears to relate to actions during a period well after the execution of the deed which created the first defendant’s liability. Connolly J found on the facts that the deed was executed after the moneys were advanced by the plaintiffs to the first defendant’s former boyfriend. I cannot see how it could be suggested that there was any fraud in the incurring of the debt by the first defendant.
In any event, it has been held by the Supreme Court of Western Australia that once judgment has been obtained for a debt incurred by means of fraud, the cause of action merges in the judgment and is extinguished, and the bankrupt judgment debtor is released by discharge from such a debt, provided, of course, that it was provable: Power v Kenny [1977] WAR 87.
The sale of the Labrador unit in December 2008 was effected with the consent of the first defendant’s trustee in bankruptcy, whose function it was to look after the interests of creditors in the bankrupt estate, those creditors including the plaintiffs. It does not seem to me that that sale can be impugned.
After the first defendant became bankrupt, the capacity to pursue moneys through the equitable doctrine of tracing passed to the trustee in bankruptcy, and the plaintiffs lost any such entitlement if it ever existed.
Counsel for the plaintiffs submits that the action against the first defendant should be seen not as a reprise of the debt claim, but as a claim for damages for the first defendant’s wrongful course of conduct, engaged in with the intention of depriving the plaintiffs of the benefit of their security. It does not seem to me that the plaintiffs can escape the prohibition in section 58 of the Bankruptcy Act by characterising the claim in that way. It remains a claim, in essence, for recovery of the debt.
For those reasons I am persuaded that the action by the plaintiffs against the first defendant cannot succeed, and accordingly should not be permitted to proceed further.
Claim against the second and third defendants
It does not seem to me that the claim by the plaintiffs against either the second defendant or the third defendant can succeed. Having arrived at the conclusion I have about the claim against the first defendant, I have carefully read the statement of claim again to see whether I can read in it the basis for any stand-alone claim against either the second or third defendant. I find myself unable to do so. I cannot discern any cause of action against the third defendant. As far as the second defendant is concerned, all that might remain arguable is that there are funds originally owned by the first defendant which can be traced into the Durras property. To the extent that that might be possible, such tracing would be available only to the trustee in bankruptcy of the first defendant, and not to the plaintiffs. Accordingly the claims against the second and third defendants are also doomed to failure, and should not be permitted to proceed.
Conclusion
The freezing orders made on 16 October 2009 should be discharged. Although the defendants have asked in their application for an order that the originating application and statement of claim be struck out, it seems to me preferable that summary judgment be entered into for the defendants, which would prevent the plaintiffs from starting again. I shall hear counsel for the parties as to the orders which should be made in the light of these reasons, and as to costs.
I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Master.
Associate:
Date: 1 October 2010
Counsel for the plaintiffs: Dr D A Hassall
Solicitor for the plaintiffs: Mr M L Elmaraazy
Counsel for the defendants: Mr S R Hausfeld
Solicitor for the defendants: Access Law Group (Wollongong) by their agents S&T Lawyers
Date of hearing: 5 March 2010
Date of decision: 1 October 2010
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