Harvey v Emery
[2020] VSC 153
•2 April 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROPERTY LIST
S ECI 2020 01462
| JEANETTE HARVEY | Plaintiff |
| v | |
| IAN EMERY | First Defendant |
| MAXINE EMERY | Second Defendant |
| THE REGISTRAR OF TITLES | Third Defendant |
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JUDGE: | John Dixon J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 1 April 2020 |
DATE OF JUDGMENT: | 2 April 2020 |
CASE MAY BE CITED AS: | Harvey v Emery & Ors |
MEDIUM NEUTRAL CITATION: | [2020] VSC 153 |
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PROPERTY – Caveat – Application for removal – Claim by defendants of interest in property arising from a constructive or resulting trust – Property sale and distribution of net proceeds subject to orders made by Family Court of Australia – Whether serious question to be tried – Whether caveat ought to be removed and proceeds held pending resolution of issues in proceeding – Transfer of Land Act 1958 (Vic) s 90.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D.B. Clough | Stenta Legal |
| For the First and Second Defendants | Mr D.K. Carlile | Madgwicks |
| Third Defendant | No appearance |
HIS HONOUR:
The plaintiff, Jeanette Harvey, is the sole registered proprietor of a property in Toolern Vale (‘the property’). She applies pursuant to s 90(3) of the Transfer of Land Act1958 (Vic) to remove a caveat.
The caveat was lodged on 21 November 2019 by Ian and Maxine Emery (‘the defendants’), who claim a freehold estate absolutely prohibiting all dealings on the grounds of an implied, resulting or constructive trust.
When the plaintiff became aware of the caveat, she applied under s 89A of the Act for its removal. In response, the defendants commenced a proceeding against the plaintiff on 6 January 2020, seeking a declaration that the property is held on trust for them as to an amount equivalent to an advance of $200,000 made at the time that the property was purchased and further monies ($120,000) expended on renovations (‘the trust proceeding’).
At present, it is not entirely clear how the defendants put their case to justify the freehold estate claimed in the property. However, I am satisfied that there are serious questions for trial. Some of those questions have been raised in the trust proceeding, while others are foreshadowed in the affidavits filed on this application.
In the following analysis, I bear in mind that there is a relationship between the strength of the case establishing a serious question to be tried, and the extent to which the caveator must establish that the balance of convenience favours them. It is sufficient that the caveator show a sufficient likelihood of success that in the circumstances justifies the practical effect that the caveat will have on the ability of the registered proprietor to deal with the property in question, in accordance with her normal proprietary rights.
In the circumstances of the present application, there are some complexities.
Firstly, the plaintiff’s ex-husband, Daniel Emery (‘Daniel’), is the son of the defendants. At the time of the acquisition of the property, their relationship was stable. Their relationship broke down soon after and the Family Court of Australia made orders in respect of a property settlement during 2019, to which I shall return.
Daniel is in custody for a period of time, for reasons that were not disclosed to the court. He is not a party to either the present application or to the trust proceeding. He apparently expressed a strong interest in retaining ownership of the property. The defendant’s counsel properly conceded that he appears to be a necessary party to the trust proceeding, given the circumstances alleged about the creation of the alleged trust.
Secondly, the property was acquired as a family home by and for the plaintiff and Daniel. They agreed that it would be acquired by the plaintiff in her name alone to protect the asset from claims by Daniel’s creditors. Daniel made no contribution to the purchase price. The plaintiff and Daniel agreed during the course of family law property negotiations that the plaintiff’s contribution to the purchase of the property was $200,000. To complete the purchase, the plaintiff required bank finance on first mortgage security and an additional $200,000 that was provided by the defendants.
On 10 April 2018, the defendants advanced $200,000 to the plaintiff to complete the purchase of the property. The plaintiff borrowed the balance of the purchase price and expenses from a bank on registered first mortgage security.
The plaintiff resided at the property for approximately one week after settlement, vacating on 2 June 2018 due to conflict in the relationship that led to its breakdown. Daniel remained in possession of the property.
The Family Court of Australia made consent orders on 18 March 2019 (‘the March orders’). These orders reflected that the plaintiff agreed to transfer the title to the property to Daniel, at his expense, on Daniel refinancing the loan with the Bank of Melbourne to discharge the plaintiff’s mortgage and release her from the debt obligation, and on payment by him into the trust account of the plaintiff’s solicitors of the sum of $200,000. Any obligation to the defendants related to the property was not explicitly acknowledged and it will be a question for trial whether such obligations (if any) were, as between the plaintiff and Daniel, passed with the beneficial interest in the property to Daniel.
In broad terms, those facts are not in dispute. However, various aspects of the detail in the conversations between the parties at that time that are deposed to in affidavits are in dispute. Relevantly, a question for trial arises as to whether the advance of $200,000 from the defendants to the plaintiff was a loan, and to whom, and for what purpose. The borrower may have been the plaintiff, or Daniel, or both of them. Alternatively, the sum advanced may have been an equity contribution by the defendants in the context of a broader joint enterprise to which they were parties, the ultimate purpose of which was to provide accommodation, not only to the plaintiff, Daniel and their children, but also to the defendants. Questions of fact that can only be determined at trial must be resolved to establish whether the proper estate or interest of the defendants in the property is that of a chargee, or as beneficiary of a resulting or constructive trust. I accept that the latter interest is prima facie arguable, although I will say more in due course about the strength of these contentions.
Thirdly, proceedings between the plaintiff and Daniel in the Family Court of Australia led to orders of that court that implemented a settlement agreement reached between them. Those orders required, amongst other things, the sale of the property by the plaintiff and directed the distribution of the proceeds.
The defendants were not party to the Family Court proceedings and did not seek to intervene to assert their claimed beneficial interest in the property. The settlement of the Family Court proceedings assumed that the whole of the beneficial interest in the property is matrimonial property, but if the allegations in the trust proceeding are proved, the defendants’ beneficial interest ought to have been excluded from the matrimonial property available for division in the settlement reached between the plaintiff and Daniel.
The Family Court’s orders also reflected agreement that if Daniel defaulted and was unable to refinance the mortgage, the property was to be sold and the proceeds of sale disbursed at settlement. The court directed that the proceeds of sale be applied first in payment of costs, commissions, and expenses associated with the sale, and secondly in discharge of the mortgage to the Bank of Melbourne. Next, the court directed payment of $200,000 to the plaintiff. Daniel, or his nominee, was next entitled to payment of the balance remaining or the sum of $200,000, whichever was the lesser. Finally, if any balance then remained, it was to be shared equally between the plaintiff and Daniel. There were other consequential orders governing the sale that I need not recite.
The March orders further provided that the parties held their respective interests in the property on trust, pursuant to the orders and that Daniel was, from the time of the orders, to have the sole right of occupancy and be solely liable for mortgage payments and all outgoings. There were further orders governing other property that I need not set out, save to note that one of those orders concerned a Hino truck that was subject to a chattel mortgage loan, secured by a personal guarantee given by the plaintiff, that I will come back to later.
Daniel was unable to refinance the property so as to comply with the terms of the order and defaulted, enlivening the enforcement terms of the March orders.
Further orders were made by the Family Court of Australia on 9 October 2019 (‘the October orders’). Daniel did not appear at this hearing and the court ordered that the plaintiff recover possession of the property from him to effect its sale, in accordance with the March orders. Daniel was restrained from returning to the property or from lodging or causing to be lodged any caveat or other encumbrance against the title.
The court also ordered that:
Any caveat or other encumbrance lodged or caused to be lodged by the respondent against the title subsequent to issue of the orders of the Family Court of Australia dated 18 March 2019 be forthwith withdrawn.
The defendants’ caveat had not been lodged at that stage.
The court gave further directions for the conduct of the sale of the property, and for the distribution of the proceeds. The direction in respect of the priority of distribution of the proceeds was:
(a) in payment of the agent’s commission and sale expenses;
(b) in reimbursement of the plaintiff’s costs of advertising and preparing the property for sale;
(c) in payment of the legal costs in respect of the sale and legal costs referrable to the execution of the order;
(d) the payment necessary to discharge the bank’s mortgage and for conveyancing adjustments;
(e) payment to the plaintiff in reduction of the amounts due to her pursuant to the March orders and any interest accrued on those amounts in accordance with the Family Law Rules 2004 (Cth); and
(f) finally payment of any remainder to Daniel in reduction of the amounts due to him pursuant to the March orders.
The orders further provided that the balance owing in respect of the Hino truck and any mortgage payments, rates or arrears of rates not paid by Daniel, as required by the March orders when he became entitled to exclusive possession of the property, were to be paid by him out of his entitlement under the October orders.
I pause to note that a court might conclude that in the matrimonial settlement, the plaintiff took no equity from the property and recovered no more than her expenditure, leaving Daniel, possibly with the acquiescence of the defendants, with the whole beneficial interest in the property encumbered with the obligation to honour whatever arrangement existed with this parents. At that time, Daniel was apparently working in his business and circumstances may have appeared more optimistic that they now appear.
If that were not the case, the defendants could enliven the Family Court proceedings, either by applying to intervene and seek a rehearing, or by appeal. Plainly, if the defendants’ contentions are correct, they have been adversely affected by the Family Court’s orders through the distribution of their beneficial interest in the property to Daniel.
Fourthly, at present there is potential for conflict between the resolution of the trust proceeding and the execution of the orders of the Family Court. That arises because the defendants were not parties to the Family Court proceedings and Daniel is not a party to the trust proceeding. Conflicting orders may be made in both proceedings about rights or interests in property.
In all the circumstances, compelling reasons appear to cross-vest the defendants’ trust proceeding to the Family Court of Australia, to be dealt with in conjunction with a reopening of the property settlement orders. This approach addresses the practical difficulty arising from not having all affected parties in both proceedings as necessary parties. Resolution of all issues by one court is only possible if both proceedings are before the Family Court of Australia. A number of complex issues may emerge in such proceedings that I need not dwell to consider. What is clear is that a summary application for removal of a caveat is not the appropriate forum for their determination.
Fifthly, the defendants alleged that when the property was in the possession of their son after the plaintiff had vacated it, they invested labour and expended approximately $120,000 in renovations and improvements to the property. They contended that these renovations were made in furtherance of a joint endeavour to acquire and improve an extended family home. In that sense, the cost of the renovations was an equity contribution relevant to their claim in the trust proceeding. They also contended that the renovations were made to enhance the value of the property. They submitted that the plaintiff acquiesced in this work and expenditure because she did nothing to stop it. The plaintiff disputed these contentions and there is a further serious question for trial as to whether there was such a joint endeavour giving rise to a constructive trust.
I pause to observe that different issues arise in relation to the purchase price contribution from the issues arising about the renovations contribution. I have noted that it is not disputed the defendants contributed $200,000 to the purchase at the time that contract was settled. What is in contention is whether that contribution was either a loan (and to whom), was a contribution of equity in the context of the suggested joint endeavour, or was essentially a transaction between the defendants and their son by which the defendants provided money to the plaintiff on behalf of their son in what could properly be characterised as his contribution. Like issues arise as to whether the renovation expenditure was intended to entirely benefit Daniel, but the plaintiff otherwise entirely disputes the alleged basis of the renovation expenditure. The plaintiff disputes that she had any knowledge of that expenditure, or of the performance of the work. It follows that she had no say in the nature of the renovations. She submitted that that money was expended in the context of the agreement between her and Daniel that the property would be his, as reflected in the March orders.
It is not suggested in the material that the constructive trust alleged by the defendants was based upon a common intention as to the split of the beneficial entitlement to the property. Rather the common intention, which in the present material is vague and ill-formed, concerned the purpose of, or use for, the property, what I have referred to as the joint endeavour.
Some observations can be made about the possible value of these interests, bearing in mind that the plaintiff purchased the property for $950,000. As it is not in doubt that the defendants advanced $200,000 towards that purchase, if the defendants could not persuade a court that there was a joint endeavour, their interests might be limited to a security interest in the sum of $200,000, or, possibly, a resulting trust to the extent of approximately 21% of the value of the property, based on the defendants’ contribution to the purchase price. I note that the caveat does not assert a security interest in the property.
If the renovation expenditure is added, the defendants’ percentage claim to the beneficial interest is correspondingly greater. For the purposes of the present application, the evidence before the court, while sufficient to conclude that there is a serious question for trial, does not persuade me to characterise as strong the joint endeavour constructive trust claim based on the contribution of $200,000 to the purchase price. The circumstances deposed to in relation to the renovation expenditure make that basis for the defendants’ asserted interest even weaker but, if accepted by a court, might support a claim for a beneficial interest of one third of the value of the property.
I stress that these observations are made solely for the purpose of assessing the balance of convenience. Ultimately, whether the defendants have any beneficial interest, and the extent of it, are matters for trial. The want of strength in the prima facie evaluation of the trust claims becomes a negative factor for the caveator on careful assessment of the defendants’ contention that the balance of convenience favours retention of the caveat.
Fifthly, there is a bona fide purchaser for value. Unless the caveat is removed, the purchaser’s rights will necessarily be interfered with. It seems that the purchaser is presently unaware that settlement of the contract in accordance with its terms may not be possible. Thus, there was no evidence before the court about the purchaser’s intention if settlement is affected. However, if the caveat remains, a litigious response from the purchaser can be expected.
Exposing the plaintiff to further litigation with the purchaser is unlikely to be in the interests of the parties or of Daniel. On the one hand, the purchaser might seek specific performance of the contract and claim an entitlement to a priority interest. Bearing in mind that the plaintiff sold the property with the authority of an order of the Family Court of Australia, which was arguably made when the defendants did not intervene and acquiesced in the position being taken by their son, there would be a serious question for trial as to whether the equity of specific performance under the uncompleted contract of sale would take priority over the equity arising through a resulting or constructive trust.
On the other hand, the purchaser might rescind the contract and sue for damages for loss of bargain. As I am about to explain, the defendants allege the sale was at an undervalue, principally motivated, it would seem, by real concerns that the remaining equity in the proceeds of this sale will fall short of satisfying all of the demands on it. If the property was sold at an undervalue to an arm’s length purchaser, pursuant to court orders, and that purchaser rescinded the contract, the defendants’ claim would fuel the purchaser’s claim for damages for loss of bargain.
It appears that whatever be the response of the third party purchaser if the caveat is maintained, the plaintiff may well be exposed to additional legal costs and damages claims flowing from the realisation of matrimonial property pursuant to an order of the Family Court of Australia. Litigating these claims could well consume any surplus from the proceeds of any sale.
Sixthly, a further complication is the defendants’ allegation that the sale of the property was at an undervalue, as I have just noted. If the defendants are advised to press this allegation, logically it will be raised by an amendment to their claim in the trust proceeding. The defendants would need to establish a proprietary interest in the property to have standing to claim that the sale was at an undervalue. With the benefit of a declaration that the plaintiff holds the property on trust for them, the defendants could allege that the plaintiff converted the trust property into money at an undervalue, in breach of duty. Such a claim is at best foreshadowed. There is no amended pleading or proposed amendment.
However, that potential claim appears weak. The defendants contended that the contract price of $1.05 million was significantly below ‘valuations’. There is no valuation evidence before the court. The argument proceeded on the basis of letters from real estate agents indicating a reasonable selling price range if the property was on the market. I do not accept these letters as evidence of value. First, the plaintiff noted in her affidavit that her real estate agent suggested that the property should be listed in the range of $1.199 million to $1.25 million. This was marketing advice. The defendants obtained what they described as a ‘curb side valuation’, which suggested a selling range of $1.35 million to $1.45 million. Although the author of the letter used some language more appropriate in a valuation, this too was marketing advice.
This material is not evidence of value. First, there is no reasoning to support these bold assertions, if they be assertions of the market value of the property on the day of sale. There is no sworn valuation.
Secondly, what is asserted is the price range for advertising the property for sale. It is notorious that the actual sale price achieved in a properly conducted arm’s length transaction between willing, but not overanxious, buyers and sellers can, and often does, differ significantly from the advice given by a real estate agent, particularly where such advice is given before a sale authority has been signed. It is common practice for selling agents to vary their estimated selling range as they come to better understand the market and the level of interest in the property through the sales campaign. The price actually achieved lies between approximately 75-88% of the postulated price ranges considered collectively.
Thirdly, the defendants’ assert some irregularities in the sale. They noted that the plaintiff refused to provide an unredacted copy of the contract. The defendants speculated that the purchaser was a party related to the plaintiff. The defendants suggested that it was unusual that the agent had declined to claim its commission and expenses. The plaintiff stated on oath that the unidentified purchaser (whose identity she redacted out of safety concerns) was unknown to her and that the sale was an arm’s length transaction in which she acted on the advice of the agent. These are competing explanations. Whether any inferences can be drawn on the basis of such matters cannot be decided on this application and, if pressed, must await a trial.
I am satisfied that as caveator, the defendants have demonstrated some probability on the material before me that they may be found to have an equitable right or interest in the land, as asserted by the caveat. There appears a greater probability that the defendants may be found to be entitled to an equitable lien or charge limited to the $200,000 advanced to assist in the purchase of the property. Were that ultimately to be so, no entitlement to maintain the caveat would be established, since that is not the grounds of claim. There is no suggestion that the grounds of claim ought to be amended, although the defendants did suggest the possibility of an amendment to the trust proceeding to add that basis for a claim against the plaintiff.
I now turn to the issue of the balance of convenience.
Beyond that lien claim, the defendants have not persuaded me that the constructive trust claim is strong. In that circumstance, the obligation to establish that the balance of convenience favours the maintenance of the caveat falls more heavily on the caveator.
On the other hand, there are significant negative practical consequences for the plaintiff if the caveat is maintained. First, the caveat will frustrate the sale ordered by the Family Court of Australia, pursuant to the agreement reached between the plaintiff and Daniel, in circumstances where none of the material facts affecting that order were, or since have been, placed before that court at the material time.
Secondly, the plaintiff will breach the contract of sale, affecting the purchaser’s rights in a manner that is may ultimately cause adverse consequences for her, which could culminate in her reopening the Family Court proceedings to adjust the value of the pool of matrimonial assets being distributed that underlay the resolution of those proceedings.
Thirdly, neither by their affidavit, nor their submissions, did the defendants offer any undertaking as to damages, notwithstanding that such an undertaking is invariably required when a caveator is permitted to maintain a caveat in circumstances where third party rights will be detrimentally affected. An offer of an undertaking as to damages was belatedly made during oral submissions. I was not persuaded that it was deserving of weight in my deliberations, in the absence of evidence of its worth. On the other hand, if the caveat is lifted and the settlement proceeds, but the net proceeds of sale are withheld in a trust account from further distribution save by court order, the opportunity for the parties to argue out the issues I have identified above is preserved, except in one respect.
The defendants contended that if the caveat was maintained, the plaintiff would be denied the opportunity to sell at an undervalue. This submission seems to assume that any adverse consequences for the plaintiff as purchaser would not ultimately be borne from the net proceeds of a sale at the true value. The submission is tantamount to a submission that the defendants are entitled to summary relief on their undervalue sale claim, the basis of the allegations that they have made in that regard in an affidavit.
Two observations may be made. The property market has been thrown into considerable uncertainty by the current COVID-19 pandemic. There was no evidence before me about the implications of either the health or financial restrictions that may in the future affect the property market, and for how long those effects will continue. Property values may, in all probability be adversely affected. In other words, the current market value of the property may now be less than it was on the day of sale and less, assuming in the defendants’ favour that these assertions of sale at an undervalue can be proved, than the contract price that was then achieved. Moreover, delay in effecting a sale comes at a cost.
On the other hand, if the sale proceeds a sum certain, that is not being eroded by mortgage interest or other expenses, will be achieved and be available for distribution once all outstanding issues have been resolved. The defendants contended that any judgment in their favour in the trust proceeding (as amended) may not be recovered.
I am not persuaded that this will be so. If the plaintiff has sold at an undervalue, her entitlement to the residue of the proceeds of sale might be reduced. More significantly, maintenance of the caveat as security for a potential damages award would be inappropriate in these circumstances.
Taking account of the issues raised by the parties, including in written submissions, I am satisfied that the course that appears to carry the lower risk of injustice, if it should turn out that I have been wrong, is to order that the caveat be removed to enable the sale to proceed.
However, the lower risk of justice on removal of the caveat is facilitated if the removal of the caveat is subject to conditions.
I am satisfied that proceeding S ECI 2020 00013, in which Ian Emery and Maxine Emery are plaintiffs and Jeanette Harvey is defendant, filed on 6 January 2020, which is pending in this court, requires amendment to:
(a) join Daniel Emery as a necessary party;
(b) make any other allegations as the Emerys may be advised by amendment, including any claim to an equitable lien or charge and any claim for damages for breach of duty by the trustee through sale at an undervalue,
and that such amendments should be made forthwith and in advance of the transfer of the proceeding as next discussed.
As the trust proceeding will impact materially on the foundational basis of the settlement agreement evidenced by the Family Court orders, the parties to the marriage, and/or the defendants may contend that the settlement was based upon a fundamental mischaracterisation of the value of the matrimonial property that it distributed. Further, any allegation that the plaintiff was in breach of her duties as a constructive trustee may conflict with the orders of the Family Court, raising questions of whether the plaintiff was in breach of its orders. Such matters are not being capable of being instituted in this court, but are capable of being instituted in the Family Court. An essential question that will ultimately arise in the relevant proceeding will involve the application of the Family Law Act 1975 (Cth). In the interests of justice, it is more appropriate that the trust proceeding pending in this court be determined by the Family Court and I will order that it be transferred to that court.
Each of these orders will be made in proceeding S ECI 2020 00013, the trust proceeding.
Because of the prospect of further consideration of the proper distribution of the matrimonial property, if the claims being asserted by the defendants are successful to any extent, I will relieve the plaintiff of the obligation to immediately comply with the orders of the Family Court.
In lieu, I will order that the proceeds of sale shall, upon receipt, be distributed by the plaintiff’s solicitors in accordance with paragraph 7(a)‑7(f) of the order of Wilson J made on 9 October 2019 in the Family Court of Australia, and that the balance thereafter remaining shall be deposited by the plaintiff’s solicitors into an interest bearing account and not be disbursed, save by further order of the Family Court of Australia.
I will reserve liberty to apply.
The parties addressed other submissions about the Family Court orders, particularly about the Hino truck, which has not been refinanced and which has been stolen. The issues in respect of the truck do not relate to the issues presently before me, save that the Family Court orders provided for a disbursement from the net balance of the proceeds of sale if the truck had not been refinanced. This is not a matter that I need deal with. Plainly, if the parties permit that finance agreement to run, the funds remaining for distribution will be dissipated.
The usual order when the caveat is removed is that costs follow the event, which would result in an order that the defendants pay the plaintiff’s costs of the proceeding. However, I will not make any order as to costs without giving the parties an opportunity to place any further evidence and a short submission before me with the intention that the question of costs be finally decided on the papers. I will give directions to facilitate that process.
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