Frank Lo Pilato (as trustee of the Bankrupt Estate of Predrag Stankovic) v ZDRAVKA Stankovic - [2012] FMCA 736

FEDERAL MAGISTRATES COURT OF AUSTRALIA

FRANK LO PILATO (AS TRUSTEE OF THE BANKRUPT ESTATE OF PREDRAG STANKOVIC) v ZDRAVKA STANKOVIC

[2012] FMCA 736

BANKRUPTCY – Transfer of property void under s.120 of the Bankruptcy Act 1966 – extent of bankrupt’s interest in the property – constructive trust.

Bankruptcy Act 1966 ss.30, 120

Equity and Trusts in Australia, Fifth Edition, G E Dal Pont, Law Book Co, 2011

Baumgartner v Baumgartner (1987) 164 CLR 137; (1987) 76 ALR 75; (1987) 62 ALJR 29; (1987) 11 Fam LR 915; (1988) DFC 95-058; [1987] HCA 59
Green v Green (1989) 17 NSWLR 343; (1989) 13 Fam LR 336; (1989) DFC 95-075
Hardman v Hobman [2004] DFC 95-281; [2003] QCA 467; [2007] ALMD 1829
Hill v Hill [2005] NSWSC 863
Lloyd v Tedesco (2002) 25 WAR 360; [2002] WASCA 63
Muschinski v Dodds (1985) 160 CLR 583; (1985) 62 ALR 429; (1985) 60 ALJR 52; (1985) 11 Fam LR 930; (1985) DFC 95-020; (1986) NSW ConvR 55-274; (1985) V ConvR 54-183; [1985] HCA 78
Official Trustee in Bankruptcy v Lopatinsky (2003) 129 FCR 234; (2003) 30 Fam LR 499; (2003) FLC 93-149; [2003] FCAFC 109

Applicant:

FRANK LO PILATO

First Respondent:

ZDRAVKA STANKOVIC

File number:

MLG 1646 of 2011

Judgment of:

Riley FM

Hearing dates:

20 & 21 August 2012

Date of last submission:

21 August 2012

Delivered at:

Melbourne

Delivered on:

31 August 2012

REPRESENTATION

Counsel for the Applicant:

Joshua Kohn

Solicitors for the Applicant:

Herman Partners

Counsel for the Respondent:

Nicholas P Jones

Solicitors for the Respondent:

Comlaw Barristers and Solicitors

DECLARATIONS

Pursuant to s.120 of the Bankruptcy Act 1966, the transfer on

28 November 2008 of the interest held by Predrag Stankovic (the bankrupt) to the respondent in the property located at 22 Azalea Crescent, Dandenong North, Victoria 3175 being the property more particularly described in certificate of title volume 8480 folio 780 (the property) is void against the applicant on the grounds that:
(a)the transfer of the interest in the property of the bankrupt to the respondent was a transfer of the property which took place in the period beginning five years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and
(b)the respondent gave consideration for the transfer of less value than the market value of the property.
The former interest of the bankrupt in the property be vested in the applicant.
Pursuant to s.30 of the Bankruptcy Act 1966, the applicant is entitled to be registered as a tenant in common of the property to the extent of

32 percent.

ORDERS

In the event that the parties are unable to agree on the value of the property, the parties have liberty to apply to the court for the value of the property to be determined.
Within 28 days of the value of the property being agreed or determined, the wife pay the trustee an amount equal to 32% of the agreed value of the property plus interest calculated under the Federal Court Rules to the date of judgment.
If the wife fails to pay the trustee 32% of the value of the property plus interest calculated under the Federal Court Rules to the date of judgment within 28 days of the value being agreed or determined, the respondent forthwith register a transfer of the former interest of the bankrupt in the property to the applicant.
The parties have liberty to apply in relation to the basis on which interest should be calculated.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT MELBOURNE

MLG 1646 of 2011

FRANK LO PILATO (AS TRUSTEE OF THE BANKRUPT ESTATE OF PREDRAG STANKOVIC)

Applicant

And

ZDRAVKA STANKOVIC

Respondent

REASONS FOR JUDGMENT

Introduction

This is an application for orders pursuant to s.120 of the Bankruptcy Act 1966. The application is brought by the trustee in bankruptcy of the husband of the respondent.
The husband and wife were married in 1983 in Bosnia. They had two sons. They came to Australia in 1996 as refugees.
The husband and wife both worked after arriving in Australia. The husband always earned significantly more than the wife.
They bought a house in Dandenong North in 2000 (“the property”).

It cost $120,000. The husband and wife paid a deposit of $12,000 and the remaining $108,000 was borrowed from a bank. The husband and wife were registered as joint proprietors.
In 2003, the wife suffered a severe back injury. She received worker’s compensation payments of 75% of her usual salary until July 2007, when she received a lump sum payment of $250,000. Of that, about $12,500 was used for legal expenses and $76,954.58 was used to discharge the mortgage over the property. The remaining $160,000 approximately was put into a cash investment account.
Additionally, in 2006, the wife’s former employer went out of business. The wife received $6,923.59 from the former employer as a redundancy payment. The wife paid that amount in reduction of the mortgage.
Before suffering her back injury, the wife had performed most of the domestic chores. Afterwards, her husband and sons did the majority of work around the house, although the wife continued to do some.
In March 2008, the husband established his own plumbing business through a corporate structure. He installed air conditioning systems in commercial premises.
On 28 November 2008, the husband transferred his interest in the property to his wife. The transfer said that the consideration was natural love and affection. At the same time, the mortgage over the property was discharged.
On 27 July 2011, a sequestration order was made against the husband’s estate on his own petition. In his statement of affairs, he said that his debts consisted of monies owing under guarantees.

The positions of the parties

In these circumstances, the applicant said that he, as trustee of the husband’s estate, was entitled to be registered as a tenant in common of the property in equal shares with the wife. Alternatively, if the court considered that it was appropriate to examine the contributions of each of the husband and the wife, the trustee submitted that his share was 57%. However, as the application only claimed 50%, the trustee abandoned any claim beyond that.[1]
[1] Transcript of proceeding on 21 August 2012, page 104, line 37.
The wife initially said that she was entitled to the whole of the property. However, that claim was reduced during the course of the hearing to 68% of the property, based on contributions.[2]
[2] Transcript of proceeding on 21 August 2012, page 84, line 34.

Legislation

Section 120 of the Act provides that:
Transfers that are void against the trustee
(1)A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor's bankruptcy if:
(a)the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and
(b) the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.
Note: For the application of this section where consideration is given to a third party rather than the transferor, see section 121A.
Exemptions
(2) Subsection (1) does not apply to:
(a) a payment of tax payable under a law of the Commonwealth or of a State or Territory; or
(b)a transfer to meet all or part of a liability under a maintenance agreement or a maintenance order; or
(c) a transfer of property under a debt agreement; or
(d)a transfer of property if the transfer is of a kind described in the regulations.
Transfers that are not void
(3)Despite subsection (1), a transfer is not void against the trustee if:
(a)in the case of a transfer to a related entity of the transferor:
(i)the transfer took place more than 4 years before the commencement of the bankruptcy; and
(ii)the transferee proves that, at the time of the transfer, the transferor was solvent; or
(b)in any other case:
(i)the transfer took place more than 2 years before the commencement of the bankruptcy; and
(ii)the transferee proves that, at the time of the transfer, the transferor was solvent.
Rebuttable presumption of insolvency
(3A)For the purposes of subsection (3), a rebuttable presumption arises that the transferor was insolvent at the time of the transfer if it is established that the transferor:
(a)had not, in respect of that time, kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor's business transactions and financial position; or
(b)having kept such books, accounts and records, has not preserved them.
Refund of consideration
(4)The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.
What is not consideration
(5)For the purposes of subsections (1) and (4), the following have no value as consideration:
(a)the fact that the transferee is related to the transferor;
(b)if the transferee is the spouse or de facto partner of the transferor – the transferee making a deed in favour of the transferor;
(c)the transferee's promise to marry, or to become the de facto partner of, the transferor;
(d) the transferee's love or affection for the transferor;
(e)if the transferee is the spouse, or a former spouse, of the transferor – the transferee granting the transferor a right to live at the transferred property, unless the grant relates to a transfer or settlement of property, or an agreement, under the Family Law Act 1975;
(f)if the transferee is a former de facto partner of the transferor – the transferee granting the transferor a right to live at the transferred property, unless the grant relates to a transfer or settlement of property, or an agreement, under the Family Law Act 1975.
Protection of successors in title
(6)This section does not affect the rights of a person who acquired property from the transferee in good faith and by giving consideration that was at least as valuable as the market value of the property.
Meaning of transfer of property and market value
(7)For the purposes of this section:
(a)transfer of property includes a payment of money; and
(b)a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and
(c)the market value of property transferred is its market value at the time of the transfer.
In the present case, the husband’s transfer to the wife clearly took place less than five years before the commencement of the husband’s bankruptcy and the wife did not give valuable consideration as that concept is explained s.120(5)(a) and (d) of the Act.
The exclusion contained in s.120(3) of the Act does not apply to this case. The wife was a related entity, as defined, of the husband. However, the transfer did not take place more than four years before the commencement of the bankruptcy.
Consequently, the husband’s transfer of his interest in the property to the wife is void under s.120 of the Act. However, the question is whether the husband’s interest was 50% or 32% or somewhere in between.

Constructive trust

The wife argued that she had a beneficial interest of 68% of the property. The trustee argued that the wife had a beneficial interest of 50% of the property.
The wife relied primarily on the decision of the Full Federal Court in Official Trustee in Bankruptcy v Lopatinsky (2003) 129 FCR 234; (2003) 30 Fam LR 499; (2003) FLC 93-149; [2003] FCAFC 109.

In that case, the court said:
112. It is well established that when two or more persons contribute unequally to the purchase of a property and title is taken by them as joint tenants, there is an equitable presumption that they hold the title on a resulting trust for themselves as tenants in common in shares proportionate to their contributions; see Calverley v Green at 258-259 per Mason and Brennan JJ. [(1984) 155 CLR 242]
…
116. However, if Mrs Lopatinsky made disproportionate contributions to the payment of mortgage instalments without intending Mr Lopatinsky to have the benefit of those payments, she may have been entitled to contribution in equity for her share of the payments and a charge to secure her equitable entitlement; see Calverley v Green at 263 per Mason and Brennan JJ.
117. There was nothing in the evidence which was capable of giving rise to any suggestion that Mrs Lopatinsky intended to make a gift to Mr Lopatinsky of her payment of $17,000 in cash. Clearly enough, there was no presumption of advancement in favour of her husband.
…
130.The principles which underlie the imposition of a constructive trust in equity provide a more flexible approach than the resulting trust in two important respects. First, as Deane J said in Muschinski v Dodds (1985) 160 CLR 583 at 614, the constructive trust is a remedial institution which is imposed by equity without regard to the actual or presumed intentions of the parties. Second, the relevant events which lead to the finding of an interest may occur after acquisition and beneficial interests may change in the course of the relationship; see Green v Green (1989) 17 NSWLR 343 at 355-356 per Gleeson CJ.
131. The unifying principle under which equity will intervene to declare the existence of a constructive trust over a former matrimonial home is that a constructive trust will be imposed where it would be unconscionable on the part of one of the parties to refuse to recognise the existence of an equitable interest in the other; see Baumgartner at 147; see also Green v Green at 353 per Gleeson CJ.
The trustee acknowledged that a constructive trust may be imposed where there has been unconscionable conduct in the form of a denial of an equitable interest in property: Baumgartner v Baumgartner (1987) 164 CLR 137; (1987) 76 ALR 75; (1987) 62 ALJR 29; (1987) 11 Fam LR 915; (1988) DFC 95-058; [1987] HCA 59 Mason CJ, Wilson and Deane JJ said at 149:
36.The case is accordingly one in which the parties have pooled their earnings for the purposes of their joint relationship, one of the purposes of that relationship being to secure accommodation for themselves and their child. Their contributions, financial and otherwise, to the acquisition of the land, the building of the house, the purchase of furniture and the making of their home, were on the basis of, and for the purposes of, that joint relationship. In this situation the appellant's assertion, after the relationship had failed, that the Leumeah property, which was financed in part through the pooled funds, is his sole property, is his property beneficially to the exclusion of any interest at all on the part of the respondent, amounts to unconscionable conduct which attracts the intervention of equity and the imposition of a constructive trust at the suit of the respondent.
The trustee acknowledged that relevant contributions need not have been directly made to the acquisition or improvement of the property, but could take the form of domestic assistance: Green v Green (1989) 17 NSWLR 343; (1989) 13 Fam LR 336; (1989) DFC 95-075 at 369 and Lloyd v Tedesco (2002) 25 WAR 360; [2002] WASCA 63 at 365, 379-380.
The trustee also noted that, in Baumgartner, the High Court said at [38] that:
The Court should, where possible, strive to give effect to the notion of practical equality, rather than pursue complicated factual inquiries which will result in relatively insignificant differences in contributions and consequential beneficial interest.
It was explained in Hardman v Hobman [2004] DFC 95-281; [2003] QCA 467; [2007] ALMD 1829 at [3] that parties to domestic relationships are not normally in a position to give accurate evidence about their respective financial contributions. Consequently, a broad brush approach is adopted of necessity.
In Equity and Trusts in Australia, Fifth Edition, GE Dal Pont, Law Book Co, 2011, Dal Pont noted at [38.184] that, while equity favours equality, that is only the starting point:
… those contributions are subsequently adjusted if the court is satisfied that injustice would occur were account not taken of any disparity between the quantum of the parties’ actual contributions.
The trustee noted that a constructive trust will not be imposed where there had been an inequality in contributions in the absence of unconscionable conduct: Muschinski v Dodds (1985) 160 CLR 583; (1985) 62 ALR 429; (1985) 60 ALJR 52; (1985) 11 Fam LR 930; (1985) DFC 95-020; (1986) NSW ConvR 55-274; (1985) V ConvR 54-183; [1985] HCA 78.
The trustee relied particularly on Hill v Hill [2005] NSWSC 863, where Campbell J said at [40] that:
… the mere making of the contribution in a domestic relationship is not something which automatically results in a trust … for an amount equal to the amount of the contribution.
In that case, the court declined to impose a constructive trust. The reasons included the fact that the sums contributed by the applicant son were not shown to have increased, by a commensurate amount, the value of the property that was already owned outright by the respondent mother.
The present case is obviously very different. The special payments made by the wife dramatically increased the husband and wife’s equity in the property and, after the second payment discharged the mortgage, meant that the husband and wife no longer had to pay interest on their home loan.
In any event, the trustee’s primary argument was that the court should apply the principle that equity favours equality and hold that, prior to the transfer, the husband and wife held the property in equal shares.
The trustee said that it would be artificial to adjust the contributions made by each party because the wife has not produced all of her bank statements evidencing the contributions made by each party and because the husband and wife were jointly liable for the mortgage and initially had the same legal interest in the property.
The wife did not produce all of her bank statements. However, she produced a great many. She also produced compelling evidence that she contributed $76,954.58 and $6,923.59 to the mortgage. Those sums total $83,878.17. The total purchase price of the property was $120,000. Consequently, the wife’s special payments, from her redundancy payment and her back injury payout, represented about 70% of the total purchase price of the property. On any view, it was a very substantial contribution.
It would be unconscionable for the trustee to deny the wife’s very substantial contribution and consequent equitable interest. Equally, it would be unconscionable for the wife to deny the husband’s substantial contribution made through his earnings.
There was some discussion at the hearing about whether the husband transferred his interest in the property to his wife to defeat creditors. That proposition was put to the husband and he denied it[3]. The proposition was not put squarely to the wife. However, she did deny that she was aware that the husband was in financial difficulty. Financial statements for the husband’s company were put into evidence. They showed that the company, as at 30 June 2008 and

30 June 2009, was running at a loss of $18,231 and $25,399 respectively. However, it was not clear whether the company’s losses, at that time, meant that the husband also had personal debts. He did say that his eventual bankruptcy was the result of personal guarantees. But it was not clarified in evidence when he gave those guarantees. Neither party pressed the issue in closing submissions. To the extent that it may be necessary for the court to determine the issue, I would say that, on the evidence before the court, it is not possible for the court to find that the husband’s transfer to the wife was for the purpose of defeating creditors.
[3] Transcript of proceeding on 20 August 2012, page 65, lines 1-3.

I reject the trustee’s contention that the court should go no further than the principle that equity favours equality. Dal Pont, whose work the trustee expressly relied upon, said that maxim is only the starting point. More importantly, in Baumgartner, the High Court, at [38], said:
The Court should, where possible, strive to give effect to the notion of practical equality, rather than pursue complicated factual inquiries which will result in relatively insignificant differences in contributions and consequential beneficial interest.
However, the court then went on to find that the relative contributions in that case were 55:45 in the appellant’s favour and then continued to make some separate and further adjustments also in the appellant’s favour.
It seems to me that the justice of the present case demands that the relative contributions of the husband and wife be ascertained, albeit in a broad brush manner, and that a constructive trust be imposed accordingly.

The trustee’s calculation

In the event the court reached this point, the trustee argued that the relative contributions of the husband and wife should be calculated as follows.
The trustee analysed the bank statements provided by the wife for the husband and wife’s joint bank account. The wages received by the husband and the wife were paid into that account. All of their mortgage repayments were made from that account, except the special repayments made by the wife.
The trustee found that, between 21 January 2001 and 29 May 2007, when the wife ceased receiving worker’s compensation payments, the wife received wages of $84,285.21. The trustee found that, between 18 July 2001 and 26 November 2008, when the property was transferred, the husband received wages of $225,821.52. The respondent said that the husband and wife’s total wages during those periods were $310,106.73. Of this, the trustee said that the husband wages represented 73% and the wife’s represented 27%.
The trustee then added to the wife’s total wages the $76,954.58 and the $6,923.59 paid by the wife off the mortgage. That totals $168,163.38. The trustee then said that the wife’s total contribution of $168,163.38 is 43% of the husband and wife’s total contributions of $393,984.90, being their wages and the lump sums. The trustee argued that the wife’s equity in the property should therefore be found to be 43%.
There are a number of things wrong with the trustee’s analysis. Firstly, the wife’s lump sum payments went entirely to the mortgage, whereas the wages went to the husband and wife’s living expenses generally. Additionally, as the trustee acknowledged, the bank statements for the entire period of the mortgage were not available.
Secondly, the trustee included on the husband’s side of the ledger his wages up until the transfer on 28 November 2008, even though the mortgage was paid off on 6 July 2007. The trustee argued that such an approach was justified because there would have been rates and insurance and such like paid from the husband’s wages. However, in the overall scheme of things, they would have been fairly trifling expenses compared with about 17 months of wages earned by the husband.
Thirdly, the contributions calculated by the trustee do not take account of the $160,000 the wife put into a cash investment account. The use to which that sum was put, if any, was not explored in evidence. However, it seems reasonable to assume that it was used in some way for the benefit of the family, and at least offset the husband’s payments of rates and insurance on the property.
Fourthly, the trustee has focussed entirely on financial contributions. The authorities permit domestic work to be included as a contribution. The evidence was that, before her back injury, the wife did all of the household chores. Afterwards, she did 20% to 30% of them. The husband and the two sons did the remainder of the chores. There was no evidence about how the tasks were divided up between the husband and the sons. Assuming the husband and the sons did the remainder of the housework equally, the husband would have done roughly the same amount as the wife.
Fifthly, there are some errors in the trustee’s analysis consisting of incorrectly including and excluding various payments. However, I will not dwell on this, because it involves the sort of “microscopic adjustment” Dal Pont warned against at [38.184].

The wife’s calculation

The wife argued that an analysis of the joint bank account statement for certain periods showed that the wife earned about half the amount the husband earned. Therefore, the husband’s contribution to the mortgage repayments was two thirds and the wife’s was one third, or $21,672. To that, the wife added her special payments of $76,954.38 and $6,923.59, and one third of the deposit, being $4,000. Altogether, the wife calculated that she contributed $109,549.97. That is about 68% of the total amounts paid on the mortgage and the deposit on the house. The wife argued that she was entitled to 68% of the property.
The trustee criticised the wife’s approach on the basis that it was derived from two short periods rather than the entirety of the period for which bank statements were available. To an extent, I accept that criticism. However, it is not necessary to engage in a microscopic analysis especially where parties have been in a long term domestic relationship.
Additionally, the trustee emphasised that making a contribution in a domestic relationship does not automatically produce a trust for an equal amount: Hill v Hill. That is undoubtedly correct. But as discussed above, Hill v Hill was a very different case to the present one.

The court’s assessment

It seems to me that a broad brush approach is proper in the present case. I would have thought that, except for the special payments made by the wife, her contributions to the property were about equal to the husband’s. That is consistent with the maxim that equity favours equality and it is consistent with her actual contributions to the property.
It is true that the husband contributed substantially more to the husband and wife’s joint endeavour in wages than the wife did. However, the wife contributed by doing virtually all of the household chores until she injured her back in 2003. After that, the husband and wife contributed about the same amount to the household chores. The sons’ contribution to household chores should not be treated as the share of either of the parents. The wife’s earnings dropped after she injured her back, but she nevertheless maintained 75% of her previous earnings.
However, in closing submissions, the wife put forward detailed argument to the effect that her contributions represented 68% of the cost of the property, based on her contributions other than special payments being one half of the husband’s, or one third of the total contributions. Although she had previously submitted that she was entitled to the entirety of the property, I understood her to withdraw from that claim and seek only 68% of the property. I consider that percentage to be within a reasonable range in all the circumstances of this case, calculated as follows.
The purchase price of the house was $120,000. However, the actual cost to the husband and wife was about $161,000, consisting of:
a)the deposit of $12,000;
b)the mortgage repayments of about $65,000; and
c)the wife’s special repayments of about $84,000.
The wife’s special repayments of about $84,000 are about 52% of the total cost to the husband and the wife of the property. The deposit plus the mortgage repayments total about $77,000. One third of that sum is about $25,000, which represents a further 16% approximately of the total cost to the husband and wife of the property. Adding 52% to 16% gives a total contribution from the wife of about 68%.
That figure seems to me to be a reasonably accurate assessment of the wife’s contribution to the property. There will be orders reflecting that assessment.
The trustee initially sought orders that the wife transfer the former interest of the bankrupt to the trustee within 28 days or, alternatively, pay the trustee an amount equal to the value of the bankrupt’s interest in the property plus penalty interest to the date of judgment. At the hearing, the trustee withdrew the second alternative of that application. However, the wife sought such an order.
In all the circumstances of this case, I consider that it is appropriate to make orders permitting the wife to buy the trustee’s interest in the property. It has been the family home for many years.
There was minimal evidence, and no submissions, on the actual value of the property at present. However, it seems to me that the order, as initially proposed by the trustee, should be made with liberty to apply to the court for a further hearing to determine the value of the property, if the parties are unable to agree. If, following agreement as to, or the determination of, the value of the property, the wife fails to pay the trustee the appropriate amount within 28 days, it would then be appropriate to require the wife to register a transfer of the former interest of the bankrupt to the trustee.
The trustee sought penalty interest. I see no basis for that at present. However, there were no submissions on it. I will order interest on the usual basis, but reserve liberty to apply on the question of interest if there is any real issue in relation to it. There will be orders accordingly.

I certify that the preceding fifty-seven (57) paragraphs are a true copy of the reasons for judgment of Riley FM

Date: 31 August 2012