Jakimowicz v Jacks
[2016] VSCA 42
•17 March 2016
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2015 0109
| PATRICIA ANNE JAKIMOWICZ | Applicant |
| v | |
| JOHN MICHAEL JACKS | Respondent |
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| JUDGES: | WARREN CJ, TATE and FERGUSON JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 27 November 2015 |
| DATE OF JUDGMENT: | 17 March 2016 |
| MEDIUM NEUTRAL CITATION: | [2016] VSCA 42 |
| JUDGMENT APPEALED FROM: | Jacks v Jakimowicz [2015] VCC 1067 (Judge Kennedy) |
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PROCEDURE – Courts and judges generally – Jurisdiction of State courts to determine standing of parties – Respondent’s standing depended upon application of provisions of Bankruptcy Act 1966 (Cth) – Trustee in bankruptcy not party to proceeding – State courts had jurisdiction to determine respondent’s standing as not exercise of jurisdiction ‘in bankruptcy’ – Bankruptcy Act 1966 (Cth) s 27 – Scott v Bagshaw (2000) 99 FCR 573; Meriton Apartments Pty Ltd v Industrial Court of New South Wales (2008) 171 FCR 380.
PROCEDURE – Standing of discharged bankrupt – Property purchased with compensation payment arising from back injury – Property subsequently held on express trust for purchaser – Trustees breached trust obligations – Purchaser made bankrupt – Standing of discharged bankrupt to bring claim for breach of trust – Claim for breach of trust property acquired with ‘protected money’ and not divisible property – Discharged bankrupt has standing to pursue claim for breach of trust – Bankruptcy Act 1966 (Cth) ss 58(1), 116(1), 116(2)(g), (n), 116(3) – Re Iskenderian; Ex parte Iskenderian Bros Pty Ltd (1989) 21 FCR 363 – Application for leave to appeal dismissed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr T Mitchell | Stephen Peter Byrne |
| For the Respondent | Mr M Galvin QC and Mr E Moon | Thomas Egan |
WARREN CJ
TATE JA
FERGUSON JA:
Introduction
Did the County Court, and does the Supreme Court, have jurisdiction?
The facts
The test for leave
Legal principles
Judge’s reasons
Proposed grounds of appeal
Is the claim for breach of trust property that was acquired with protected money?
Conclusion
Introduction
The appellant, Patricia Jakimowicz, and her former partner, Victor Jakimowicz, owned a property at 18 Hawker Street, Preston. They sold that property in 1995 for $170,000 to the respondent who is Victor’s brother, John Jacks. Mr Jacks paid the purchase price from money he had received as compensation for a back injury that he had sustained at work.
The Preston property was never transferred into the name of Mr Jacks but he and his mother began living there in late 1995. A dispute arose between Mr Jacks and the Jakimowiczs. Mr Jacks commenced proceedings in 2000. Those proceedings were resolved on 29 August 2002 on the basis of terms of settlement which incorporated a deed of trust in which the Jakimowiczs declared that they held the Preston property on trust for Mr Jacks ‘to the extent of their net equity’ in that property after allowing for the mortgage which was then registered over it in favour of Suncorp-Metway Ltd. Under the terms of the trust deed, the Jakimowiczs were obliged to use their own funds to make payments under the mortgage and ultimately, to discharge it. They breached that obligation. As a result, Mr Jacks was evicted from the property and it was sold by the registered mortgagee for $495,000 in December 2008.
Mr Jacks was made bankrupt in April 2009. Under the Bankruptcy Act 1966 (Cth) (‘the Act’), compensation payments for personal injury are protected and are not available for distribution amongst the bankrupt’s creditors.[1] In 2011, Mr Jacks sued Ms Jakimowicz for damages for breach of trust. The central issue in this appeal is whether Mr Jacks has standing to bring the claim for damages. He submits that he has standing because the damages arise out of a breach of trust in respect of the Preston property that, as mentioned, was paid for by Mr Jacks from his compensation payment. He submits that the damages are therefore protected under the Act.
[1]Act s 116(2)(g).
The trial judge held that the damages were protected and awarded Mr Jacks damages of $270,771.42 plus interest and costs. Ms Jakimowicz seeks leave to appeal.
We would refuse the application for leave.
In what follows, we will first address a threshold matter that was raised by Mr Jacks on the hearing of the application for leave to appeal; that is whether the County Court and this Court have jurisdiction to determine the standing of Mr Jacks to bring his claim. As will be seen from what we say in the next section of these reasons, in our view, both courts do have jurisdiction. Having determined that threshold matter in favour of Ms Jakimowicz, we will then set out the facts in some detail before considering the test for leave to appeal and the legal principles that are relevant to the issue of standing. We will then summarise the judge’s reasons and the proposed grounds of appeal. Finally, we will analyse the submissions of Ms Jakimowicz and explain why leave to appeal should be refused.
Did the County Court, and does the Supreme Court, have jurisdiction?
The question of whether Mr Jacks had standing to bring the proceeding in the County Court was the subject of an interlocutory application. Relevant to that application was that in addition to his claim for damages (which is the only subject of this application for leave to appeal), Mr Jacks sought a declaration that Ms Jakimowicz held a property at Willowmavin (‘the Willowmavin property’) on trust for him. The Willowmavin property was purchased by the Jakimowiczs using funds advanced on the security of the Preston property.
Ms Jakimowicz made an application for an order dismissing or alternatively staying the proceeding on the basis that Mr Jacks lacked standing because he had been declared bankrupt before the proceeding was commenced such that the chose in action vested in the trustee in bankruptcy pursuant to s 58 of the Act.[2] Mr Jacks defended the application on the basis that his rights as pleaded had not vested in his trustee by reason of the exceptions in ss 116(2) and (3) of the Act.[3] Ms Jakimowicz succeeded in her application.[4] Mr Jacks appealed. This Court allowed the appeal holding that there is nothing in the Act to prevent Mr Jacks, as an undischarged bankrupt, from bringing proceedings in his own name.[5] In this regard, Mandie JA (with whom Maxwell ACJ and Osborn JA agreed) observed:
The correct position, in my opinion, is that a bankrupt is competent to bring a variety of proceedings in his own name but he may lack standing to bring a particular proceeding to the extent that a cause or causes of action the subject of the proceeding had vested in the bankrupt’s trustee and thus could not be sued upon by the bankrupt. In a given case, and this case may or may not be one such case, a defendant might successfully obtain an order for a stay or dismissal of the proceeding on the basis that the bankrupt had no standing to bring the proceeding because the causes of action relied upon had vested in the bankrupt’s trustee.[6]
[2]See [52] below.
[3]See [53] below.
[4]Jacks v Jakimowicz [2011] VCC 1409.
[5]Jacks v Jakimowicz (2014) 288 FLR 365, 371 [22] (Mandie JA, Maxwell ACJ and Osborn JA agreeing).
[6]Ibid (citations omitted).
Another ground of appeal concerned whether the primary judge had erred by failing to characterise Mr Jacks’ claim as property that was not divisible property in his bankruptcy pursuant to s 116 of the Act. Mandie JA held that there was insufficient evidence before the judge to determine whether or not Mr Jacks’ claim, or any part of it, was or was not divisible property.[7] His Honour stated that ‘the facts must be fully investigated and the question cannot be determined on a summary application.’[8] He concluded that the judge’s orders could not be supported on the basis that Mr Jacks’ claims were divisible property but said that it would be open to Ms Jakimowicz to rely upon that argument to challenge the standing of Mr Jacks at trial.[9] Indeed, that is what happened.
[7]Ibid 373 [31]–[32].
[8]Ibid 373 [32].
[9]Ibid 373 [33].
Neither party contended that either the judge dealing with the stay application, or this Court on appeal from that decision, lacked jurisdiction to determine the question of standing.
Be that as it may, a preliminary matter raised by senior counsel for Mr Jacks when the application for leave to appeal came on for hearing in the present proceeding was whether the County Court had jurisdiction insofar as the case dealt with ss 58 and 116 of the Act or whether only the Federal Court was seized of jurisdiction in that respect. Counsel brought to the Court’s attention two decisions: Turner v Gorkowski[10] (a decision of this Court) and the Full Federal Court decision in Truthful Endeavour Pty Ltd v Condon.[11] We will say more about these cases below. For present purposes it is sufficient to say that in each case it was held that the Federal Court had exclusive jurisdiction to determine the entitlement of a trustee in bankruptcy to property. In both cases, the trustee was a party to the proceeding and claimed an interest in the relevant property.
[10][2014] VSCA 248 (‘Gorkowski’).
[11](2015) 233 FCR 174 (‘Truthful Endeavour’).
Having raised the issue of jurisdiction (which regrettably had not been raised before the primary trial judge, nor for that matter, in the interlocutory application for a stay in both the County Court and on appeal to this Court), counsel for Mr Jacks, at the hearing of the application for leave to appeal, submitted that Gorkowski and Truthful Endeavour were distinguishable. Counsel’s basis for this submission was that in this proceeding the trustee in bankruptcy, Ms Robyn Erskine, is not a party to the proceeding and has never been a party to the proceeding. More importantly, submitted counsel, is the fact that Ms Erskine was aware of Mr Jacks’ claim and has never pressed a claim as the trustee in bankruptcy to an interest in the relevant property. According to counsel, the reason Ms Erskine has taken this approach is because she agrees with Mr Jacks’ position. Counsel submitted that this is demonstrated in an affidavit sworn by Ms Erskine in the County Court proceeding shortly before the hearing of the stay application.[12] In that affidavit, Ms Erskine deposed that her enquiries had led her to conclude that the Willowmavin property was not property which had vested in her as Mr Jacks’ trustee in bankruptcy. The trustee formed this view because, in her words, Mr Jacks had acquired the property using the proceeds of a personal injury claim. Her conclusion was therefore that she did not have any interest in the Willowmavin property and she did not believe that she had standing to prosecute legal proceedings in respect of any interest of Mr Jacks in that property. Ms Erskine did not go on to deal with whether, as the bankruptcy trustee, she believed she had any interest in the claim for damages that Mr Jacks pursued in the same proceeding. There is no explanation for why the affidavit is silent in this respect when the stay application concerned that claim as well as the claim to the Willowmavin property.
[12]Affidavit of Robyn Lee Erskine sworn 28 July 2011. See also Jacks v Jakimowicz (2014) 288 FLR 365, 368 [10].
As the question of jurisdiction was only raised shortly before the hearing of the leave application, the Court gave Ms Jakimowicz time to file written submissions in respect of that issue, with Mr Jacks being given an opportunity to reply in writing to those submissions. Contrary to the position taken by counsel on the hearing, Mr Jacks contends in his written reply submissions that the County Court lacked jurisdiction. He maintains that the County Court had no jurisdiction to determine the defence relied upon by Ms Jakimowicz that went to the question of a trustee in bankruptcy’s title to property, which is a matter in respect of which the Federal and Federal Circuit Courts have exclusive jurisdiction by reason of s 27 of the Act. He contends that the fact that the County Court did not have jurisdiction to determine those issues did not deprive the County Court of its jurisdiction to hear and determine Mr Jacks’ claims to equitable relief in respect of which Mr Jacks was successful.
Subject to exceptions which are not relevant here, s 27 of the Act provides that the Federal and Federal Circuit Courts have exclusive jurisdiction in bankruptcy. In relation to jurisdiction, ‘bankruptcy’ is defined as jurisdiction under or by virtue of the Act.[13] Section 31(f) provides that applications to declare for or against the title of the trustee to any property must be heard in open court. That section does not confer jurisdiction, but does indicate what was intended to fall within the scope of jurisdiction in bankruptcy.[14]
[13]Act s 5.
[14]Scott v Bagshaw (2000) 99 FCR 573, 577 [18].
The Court was referred to a number of authorities.
In Geia v Palm Island Aboriginal Council,[15] an employee claimed damages for wrongful termination of his employment contract. He brought the claim in the Queensland District Court. At the time of the termination, the employee was bankrupt. The trustee in bankruptcy was not a party to the litigation. The primary judge held that the chose in action vested in the employee’s trustee in bankruptcy and dismissed the action. The employee appealed. The appeal was dismissed. No party argued that there was any lack of jurisdiction to decide the case. Nevertheless, the Queensland Court of Appeal considered that question. Having referred to s 27, their Honours stated:
our decision and that made by the learned District Court judge are not in proceedings of a kind which are, by any specific provision of the Bankruptcy Act 1966, required to be brought in the Federal Court. That Act does not give the Federal Court power to dismiss an action brought in a State court by a bankrupt, purporting to exercise a cause of action which the Bankruptcy Act vests in the trustee. For this reason we are of the view that the assumption the parties have made, that the District Court and this Court have appropriate jurisdiction, is correct.[16]
[15][2001] 1 Qd R 245 (‘Geia’).
[16]Ibid 253 [19].
In Scott v Bagshaw,[17] Mr Scott, who was the trustee of a trust, sought a declaration that three properties were charged in his favour and also sought orders for the appointment of a receiver of the properties. The defendants included a bankrupt and his trustees in bankruptcy. The properties were registered in the name of the bankrupt (together with his wife in respect of two of the properties). Mr Scott contended that the Federal Court had jurisdiction to hear the case. The proceeding was stayed for want of jurisdiction at first instance. The Full Federal Court set aside this order on appeal, holding that the proceeding fell within the Federal Court’s jurisdiction in bankruptcy under s 27 of the Act. In reaching this conclusion, their Honours noted that the claim was one to realise an equitable charge and that the pleadings did not refer to the Act in that regard. They went further and observed that the case may be capable of reaching judgment without reference to any section in the Act:
However, the undoubted effect of an order being made in the terms sought by [Mr Scott] would be that a declaration would be made against the title of the third respondents [the trustees in bankruptcy]. Upon the third respondents’ becoming trustees, the title to the properties (and subsequently to the money representing part of the properties) became vested in them: ss 58(1) and 132 of the Act. The consequence of any such order must therefore be that it would have a necessary adverse effect on the title of the third respondents to the extent that it established title in [Mr Scott]. That is a matter that falls within the jurisdiction in bankruptcy.[18]
[17](2000) 99 FCR 573.
[18]Ibid 577 [20].
Cordes v Dr Peter Ironside Pty Ltd[19] is to similar effect. In that case, a bankrupt sought an order against her trustee in bankruptcy that property be reconveyed to her. The Queensland Court of Appeal held:
This case falls squarely within what was described in Scott v Bagshaw: the orders the [bankrupt] seeks, to the extent that they recognise title in her, as trustee or otherwise, must have a ‘necessary adverse effect on the title’ of the trustee in bankruptcy. That case makes it clear that it is irrelevant whether one of the parties to the proceeding is a bankrupt or a trustee in bankruptcy, and it is unnecessary that any particular section of the BankruptcyAct be invoked.[20]
[19][2010] 2 Qd R 235.
[20]Ibid 246 [39].
With respect, we do not agree that Scott v Bagshaw is authority for the proposition that the identities of the parties is an irrelevant consideration. Of course, the making of an order that property belongs to a bankrupt will adversely affect the title of trustees in bankruptcy if they are parties to the litigation. We do not think that Scott v Bagshaw is authority for any broader proposition. The position is less clear when the trustee is not a party. As will be seen from other authorities, which we will discuss below, it has been held that trustees who are not parties to the litigation will not be bound by a decision to the effect that title to property vests in a bankrupt.
One such case is Macchia v The Public Trustee.[21] In that case, Mr Macchia’s mother died intestate and he and his two sisters were entitled to share her estate equally. However, Mr Macchia was bankrupt. Letters of administration were granted to the Public Trustee. Mr Macchia sought orders revoking the administration. The Public Trustee made an application for orders that Mr Macchia was not a person interested in his mother’s estate on the basis that the chose in action (his entitlement to share in the estate) vested in the trustee in bankruptcy and as there would be no surplus moneys available to Mr Macchia after payment of his creditors, he was not a person interested in the estate. The Public Trustee sought orders dismissing the proceeding brought by Mr Macchia. The trustee in bankruptcy was not a party at first instance but was joined for the purposes of the appeal. Steytler P (with whom Le Miere AJA agreed) held that the Public Trustee’s application was not one ‘to declare for or against the title of the trustee to any property’ but rather, was only one as to whether Mr Macchia was a person interested in his mother’s estate.[22] That, so his Honour held, was a matter within the jurisdiction of the Supreme Court of Western Australia.[23] His Honour observed that the trustee had not been a party to the proceeding below and stated that the trustee would therefore not be bound by the decision.[24] We would interpolate that there are situations where a person who is not party to a proceeding will, in effect, be bound by a decision in that proceeding and will be prevented from pursuing the same or similar issues in a second proceeding.[25]
[21](2008) 251 ALR 385 (‘Macchia’).
[22]Ibid 390 [21].
[23]Ibid.
[24]Ibid.
[25]Kermani v Westpac Banking Corporation (2012) 36 VR 130.
As we mentioned, the trustee was a party to the appeal in Macchia. Steytler P relied upon provisions in the Western Australian cross vesting legislation (which are not relevant in the present proceeding) so that the court could deal with the application before it.[26]
[26]Macchia (2008) 251 ALR 385, 390–1 [22]–[25].
Meriton Apartments Pty Ltd v Industrial Court of New South Wales[27] concerned whether the Industrial Court of New South Wales had jurisdiction to determine that the proceeding before it had or had not been deemed to be abandoned by a trustee in bankruptcy pursuant to s 60(3) of the Act. The proceeding had been commenced by Mr Rose against Meriton Apartments Pty Ltd and Owners Corporation (‘the defendants’) seeking various orders including orders for the payment of money to him. Mr Rose became bankrupt after the proceeding had been instituted. In those circumstances, the right to bring the proceedings vested in his trustee in bankruptcy[28] who purported to assign the chose in action to him. The effect of s 60 of the Act then became relevant. It reads:
[27](2008) 171 FCR 380 (‘Meriton Apartments’).
[28]Act s 58.
(1)The Court may, at any time after the presentation of a petition, upon such terms and conditions as it thinks fit: …
(a)discharge any order made … against the person or property of the debtor … ; or
(b)stay any legal process … against the person or property of the debtor …
(2)An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.
(3)If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.
The solicitors for Owners wrote to the trustee requiring him to make an election under s 60 as to whether he would prosecute the proceeding.[29] The trustee responded by informing the solicitors that he had assigned the proceeding to Mr Rose. The defendants took the view that the assignment was invalid and that therefore notification of the assignment could not constitute an effective election to prosecute the proceeding with the consequence that the proceeding was deemed to be abandoned.[30] The Full Bench of the Industrial Relations Court held that the assignment was valid and that the trustee’s letter was effective as an election. On appeal the Full Federal Court held that the Industrial Court had jurisdiction to determine whether the proceeding was stayed or deemed to be abandoned. Branson J said:
It can be seen that s 60 has two broad purposes. First, it empowers ‘the Court’ to discharge certain orders and stay certain legal processes against the person or property of a debtor in respect of whom a petition has been presented. Secondly, it impacts directly on the status of actions commenced by a person who subsequently becomes bankrupt. Section 5(1) of the Act defines ‘the Court’ to mean a court having jurisdiction in bankruptcy under the Act. As mentioned above, s 27 gives jurisdiction in bankruptcy to federal courts to the exclusion of other courts. It is therefore clear that a State court does not enjoy the powers given to ‘the Court’ by s 60. For this reason a State court cannot discharge an order or stay legal process in reliance on s 60(1) of the Act.
However, s 60(2), (3) and (4) of the Act are not concerned to give powers to ‘the Court’. They are intended to apply generally to litigation commenced by persons who subsequently become bankrupt. The subsections are binding on all Australian courts. The status of a proceeding commenced by a person who subsequently becomes bankrupt is a matter which must necessarily be addressed by the court in which the proceeding has been commenced. Nothing in s 27, or elsewhere in the Act, discloses an intention to deprive a State court of the power to determine the status of a proceeding before it. Whether or not a trustee has made an election in writing to prosecute or discontinue a proceeding is a mixed question of law and fact. Although the Act requires every court seized of an action commenced by a person who subsequently becomes a bankrupt to determine this question, the determination of the question does not involve the exercise of jurisdiction ‘under or by virtue of [the] Act’. It relevantly involves mere recognition of the binding legal effect of the Act. Further, every court has the implied or inherent jurisdiction to determine the extent of its jurisdiction and whether there is an impediment in the way of its hearing and determining a proceeding before it.[31]
[29]Ibid s 60(3).
[30]Ibid.
[31]Meriton Apartments (2008) 171 FCR 380, 384–5 [7]–[8].
Greenwood J held:
when a State court determines whether a proceeding can properly be commenced or maintained before it or whether the plaintiff has standing to engage the jurisdiction of the Court, by reason of any impediment going to the operation or application of a provision of the Bankruptcy Act, such an application is not one under or by virtue of the Bankruptcy Act. The Commission in Court Session was not exercising a jurisdiction in bankruptcy by determining the motions before it brought by Meriton and Owners.[32]
[32]Ibid 408 [117].
Both Branson and Greenwood JJ held that the Industrial Court had jurisdiction to determine whether the assignment by the trustee was valid.[33] In this regard, Branson J said that such a decision did not involve the Industrial Court acting in the exercise of jurisdiction in bankruptcy because all that was required was for the court to recognise the effect of the Act.[34] Her Honour observed that courts must be able to determine the standing of parties in proceedings before them.[35] Perram J dissented on this point, holding that the question of the validity of the assignment determined the title of the trustee to the chose in action such that it was a question which must be determined ‘in bankruptcy’.[36]
[33]Ibid 383 [3], 417 [155].
[34]Ibid 387 [18].
[35]Ibid.
[36]Ibid 427 [194], 431 [211].
To similar effect is Moss v Eaglestone.[37]That case involved an application to stay a proceeding brought by a bankrupt. The question was whether the claim was one in respect of personal injury. If it was, then the claim was protected and did not form part of the divisible property of the bankrupt. Allsop P (as his Honour then was) held that the Supreme Court of New South Wales had jurisdiction to deal with the application and the court was not exercising ‘jurisdiction in bankruptcy’ for the purposes of s 27 of the Act.[38]
[37](2011) 83 NSWLR 476.
[38]Ibid 479 [2] (Campbell and Young JJA agreeing).
Cooper v Moloney (No 5)[39] concerned two separate proceedings in the Supreme Court of South Australia. In the first, a bankrupt, Mr Cooper, was sued for trespass to land. He defended that proceeding on the basis that he was entitled to quiet enjoyment pursuant to an oral lease. In the second proceeding, Mr Cooper sued the Moloneys for debts he claimed were due to him. The Moloneys contended that Mr Cooper had no standing to bring the claim for the debt nor did he have any standing in respect of the alleged lease because the chose in action and the lease had vested in his bankruptcy trustee. The trustee (who was not a party to the proceeding) took the view that the chose in action did not vest in him. Having reviewed the legislative history and many of the authorities, Blue J summarised the principles as follows:
[39][2012] SASC 211.
1.Section 27(1) is the source of the federal court’s jurisdiction in bankruptcy. Sections 30 and 31 do not confer jurisdiction, although they elucidate what is encompassed as falling within the concept of ‘jurisdiction in bankruptcy’.
2.The mere fact that it is necessary in a proceeding to apply or interpret a provision of the Bankruptcy Act does not mean that a court is exercising jurisdiction in bankruptcy within the meaning of ss 5 and 27.
3.The Bankruptcy Act does not deprive State courts of their ordinary jurisdiction in matters arising under the general law as between a bankruptcy trustee and a stranger to the bankruptcy or as between the bankrupt and a stranger to the bankruptcy.
4.Section 27 of the Bankruptcy Act vests exclusive jurisdiction in the federal courts to determine, in proceedings to which a bankrupt and the trustee are parties, the title to property contested between them.
5.State and Territory courts have jurisdiction to determine the standing of a bankrupt as between the bankrupt and a stranger to the bankruptcy. This is so notwithstanding that the determination depends upon the construction of ss 58 and 116 of the Bankruptcy Act [citing Geia, Meriton Apartments and Macchia]. …
[6.]A determination of the standing of a bankrupt as between the bankrupt and a stranger to the bankruptcy cannot bind the bankruptcy trustee who is not a party to the action. [citing Macchia]
[7.]Conversely, a determination by a court having jurisdiction in bankruptcy as between bankrupt and trustee as to entitlement to a chose in action will necessarily have a consequential effect in any proceedings in a court of general jurisdiction in which the title of the bankrupt or trustee to sue is raised by a stranger to the bankruptcy.[40]
[40]Ibid [66]–[67] (citations omitted).
Blue J observed that in the case before him, there was no proceeding between Mr Cooper and the trustee as to the entitlement to pursue the debt action and the trustee had not asserted any rights in respect of the lease and had not sought to intervene in the proceeding between Mr Cooper and the Moloneys.[41] Consequently, his Honour held:
There being no issue between Mr Cooper and the trustee in relation to the entitlement of Mr Cooper to pursue the claims which he does in the actions, no question of jurisdiction under or by virtue of the Bankruptcy Act arises. This Court has jurisdiction to hear and determine the actions, including the question of standing which arises incidentally therein as between Mr Cooper and the Moloneys.[42]
[41]Ibid [68]–[69].
[42]Ibid [70].
In BA and BB v Sutherland,[43] a claim for contribution was made by two defendants against the third defendant, Mr Jatkar, who was bankrupt. He applied to stay the contribution proceedings on the basis that the claims against him were provable in his bankruptcy. The other defendants argued that the Court did not have jurisdiction to determine the stay application (which rested on whether the claims were provable in the bankruptcy) because to do so would involve it exercising jurisdiction ‘in bankruptcy’, which it did not have under s 27 of the Act. The trial judge did not accede to that contention and held that the Court had an inherent jurisdiction to control its own processes which included the jurisdiction to determine the competence of the contribution proceedings with reference to the effect of the relevant sections of the Act.[44] Her Honour held that the commencement of the contribution proceedings against Mr Jatkar required leave under s 58(3) of the Act, and therefore granted the stay sought by Mr Jatkar.[45]
[43][2013] VSC 336 (R).
[44]Ibid [18].
[45]Her Honour’s ruling was published to the parties but has not otherwise been made publicly available.
An unsuccessful application was made to the Federal Court for declarations that the contribution claims were not provable debts.[46] The judge in that case determined that they were provable debts. It was therefore not necessary for him to consider Mr Jatkar’s application that the Federal Court proceeding was an abuse of process because the issues had been determined in the Supreme Court. Nevertheless, his Honour did consider the matter briefly and stated:
The issue before her Honour in the stay application was whether the proceeding before her, and which was properly within the jurisdiction of the Supreme Court, should be stayed. That question called for her Honour to consider whether the claim made in those proceedings, which had been made under s 23B of the Wrongs Act against Dr Jatkar, required leave under s 58(3) of the BankruptcyAct. That question, in turn, depended upon whether the claim against Dr Jatkar for contribution was a debt or liability provable in his bankruptcy within the meaning of s 82(1) or a demand in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust within the meaning of s 82(2). The declarations sought by the applicants come within the exclusive jurisdiction of this court, but their attempts to enliven that jurisdiction in this proceeding is an abuse of process in circumstances where they fully participated in addressing the very same issues in the Supreme Court in the context of seeking to oppose Dr Jatkar’s application for a stay. There is no suggestion that they were prevented from enlivening this Court’s jurisdiction before fully participating in their unsuccessful opposition to the stay application before Williams J. The applicants in this proceeding seek to challenge the basis upon which Williams J determined an application within the jurisdiction of the Supreme Court. The present application raises the same issues between the same parties and is sought for the same reason.[47]
[46]Sutherland v Jatkar (2014) 222 FCR 601.
[47]Ibid 613 [21].
In short, his Honour was of the view that this Court had jurisdiction to determine the application for a stay even though that necessitated consideration of whether the contribution claims were provable debts.
Gorkowski[48] concerned a claim by Ms Gorkowski that she had a beneficial interest in property owned by her son who was a bankrupt. She brought the claim against the trustee in bankruptcy in this Court. The trustee applied to have the proceeding struck out on the basis that the Court did not have jurisdiction because it was a matter that fell within the exclusive jurisdiction of the Federal Court under s 27. The trial judge held that although s 27 deprives the Court of jurisdiction ‘in bankruptcy,’ the effect of s 4(1) of the Jurisdiction of Courts (Cross Vesting Act) 1987 (Cth) was to confer federal jurisdiction on the Court in relation to matters arising ‘in bankruptcy’ and the claim did not give rise to a ‘special federal matter’ within s 6(1) of that legislation which (subject to one exception) requires the proceeding to be transferred to the Federal Court. A ‘special federal matter’ is one arising under a law made by the Commonwealth Parliament.[49] The trustee appealed on the basis that the claim gave rise to a ‘special federal matter’ because the proceeding fell within the exclusive jurisdiction of the Federal Court conferred by s 27 of the Act. Neave and Santamaria JJA allowed the appeal. Their Honours said:
Although the matter is not without difficulty, we consider that his Honour should have held that the proceeding was a ‘special federal matter.’ We reach that conclusion because it was necessary for the trustee in bankruptcy to rely on the sequestration order made under the Bankruptcy Act and the title conferred on him as a consequence of that order, to resist Mrs Gorkowski’s claim. Although his title was not ‘a defence’ to Mrs Gorkowski’s claim, s 58 of the Act, which vested the property of the bankrupt in him, was the basis on which the proceedings had to be brought against him. The onus lay on Mrs Gorkowski to establish her interest in the property, which the trustee claimed was vested in him. This was not a case where the bankruptcy was simply ‘lurking in the background’ to the proceedings.[50]
[48][2014] VSCA 248.
[49]Jurisdiction of Courts (Cross Vesting) Act 1987 (Cth) s 3(e).
[50]Gorkowski [2014] VSCA 248, [41] (citations omitted).
In the subsequent case of Truthful Endeavour,[51] the Full Federal Court considered the first instance decision in Gorkowski. The Court does not seem to have been referred to the appellate decision in Gorkowski. Nevertheless, as had this Court, the Federal Court took a different view to the trial judge in Gorkowski and said:
the rights in issue [in Gorkowski] were not the equitable principles or issues to resolve the dispute, but were [the trustee’s] claim to ownership or Mrs Gorkowski’s claim that the property was not divisible. Both of those rights owed their existence to federal law, in the former case to ss 58(1) and 116(1) of the Bankruptcy Act and in the latter to s 116(2). That the outcome of a controversy does not depend on federal law for resolution or enforcement is not determinative.[52]
[51](2015) 233 FCR 174.
[52]Ibid 190 [58].
A little later in their reasons, their Honours stated:
If a controversy or matter manifested by a proceeding regarding beneficial ownership of property (by reference to equitable principles) claimed by the trustee in bankruptcy by force of ss 58(1) and 116(1) did not arise under the Bankruptcy Act, then what was said by the Full Court in Scott v Bagshaw at [20] would have been wrong. The Full Court was not wrong. In such a case a matter does arise under the Bankruptcy Act. It is a matter in bankruptcy; it is a matter that arises under a law of the Parliament (the Bankruptcy Act); it is a matter within the original jurisdiction of the Federal Court; it is a matter in respect of which the Supreme Court of a State or Territory would not, apart from the Cross-vesting Act, have jurisdiction within the closing clause of the definition of ‘special federal matter’ in s 3(1) of the Cross-vesting Act; and it is a ‘special federal matter’ for the purposes of the Cross-vesting Act, in particular s 6 of that Act.[53]
[53]Ibid 192 [60].
Fewin Pty Ltd v Burke[54] was a case brought in the New South Wales Supreme Court. The plaintiffs claimed to be creditors of a bankrupt estate. They sought orders that the trustee in bankruptcy had breached his duties. The claim was brought as a common law claim in negligence. Wilson J held that the court had no jurisdiction. He said:
The plaintiffs’ claim is one founded upon the fulfilment of duties by the defendant while acting as trustee under the Bankruptcy Act. The statutory source of his duties and obligations is the same Act. Section 27 of that legislation provides that the Federal Court of Australia and/or the Federal Circuit Court of Australia have exclusive jurisdiction, save for some exceptions. The exceptions are not relevant for present purposes.
I do not believe that this Court has jurisdiction to determine the plaintiffs’ claim. That jurisdiction rests in the Federal Court.[55]
[54][2015] NSWSC 1411.
[55]Ibid [50]–[51].
In Goggin v Majet[56] the Majets sold a property to Mr Brett-Hall who paid a deposit and subsequently became bankrupt. The trustees in bankruptcy disclaimed the contract. The Majets instituted a proceeding in the Supreme Court of Queensland against the trustees seeking forfeiture of, or a declaration of their entitlement to, the deposit and an order for payment of the deposit to them. The trustees filed an application seeking a declaration of their entitlement to the deposit and an order for payment of it to them. The trial judge declared that the Majets were entitled to the deposit and directed that it be paid to them. The trustees’ application was dismissed. The trustees appealed. The Queensland Court of Appeal described the central issue in the proceeding which had been determined by the trial judge as whether the trustees’ disclaimer triggered a provision of the contract of sale (cl 2.4(1)) which entitled the Majets as seller to the deposit if the contract had been terminated owing to default of the buyer.[57] No issue as to jurisdiction was raised before the trial judge. On appeal, the trustees contended that the applications for declarations (made by the Majets and the trustees) for declarations as to the entitlement to the deposit were matters within the exclusive jurisdiction of the Federal and Federal Circuit Courts pursuant to s 27 of the Act. The court rejected that ground of appeal. Gotterson JA said:
The applications did not put in contest the title of the trustees to any property. Put at its highest for the trustees, the interest in the deposit which vested in them upon Mr Brett-Hall’s bankruptcy was a Buyer’s contingent beneficial interest. No absolute entitlement to the deposit could have vested in them then. There is, and has been, no claimant to a Buyer’s contingent beneficial interest other than the trustees. Likewise, for the Majets’ claim to a Seller’s contingent beneficial interest in the deposit at that time.
In the event of the contract being terminated, the trustees’ interest in the deposit was contingent upon there being no default on the part of the Buyer. For the Majets, it was contingent upon there being a default of the Buyer which occasioned the termination. Which of these contingencies occurred is a matter that arises under the general law. Judicial determination of it requires a construction of the provisions of clause 2.4(1) and an application of the clause so construed to the facts, including the disclaimer. Entitlement to the deposit is dependent upon that determination. The determination is properly within the jurisdiction of the Supreme Court of Queensland.[58]
[56][2015] QCA 244.
[57]Ibid [10] (Gotterson JA, Morrison and Philippides JJA agreeing).
[58]Ibid [20]–[21] (citations omitted).
Gotterson JA distinguished Cordes v Dr Peter Ironside Pty Ltd on the basis that, to the extent that the orders sought by the bankrupt in that case recognised title to the property in her, this would necessarily have an adverse effect on the title to the trustee in bankruptcy in the property.[59] Gotterson JA noted that in that case the trustee claimed that the legal and beneficial ownership in the property had vested in him.[60] His Honour also distinguished Gorkowski on the basis that there the trustee had to rely on the sequestration order to resist the equitable claim but in the case before the Queensland court ‘no comparable claim is made against the Buyer’s contingent beneficial interest in the deposit which vested in the trustees’.[61]
[59]Ibid [22].
[60]Ibid.
[61]Ibid [23].
In our view, both the County Court and this Court have jurisdiction to determine whether or not Mr Jacks has standing to bring his claim for compensation for breach of Ms Jakimowicz’s duties as trustee. Standing is a threshold issue. That is so even where, as here, it is determined at trial rather than at an interlocutory stage. Courts must be in a position to determine whether parties before them have standing to bring any claim. Were it not so, courts would not be able to control their own processes and the proceedings before them. In this regard, if a plaintiff does not have standing in a State court because the property in question has vested in the trustee in bankruptcy, then the proceeding is liable to be dismissed or at least stayed. In such situations, a court is simply giving effect to the provisions of the Act when considering the question of standing. As was pointed out by Branson J in the Federal Court in Meriton Apartments, there is no difficulty with that.
The alternative would be that all questions of the standing of undischarged bankrupts and third parties to a bankruptcy to pursue claims commenced in State courts would have to be determined by the Federal Court or the Federal Circuit Court. That would fly in the face of courts controlling their own proceedings. It would involve an impermissible interference by those federal courts which do not have jurisdiction over, nor a supervisory role in respect of, State courts.
The position is different when a trustee is a party to the litigation and claims that the property in dispute (which may be the chose in action itself) has vested in the trustee pursuant to s 58 of the Act and is divisible property under s 116. In that situation, the question is not just one of standing. Rather, there is also a question that requires a binding determination as to whether the property has vested in the trustee. In those cases, a court’s finding will necessarily have an effect on the trustee’s title. That was the situation in the following cases:
·Scott v Bagshaw (claim by trustee to real property and proceeds of sale);
·Cordes v Dr Peter Ironside Pty Ltd (claim by bankrupt against trustee for reconveyance of real property);
·Gorkowski (claim against trustee by third party alleging she had an equitable interest in property); and
·Truthful Endeavour (claim by third party that property held on trust for her by trustee in bankruptcy).
Consequently, while it is necessary in determining the sole issue of standing to consider whether the property is divisible property and has vested in the trustee in bankruptcy, all that a court is doing in that situation is applying the Act. It is not determining for or against the title of the trustee to the property, as it must of necessity do if the trustee is a party and makes a claim to the property or if the trustee claims the right to bring the action instead of the bankrupt. Where the trustee makes no claim to the property and does not claim that the cause of action has vested, a court is not exercising jurisdiction in bankruptcy.
Here, as Mandie JA pointed out on the appeal from the stay application, the question of standing had to be fully investigated and could not be dealt with in a summary manner on an interlocutory application. Whilst in her affidavit Ms Erskine as the trustee in bankruptcy did not expressly disavow any interest in the damages claim made by Mr Jacks, she must have been aware of the proceeding, yet she did not seek to intervene in it, nor did she take any other positive step to assert any rights over the breach of duty claim. When the trial judge held that Mr Jacks was entitled to damages, she did so on the basis that he had standing to bring the claim. That was the threshold issue that had to be determined. Many defences were raised at trial, but they were only relevant if Mr Jacks had standing to bring the claim. It matters not that on appeal, the only issue for determination is one concerning standing. The Court has jurisdiction to determine that issue and is not exercising jurisdiction in bankruptcy.
It is therefore necessary to deal with the substantive issues raised by the proposed appeal grounds; that is whether Mr Jacks has standing to bring his claim. We will first set out in a little more detail the salient facts leading to the current claim.
The facts
In December 1995, Mr Jacks received just under $360,000 as compensation for a back injury that he had sustained at work a few years earlier. He used $170,000 of that amount to buy the Preston property from his brother and Ms Jakimowicz. At the time of the sale, National Australia Bank Limited (‘NAB’) held a mortgage over the Preston property.
As we have said, the Preston property was not transferred into the name of Mr Jacks. On 30 August 2000, he lodged a caveat over the property claiming an interest as purchaser. The next month he commenced County Court proceedings against the Jakimowiczs seeking a declaration that they held the property on trust for him and orders that they discharge the NAB mortgage and do all that was necessary for the property to be transferred into his name. Mr Jacks and Mr Jakimowicz (but not Ms Jakimowicz) entered into an agreement which involved Mr Jacks withdrawing his caveat over the Preston property in February 2001. The County Court proceeding remained on foot despite this agreement between Mr Jacks and his brother.
Following Mr Jacks’ withdrawal of caveat, the NAB mortgage was discharged and replaced by a mortgage in favour of Suncorp-Metway Ltd. The Jakimowiczs used some of the funds advanced by Suncorp-Metway and secured by the mortgage to purchase the Willowmavin property.
About 18 months later, in late August 2002, Mr Jacks and the Jakimowiczs settled the County Court proceeding. Under the terms of settlement, the Jakimowiczs represented and warranted that the amount secured by the Suncorp-Metway mortgage did not exceed $200,000, undertook not to increase the amount outstanding, agreed to pay $200,000 to Mr Jacks within 12 months and acknowledged that they held the Preston property on trust for Mr Jacks (‘Settlement Agreement’). The Settlement Agreement recorded that the agreement to pay the $200,000 was ‘in accordance with the Deed of Trust’ which was annexed to the terms of settlement (‘Trust Deed’). Relevantly, the Trust Deed provided:
1.The Trustees [the Jakimowiczs] declare that the trust property [the Preston property] is held by the Trustees upon trust for the Beneficiary [Mr Jacks] to the extent of their net equity in the trust property after allowing for the mortgage [in favour of Suncorp-Metway].
2.The Trustees are personally obliged out of funds provided by the Trustees to perform and comply with the terms of the mortgage as and when such monies are due to be paid and to ultimately discharge the mortgage.
3.The Trustees indemnify the Beneficiary against any action or claims or liabilities arising out of or in connection with the mortgage.
4.Nothing in this deed entitles the Trustees to beneficial ownership of the trust property or to deprive the Beneficiary of the rights of beneficial ownership (including the right of possession) of the trust property.
5.The Trustees must notify the Beneficiary of all notices, assessments, claims or demands which the Trustees receive in respect of the trust property …
9.If the Trustees make available to the Beneficiary the trust property and the certificate or other documents of title in respect of the trust property and a form of transfer duly executed by the Trustees whereby the trust property is capable of being transferred to the Beneficiary:
(a)the obligations of the Trustees as Trustees under this deed will be discharged in full;
(b)the Beneficiary must immediately cause the trust property to be registered in the name of the Beneficiary.
10.The Trustees must at the request of the Beneficiary make available to the Beneficiary the documents of title in respect of the property which may come into the hands of the trustee by virtue of the trustee being registered as the holder of the trust property under this deed.
Sometime after this the Jakimowiczs separated. They failed to pay the money that was due to Suncorp-Metway under the mortgage. The result was that Suncorp-Metway obtained orders for possession of the Preston property, and Mr Jacks was evicted in October 2007. Suncorp-Metway sold the property for $495,000. Once Suncorp-Metway had recouped its debt from the sale proceeds, it paid the balance of $224,228.58 into court in February 2009. A couple of months after this, Mr Jacks was made bankrupt. His trustee in bankruptcy commenced proceedings for recovery of the money that had been paid into court. Those proceedings were settled on the basis that $170,000 was paid to Mr Jacks with the balance being paid to his trustee in bankruptcy.
In 2011, Mr Jacks commenced a fresh proceeding (being the proceeding which is the subject of this appeal) against Ms Jakimowicz relevantly claiming damages for breach of trust and declaratory relief in respect of the Willowmavin property. The trial judge refused the claim for declaratory relief in respect of the Willowmavin property but ordered that there be judgment for Mr Jacks in the sum of $270,771.42 plus interest and costs.[62] The amount awarded represents the Preston property sale price of $495,000 less $224,228.58 which was the total amount paid to Mr Jacks and his trustee in bankruptcy.
[62]Jacks v Jakimowicz [2015] VCC 1067 (‘Reasons’).
The test for leave
As was observed in Northern Health v Kuipers,[63] there is some uncertainty as to whether the application for leave to appeal from a decision of the County Court is an application under s 14A of the Supreme Court Act 1986. Dependent upon the answer to that question, the test for leave may either be:
(a)whether the decision from which the appeal is sought to be brought is attended by sufficient doubt to justify the grant of leave to appeal;[64] or
(b)whether the appeal has a real prospect of success in the sense that it is not fanciful. [65]
[63][2015] VSCA 172.
[64]Niemann v Electronic Industries Ltd[1978] VR 431, 433, 441–2.
[65]Supreme Court Act 1986 s 14C; Kennedy v Shire of Campaspe [2015] VSCA 47, [12].
It is unnecessary to determine that issue in this case because on either test, we would not grant leave to appeal.
Legal principles
Section 58(1) of the Act provides that property of a bankrupt vests in the trustee in bankruptcy. ‘Property of a bankrupt’ is defined as property divisible amongst the bankrupt’s creditors and rights and powers in relation to that property that, but for the bankruptcy, would have been exercisable by the bankrupt.
What is divisible property is dealt with in s 116. Subject to exceptions listed in s 116(2), the Act provides that property that belonged to or was vested in the bankrupt at the date of bankruptcy is property divisible amongst the bankrupt’s creditors.[66] Section 116(2)(g) excludes damages or compensation recovered for personal injury or wrong done to the bankrupt such as the compensation paid to Mr Jacks in respect of his back injury. The Act contemplates that such compensation might be used in the acquisition of other property and provides for the protection of that property as well. One way that the Act achieves this is through ss 116(2)(n) and (3). The effect of s 116(2)(n) is that divisible property does not extend to property falling within s 116(3). Section 116(3) provides:
Where, at any time, the whole, or substantially the whole, of the money paid for the purchase, or used in the acquisition, of particular property is protected money, paragraph (2)(n) applies to the property.
[66]Act s 116(1).
‘Protected money’[67] is defined as ‘exempt money’ which in turn is defined to include damages or compensation for personal injury or wrong done to the bankrupt.[68] As will be seen later in these reasons, the question is whether Mr Jacks’ claim for damages for breach of trust falls within ss 116(2)(n) and (3).
[67]Ibid s 116(2D).
[68]Ibid, incorporating reference to s 116(2)(g).
‘Property’ is defined in broad terms to mean:
real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.[69]
[69]Ibid s 5.
A chose in action falls within this definition and will be divisible property vesting in the trustee in bankruptcy under s 58(1) unless it falls within one of the exemptions in s 116(2).[70]
[70]Moss v Eaglestone (2011) 83 NSWLR 476, 485 [28] (Allsop P, Campbell and Young JJA agreeing); Di Cioccio v Official Trustee in Bankruptcy [2015] FCAFC 30, [40].
In Re Iskenderian; Ex parte Iskenderian Bros Pty Ltd,[71] Aida Iskenderian settled a personal injuries claim she had for $160,000 in 1983. Ms Iskenderian used the money to pay some personal debts, to buy a house at Frenchs Forest ($124,000), to pay stamp duty ($2,790) and for improvements to the house ($30,000). The Frenchs Forest property was sold. Ms Iskenderian used $36,000 from the net proceeds of sale to buy some vacant land at Bonnells Bay (‘Lot 128’). She then purchased more land at Bonnells Bay (‘Lot 129’) with her daughter. Ms Iskenderian contributed $7,000 to the purchase price. That money came from the net proceeds of sale of the Frenchs Forest property. Ms Iskenderian later became bankrupt. The question was whether Lot 128 and Ms Iskenderian’s interest in Lot 129 were divisible property. Neaves J determined that they were not. His Honour said:
The argument presented on behalf of the applicants requires the language of s 116(3) to be read as fastening upon, to the exclusion of all other considerations, the immediate source of the money used in the purchase or acquisition of the property in question. I am unable to accept that approach. Notwithstanding the difficulties to which the language of the provision gives rise, I am of opinion that s 116(2)(g) and (n) and subs (3) sufficiently reflect a legislative intention that a bankrupt, notwithstanding his bankruptcy, is to continue to have the benefit not only of any damages or compensation of the kind referred to in s 116(2)(g) recovered by him, but also of any property which can, as at the time when he becomes a bankrupt, properly be described as representing such damages or compensation. Those provisions are, therefore, to be construed accordingly. In the light of that evident legislative intention, I can see no basis for concluding that the protection is to extend only to the damages or compensation and to property initially purchased or acquired with the money recovered by way of damages or compensation: see Leach v Official Assignee [1975] 1 NZLR 83 at 87–88. In my opinion, s 116(3) requires that the totality of the circumstances be considered and the question asked whether the property, in truth, represents such damages or compensation. In the circumstances of a particular case, where properties have been bought and sold, it may well be difficult for a bankrupt to establish that property of which he is the beneficial owner as at the time when he becomes a bankrupt does, in truth, represent damages or compensation of the kind referred to in s 116(2)(g) which he recovered at some earlier time. That circumstance, however, provides no reason for reading the provisions in the limited way contended for by the applicants and as protecting only the money received by way of damages or compensation and the property first purchased therewith. The question is ultimately one of fact.[72]
[71](1989) 21 FCR 363 (‘Re Iskenderian’).
[72]Ibid 372. The approach of Neaves J was endorsed by the Full Federal Court in Turner v Official Trustee (1996) 71 FCR 418.
Judge’s reasons
Ms Jakimowicz submitted at trial that the cause of action in the proceeding had vested in the trustee in bankruptcy pursuant to s 58 of the Act. Mr Jacks submitted that the claim ‘in truth’ represented the damages or compensation he received for his back injury and that, as a result, he had standing to bring the claim because it fell within ss 116(2)(n) and (3). He relied on the authority of Re Iskenderian. So far as relevant to this point,[73] the trial judge identified that the sole issue for determination was whether s 116(2) of the Act altered the position that Mr Jacks’ claim under the Settlement Agreement and/or the Trust Deed was property which was divisible amongst his creditors.[74]
[73]The trial judge also dealt with a number of other claims and defences that are not relevant to this application for leave to appeal.
[74]Reasons [170]–[171].
She accepted that the $170,000 used by Mr Jacks to purchase the Preston property was protected money and identified as the real issue whether it lost its character by reason of its ‘transformation’ into rights under the Trust Deed.[75]
[75]Ibid [172]–[173].
The judge considered the authorities and concluded that the crucial question was whether the property (here the rights under the Trust Deed) ‘in truth represents such damages or compensation’ (that is, the compensation paid to Mr Jacks for his back injury part of which he used to purchase the Preston property).[76] The judge held that the moneys used by Mr Jacks to acquire his rights under the Trust Deed (those rights replacing his rights in relation to the Preston property) were protected money for the purposes of ss 116(2)(n) and (3) because they were acquired with funds sourced from the compensation payout.[77]
[76]Ibid [180].
[77]Ibid [182].
Based on the reasoning in Re Iskenderian, her Honour rejected the applicant’s submission that ‘particular property’ is limited to property acquired with the compensation moneys. The judge took the view that the principles espoused in Re Iskenderian applied regardless of whether the subsequent property acquired was real property or, as in this case, rights under the Trust Deed.[78] She reasoned that cl 2 of the Trust Deed effectively imposed an obligation to ensure that ultimately the mortgage would disappear, with the substantive intention being that Mr Jacks would receive ‘the full benefit of his equitable interest (represented by his compensation payout) unencumbered by the mortgage as he purchased it in the first place.’[79] As such, her Honour held that Mr Jacks’ rights to sue for breach of the Trust Deed ‘in truth’ represented his protected monies.[80]
[78]Ibid [183].
[79]Ibid [184].
[80]Ibid [185].
The judge distinguished a number of cases relied upon by Ms Jakimowicz including Foyster v Prentice.[81]In that case, a bankrupt had paid money to his petitioning creditor in an effort to stave off the bankruptcy. Part of the money that was paid was protected by s 116(2)(g) being settlement monies received for personal injuries he had sustained. The Court held that the money that was paid did not, in truth, represent damages or compensation but rather represented an amalgam of funds used by the bankrupt as an attempt to purchase a compromise which resulted in the monies losing their character as compensation.[82] In the present matter, the judge noted that what was involved in Foyster v Prentice was an ‘amalgam of funds used to purchase a compromise‘ whereas in Mr Jacks’ case, there was just one source of funds — his compensation payout.[83] In addition, her Honour observed that here there were trust obligations involved which took it outside a simple purchase of a compromise case and highlighted that the Jakimowiczs’ obligations ‘are intended to ensure that [Mr Jacks] enjoy his full equitable interest (represented by his payout) unaffected by the encumbrance.’[84]
[81][2008] FMCA 757.
[82]Ibid [73].
[83]Reasons [187]–[189].
[84]Ibid [190].
The judge also distinguished Metsikas v Quirk.[85]There, Ms Metsikas had been defrauded of more than $400,000. Of that amount, $50,000 was paid to the fraudster’s parents. Ms Metsikas was bankrupt. She commenced proceedings against the parents seeking among other things an order extending the operation of a caveat claiming an interest in property owned by the parents and declarations and tracing remedies in respect of the $50,000. The Court considered her claim to be hopeless and doomed to failure because she lacked standing. The Court observed that her claim against the parents did not fall within s 116(2)(g) because it was not one for personal injury or wrong but was rather a claim for wrong to her property.[86] She had been defrauded of money and had sued to recover money.[87] In the present case, the judge contrasted that with Mr Jacks’ case ‘where there is clearly an initial receipt of damages for personal injury; the question being whether its character has been lost.’[88]
[85][2010] NSWSC 756.
[86]Ibid [11].
[87]Ibid.
[88]Reasons [197]-[198].
In conclusion, her Honour held that Mr Jacks’ rights under the Trust Deed, in truth, represents his compensation payout such that it was property that was not divisible amongst his creditors.[89] He therefore had standing to bring the claim. No defence having been made out to the claim, the judge awarded Mr Jacks $270,771.42 plus interest and costs.
[89]Ibid [199].
Proposed grounds of appeal
There are three proposed grounds of appeal,[90] but ultimately they amount to one issue; that is whether the right to sue for breach of trust is a separate and distinct item of property that was not purchased or acquired with protected money. If the right to sue is not protected, then Mr Jacks did not have standing to bring the proceeding.
[90]Ground 1: The judge erred in failing to find that what was ‘purchased’ or ‘acquired’ with the compensation money (being ‘exempt money’) and therefore protected under s 116(3) of the Act was the Preston property and not the cause of action for breach of trust and/or breach of terms of settlement that accrued later, upon the breach.
Ground 2: The judge ought to have found that the protection afforded by s 116 only operated to protect ‘particular property’ if it had been purchased or acquired with the whole or substantially the whole of money which is protected money and did not extend to choses in action arising from the loss of such property.
Ground 3: The judge erred in finding that the protection afforded under s 116(3) of the Act extended to the transformation of rights which arose under the declaration of trust following the sale of the Preston property by Suncorp-Metway.
Is the claim for breach of trust property that was acquired with protected money?
Ms Jakimowicz submitted that Mr Jacks’ claim for equitable compensation for breach of trust is not caught by s 116(2)(n) because that particular property was not purchased or acquired with protected money as is required by s 116(3) if the property is to be exempted from the scope of divisible property in s 116(1). Consequently she submits that the chose in action vested in Mr Jacks’ trustee in bankruptcy.
Ms Jakimowicz does not dispute that Mr Jacks’ interests under the Settlement Agreement and Trust Deed were in substitution for his equitable interest as purchaser of the Preston property and were acquired with protected money. As will be recalled, under the Trust Deed, the Jakimowiczs held their interest in the Preston property on trust for Mr Jacks and they were obliged to make mortgage repayments and ultimately to discharge the Suncorp-Metway mortgage. Ms Jakimowicz submitted that Mr Jacks had therefore used his compensation payment to acquire two items of property. First, an equitable interest in the Preston property and secondly, a promise to discharge the mortgage over the Preston property. She submitted that the right to sue for damages for breach of the promise is a separate item of property and is not just incidental to the promise to discharge. Her argument proceeded on the basis that that separate item of property came into being in February 2009 when the Jakimowiczs breached their obligation and it was not purchased or acquired with any money and certainly not with protected money. So she says, upon breach, the right to a discharge of the mortgage was extinguished with the right to sue for breach being new property.
This argument is not persuasive. We do not accept Ms Jakimowicz’s characterisation of what Mr Jacks acquired when he used his personal injuries compensation payment. On proper analysis, what he acquired initially was his equitable interest in the Preston property as purchaser. That brought with it associated or incidental rights to require the Jakimowiczs to transfer the legal interest in the Preston property to him free of any encumbrance or, if they did not do so, to seek specific performance or to obtain damages. All of that was non-divisible property because it was purchased with protected money. The Settlement Agreement and Trust Deed then had the effect of substituting for that initial non-divisible property Mr Jacks’ equitable interest in the Preston property as beneficiary, the right to performance of the Jakimowiczs’ duties as trustees (including the obligation here to protect the property by honouring their promise to pay and ultimately discharge the mortgage) and the right to equitable compensation should they breach any of those duties. In substance, all of that property was acquired with protected money because absent the initial compensation payment, Mr Jacks would not have acquired any interest or associated rights in the Preston property as he had no other available funds. In this regard, it seems to us that the words ‘used in the acquisition’ where they appear in s 116(3) are to be interpreted broadly. They lead one to look beyond what the protected money may initially have been used for to what has ultimately been acquired with that money.
Looking at the statutory text,[91] the definition of ‘property’ is broad enough to include the equitable interest in the property and the associated rights to performance of the trustees’ duties and, in default, the right to equitable compensation. The definition provides for the inclusion of interests ‘arising out of or incident to’ real or personal property. That is what the rights are here — they arise out of and are incidental to the equitable interest in the Preston property. It is artificial to divorce the rights from the equitable interest because the rights do not have any independent existence. Rather, they only have any existence, purpose and meaning in the context of Mr Jacks’ equitable interest in the property. If he did not have that, the Jakimowiczs would have no duties as trustees and they could not be liable to pay compensation. It is even more artificial to attempt to sever the right to performance of the trustees’ duties (including in this case the obligation to make mortgage repayments and to discharge it to protect the equitable interest in the property) from the right to compensation for breach. The latter right cannot exist in the absence of the former. It is the corollary of the trustees’ duties.
[91]Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27, 46 [47] (Hayne, Heydon, Crennan and Kiefel JJ); Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503, 519 [39] (French CJ, Hayne, Crennan, Bell and Gageler JJ).
Viewed in this way, it is wrong to say, as the applicant does, that the right to compensation only arose in February 2009 and thus could not have been acquired with protected money. For the right was always there although it could not be (and indeed would not need to have been) enforced unless and until there was a breach. That is, the right was contingent upon breach in the future but it was always there as an incident of Mr Jacks’ equitable interest in the Preston property which was itself protected property.
We do not accept Ms Jakimowicz’s submission that the use of the word ‘particular’ in s 116(3) tends against the adoption of a construction that includes the right to compensation for breach of duty as incidental property. She contended that this construction is not to be preferred because the section directs attention to an item of property with the focus of the enquiry being on whether the particular item of property vests or not. True it is that the section is focused on ‘particular property.’ But that does not mean that a narrow meaning must be given to the phrase or the word ‘property.’ Our view is that the word ‘particular’ as used in s 116(3) refers to specific property acquired using protected money, as compared to the bankrupt’s property generally. Understood in this way, the word ‘particular’ does not narrow the scope of the word ‘property’. This interpretation is consistent with the ordinary meaning of the word ‘particular’.[92] The phrase ‘particular property’ is also used elsewhere in the Act[93] in a manner that does not suggest an intention to distinguish between primary property and rights associated with that primary property. For example, s 129AA(5) states (emphasis added):
There is no limit on the number of extension notices that the trustee may give (either generally or in relation to particular property).
In that provision, ‘particular property’ appears to be used in contrast to property ‘generally’.
[92]The first definition of ‘particular’ in the Macquarie Dictionary (online edition) is ‘relating to some one person, thing … etc, rather than to others or all; special, not general’.
[93]See ss 129AA(4)–(5), 139D(1)(c), 139DA(a), 139EA(a), 189AB(5)–(6).
As we have said above, the word ‘property’ as defined in the Act is broad enough to include not only the primary property (here the equitable interest in the Preston property) but also the rights associated with it.
We also reject Ms Jakimowicz’s submission that a construction of s 116(3) which includes incidental property would involve the use of more than one meaning for the word ‘property’ within the same provision. Ms Jakimowicz contends that this is so because in essence part of the definition of ‘property’ would be adopted in relation to the second use of ‘property’ where a narrower meaning (which would also be encompassed in the definition) would be adopted for the first appearing ‘property’ in that section. So she says, the use of the word ‘particular’ and the use of the definite article before the word ‘property’ demonstrate that it is the same property and the same property should convey the same meaning to avoid confusion in construing the statute. We accept that the property to which reference is made at the end of the section is to the ‘particular property.’ However, for the reasons that we have given, the particular property in this case includes the chose in action for compensation for breach of duties. As such, only one meaning is given to the word ‘property’ as it appears in s 116(3).
The conclusion that we have reached is consistent with the effect of s 58(1) of the Act. As noted above, that section provides that ‘property of a bankrupt’ vests in the trustee in bankruptcy. ‘Property of a bankrupt’ is defined as divisible property and rights and powers in relation to that property. That is, divisible property and its incidental rights are bound up together. It would make no sense then if rights in relation to non-divisible property were to be cast adrift to vest in the trustee in bankruptcy. Yet that would be the effect if Ms Jakimowicz’s submissions were accepted. In addition, if one acceded to those submissions, the effect would be that by her breach Ms Jakimowicz was able to deprive Mr Jacks not only of his equitable interest in the Preston property (which was protected) but also of the rights that flowed from that breach such that, without any default on his part, he would be left empty handed. The result would be that although the creditors of Mr Jacks would not be entitled to his interest in the property (because it is protected) they would nevertheless be entitled to the fruits of the claim when he has been deprived of his interest. There is no rational nor well founded reason why that should be so.
Our conclusion is also consistent with the reasoning in Re Iskenderian, an authority of long standing and application. Taking account of the whole of the circumstances, as the judge concluded, the claim by Mr Jacks in truth represents his personal injury compensation payment. Whilst Ms Jakimowicz is focused on what happened at the time that the right for breach of duty was enforced and says that at that time no money was paid, as Neaves J observed in Re Iskenderian, it is necessary to look beyond the initial purchase (or in this case, acquisition) made with the compensation moneys.
Metsikas v Quirk[94] and Foyster v Prentice[95] are distinguishable. Metsikas v Quirk did not concern whether property had been purchased or acquired with protected money under s 116(3). Rather, that case concerned whether the claim in question fell within s 116(2)(g) as a right to recover damages or compensation for personal injury or wrong done to the bankrupt. On the facts, the Court held that it did not. The Court in Foyster v Prentice determined on the facts that the mixing of compensation moneys with other moneys meant that they lost their character as compensation. As we have noted, there is no question of any funds other than his personal injury compensation having been used by Mr Jacks. The trial judge was right to distinguish these cases.
[94][2010] NSWSC 756.
[95][2008] FMCA 757.
On the hearing of the application for leave to appeal, Ms Jakimowicz also sought to rely upon Di Cioccio v Official Trustee in Bankruptcy.[96]It does not assist her and is distinguishable. The case concerned whether income used by the bankrupt to purchase shares resulted in the shares being protected. On the facts there, the income did not fall within any of the exemptions in s 116(2). Consequently, as the income was not protected, the shares purchased with it were not protected either. That is in contrast to the present case where the money used to purchase the asset (the personal injury compensation) was protected under s 116(2)(g).
[96][2015] FCAFC 30.
It follows that Mr Jacks had standing to bring his claim against Ms Jakimowicz.
Conclusion
The proposed grounds of appeal seek to challenge established authority of long standing. Ms Jakimowicz attempts to distinguish in an artificial way Mr Jacks’ chose in action from the property that gave rise to it, of which it is an incident and which was acquired entirely with his personal injuries compensation payment which was not available for his creditors. The proposed grounds of appeal have no real prospect of success and the judge’s decision is not attended by doubt. Mr Jacks had standing to bring the claim and he is entitled to the amount awarded to him by the trial judge. It follows that we would refuse leave to appeal.
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