Jarrott and Jarrott

[2009] FamCA 939

FAMILY COURT OF AUSTRALIA

JARROTT & JARROTT [2009] FamCA 939

FAMILY LAW – PROPERTY – Interim

APPLICANT: Mr Jarrott

RESPONDENT: Ms Jarrott

FILE NUMBER: SYC 1134 of 2009

DATE DELIVERED: 1 September 2009

PLACE DELIVERED: Sydney

PLACE HEARD: Sydney

JUDGMENT OF: Cohen J

HEARING DATE: 29 July 2009

REPRESENTATION

COUNSEL FOR THE APPLICANT: Mr Lloyd for husband

SOLICITOR FOR THE APPLICANT: Mcdonell Milne Toltz Family Lawyers

COUNSEL FOR THE RESPONDENT: Ms Winfield for wife

SOLICITOR FOR THE RESPONDENT: Tonkin Drysdale Partners

Orders

1. That the husband’s application for interim sale of the former matrimonial home situated at and known as U property and orders consequent upon sale is hereby dismissed.

2. Costs are reserved.

IT IS NOTED that publication of this judgment under the pseudonym Jarrott & Jarrott is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth)

FAMILY COURT OF AUSTRALIA AT SYDNEY

FILE NUMBER:

MR JARROTT

Applicant

And

MS JARROTT

Respondent

REASONS FOR JUDGMENT

1. During the hearing these proceedings evolved to be an application of the husband for the sale of the former matrimonial home on the following conditions:

   1.That the husband have the conduct of the sale which is to be by private treaty.

   2.That in the absence within a reasonable time of agreement on the solicitor to act in the sale, the solicitor be nominated by the President of the Law Society of New South Wales.

   3.That in the absence within a reasonable time of agreement on the real estate agent to have the conduct of the sale and nominate the sale price the real estate agent to do so be nominated by the President of the Real Estate Institute of New South Wales.

   4.That the wife vacate the premises on completion of the sale.

   5.That the wife co-operate with the husband and the real estate agent and do all things necessary or appropriate to assist in effecting a sale.

   6.That the entire net proceeds of sale be paid to the wife and that the nature of that payment be referred to the trial judge to be determined at the trial.

   7.That within one week of completion of the sale the wife inform the husband in writing of her residential address.

2. The wife opposes the sale, wishes to continue living in the home and seeks an order to transfer it to her as part of the final property settlement.  She also claims that it will be disruptive to the parties’ children if she has to move now or at any time.  She says the husband’s obligations are not as great as he has said and that he can rearrange his affairs so that he can meet them and has not proven the sale is necessary.

3. The husband’s claimed reason for wishing to sell the home is that the interest on the housing loans and the costs of maintaining the home result in his monthly outgoings being about $11,000.00 more than his income.  He says that, so far, the difference has come from his business by way of increases in his loan account debt but that the business can no longer bear this.  In answer to the wife’s claim to wish to retain the home, he says that until the day of hearing the wife’s formal stance was that she wished to live at B in the central coast area, to be near her father and was seeking a cash settlement of $2.0m. In the circumstances that the former matrimonial home is wholly owned by the husband, this implied that the husband could deal with the home as he pleased and that it would be sold as he did not wish to retain it.

4. The wife’s response is that this stand was only taken because she did not know enough of the husband’s true financial circumstances and believed that the home would have to be sold to meet her claim.  Now she believes the husband’s business is of such value that the unencumbered home could be transferred to her.  She is in no position to obtain a loan which would allow her to retain it with any substantial encumbrance.

5. The wife is aged 41 years and is not in paid employment.  The husband is almost two years older and operates a food distribution business and other related businesses. They commenced to live together in 1999 but did not marry until 2005. There are two children, one aged about 5½ years and the other about 2½ years.  The older child commenced school this year and is in kindergarten.  The younger child attends preschool.

6. The food distribution business is principally located in inner Sydney. The husband lives in Sydney for most of each week but has rented a home so he can have an appropriate place near the former matrimonial home when he has the children on contact two days and nights each week.  His home is at G, which is approximately 7 kms from U where the former matrimonial home is situated.  Both are inland from the Central Coast and about equidistant between Sydney and Newcastle, being roughly 80 kms from each. 

7. Originally the parties lived in the inner Sydney area but moved to U on 30 July 2008. They separated on 8 September 2008. The wife and children remained at U.  The husband lived in the Sydney area immediately after separation but within the last few months rented the home at G. The wife says, and there is no reason to dispute, that the children are settled where they live, the older also being settled at school.

8. The U property was purchased for $1.5 million in mid 2008 and is now valued at about $1.4 million.  There are two mortgages over it.  They total about $1.1 million. As the husband says, it is likely that between $350,000.00 and $300,000.00 net would be realised from a sale.

9. On 21 April 2009 the wife filed an Amended Response to the principal application of the husband.  The husband had sought to have the former matrimonial home sold.  The Amended Response sought a lump sum property settlement by way of payment by the husband to her of $2.0 million.  Her original Response had not dealt with property.

10. In her affidavit filed at the same time she said she wanted to live at B which is not far from Nelsons Bay or about 70 kms by road north of Newcastle.  She gave various reasons why she wanted to move there, some of them substantial.  She said to rent in that area would cost between $400.00 and $650.00 per week. 

11. However, it may be misleading for the husband to allege that the home should be sold because the wife wanted to sell it anyway until very recently, inferring that her motive for allegedly changing her mind is tactical to put pressure on the husband or otherwise disadvantage him in litigation.  Her affidavit puts her wish to move to B into its true context.  In paragraph 2. of it, she states “I have been hopeful that I might be able to remain living with the children in the former matrimonial home at [U] … I now appreciate that this will not be possible since there is a very large debt over the property and I will not be in a position to be able to service the mortgage”.  This was said on 20 April 2009.

12. The wife submits that now, as her knowledge of the financial situation has evolved, it is quite possible that the husband’s business is worth much more than she then thought and as he has failed to call evidence, even from his accountant who has a financial interest in the business, which might provide a realistic basis for assessing the value of the business and as the husband has the onus of satisfying the Court that it is reasonably necessary to sell the home, he has not established his case for financial distress or for sale. She says that the information which is now available and has come to her only recently justifies a consideration that the value of the business is such that it is a reasonable possibility that she might receive the former matrimonial home unencumbered under s 79 of the Family Law Act.

13. There is a fault in the wife’s claim that she wanted to keep the home and was only constrained to ask for a cash settlement because the husband and/or his business could not raise the cash to provide her with a clear title.  To do so would cost about $1.103 million at present.  This is the cumulative value of the husband’s bank debts secured over the home.  One can assume that earlier this year the situation was little different.  Yet the wife asked for $2 million in cash when she says she believed the business was worthless.  If she wished to keep the home yet get $2 million in all, she would need to have asked for it to be transferred to her clear of encumbrances, which would make up $1.4 million, and the balance of $600,000.00 in cash.  In any event, the husband would have to raise the same amount, that is, the money to pay out the $1.103 million overdraft, plus $600,000.00. It is not as though she could have believed the home was worth much more than $1.4 million because the economic situation since the property was purchased had already worsened.

14. The husband’s case is quite simple.  He says his income of $12,000.00 after tax per month is not enough to meet his expenses, which are about $17,230.00 per month, not including tax, and that he no longer can look to his business to make up the shortfall.  He asserts that, as the outgoings on the former matrimonial home are about $11,000.00 per month including mortgage payments, the sale of the home will overcome his financial difficulties in this respect. As he will not be able to continue the home mortgage payments of about $9,400.00 per month if the home is not sold, there will have to be a sale anyway and a mortgagee’s sale is to be avoided.  He has tabulated his costs of living.  In an abbreviated form, the situation he claims to be in is broadly:

    IncomeMonthly

    Net salary$7,000.00

    Fully franked dividends  $5,000.00

    $12,000.00

    Expenses

    Mortgage payments  $9,400.00

    U property – electricity, maintenance, rates etc,

    insurance$1,670.00

    Child support  $2,600.00

    Preschool – Fees  $430.00

    Other child expenses  $255.00

    Rent – husband  $1,650.00

    Husband’s other living expenses  $1,240.00

    $17,245.00

    Shortfall$5,245.00

15. He husband has ceased or is ceasing to meet the younger child’s preschool fees.  The wife asserts his rent has recently been reduced from $765.00 to $380.00 per week.  If this is the case, it would not alter the above because the table only allows for a rental cost of $380.00 per week.  Some of the expenses claimed could be said to be such that, in the circumstance of constraint being needed, they could be avoided.  They are minor expenses such as the relative luxuries of having a cleaner and Foxtel.  More significantly, nearly $1,000.00 per month is being spent on maintenance of the U property which does not appear to be out of necessity.  It would be preferable to cease those expenses rather than have to sell the home.  Thus, I am satisfied that the husband’s reasonable expenses do or will necessarily exceed his current net income by about $3,815.00 per month rather than $5,255.00.

16. The husband’s ability to afford his outgoings is not purely a manifestation of his income.  It is a manifestation of his overall financial situation.  This involves his income, his assets and his ability to rearrange his finances and the financial arrangements he currently has in place, as well as the net outgoings if one regards all his business and business entities and his own personal outgoings as one.

17. The husband has instituted a complex of individual entities through which he carries on business and holds property.  He has set out to expand his food distribution business into a franchising operation.  His financial situation is not simply as he says and is by no means clear to me.  He could have produced prima facie evidence of the overall position but, as the wife claims, has failed to do so.  I am not a forensic accountant, but if I were I would, on the evidence before me, have no realistic idea of the husband’s true financial circumstances.  He appears to have attempted to place an onus on the wife to show he can afford to keep the former matrimonial home rather than make an attempt to show by sufficient evidence of his own that, in his overall situation, he cannot afford to do so. He relies only on his income and outgoings to prove his case in circumstances where his income may well be arbitrarily set with his other entities retaining an overall net profit and/or making an overall capital accumulation.

18. He suggests the wife and the Court should know his financial circumstances because, on 9 February 2009, his solicitor sent to the wife what was referred to as a “background summary of the various interconnected entities”.  The solicitor also said that his firm also holds “financial records as set out in the enclosed index”.  These records relate to the background summary and list seven entities of the nine referred to in the index and purport to state the main assets and 2008 balance sheet asset values and 2008 pre-tax trading profit.  Nowhere for any of these entities is any goodwill value acknowledged. There is no information about two of the entities. 

19. The net profit of all seven entities is $324,739.00.  All of the entities except one have some shareholders who directly or indirectly can be identified on the evidence as being independent of the husband.  These are entities identified with Mr C, the husband’s accountant.  If Mr C’s share of the profits and losses listed is accounted for, the net profit of the balance of the group would be $287,854.00.  However, the husband’s sister is said to own 49 per cent of the one company in which Mr C has no interest.  It made a loss of $44,211.00, so $21,663.00 of that loss would not necessarily reduce the overall profitability of the husband’s interest in the group.  As I have already included the $44,211.00 loss in the profit of $287,854.00, it could be up to $21,663.00 more, that is, $309,517.00.

20. Of course, one would expect businesses which make a profit to have valuable goodwill or a sale value.  Overall, it is likely that the total value of the business interests of the husband based upon an overall profitability of his share of about $300,000.00 per annum before tax is significant. The stock, fixtures and fittings in the businesses, not including land, are also of significant value. The husband’s interest in these is about $499,406.00. None of these figures include what seems, from the evidence that the wife has put before the Court, to be the potential for capital gain or profit by sale of the franchises. 

21. The wife says that since 2001 the husband has been working toward franchising aspects of his business and the creation of an identifiable corporate persona for this purpose.  This has not been denied by the husband.  As early as 2002 he had a prospective purchaser for a master franchise for an area which would have left the husband’s business with some guaranteed wholesale sales and, no doubt, a profit share in the business purchased.  The husband decided not to sell at that time. Recently, he has been advertising the sale of a master franchise or franchises for $1.8 million plus stock.  This may be for Sydney or for New South Wales.  Both are referred to in one of the husband’s advertisements; the advertisement linking a shop in W, which in the Background Summary is said to have $200,684.00 in assets and $47,134.00 in before tax profits from trading, with the sale of the franchise.  One would expect the W shop to be the base for the master franchise. In October 2006 the husband was planning to sell the New South Wales master franchise for $2 million plus in 2010 and the franchise for three other states for $500,000.00 each in 2011.  There is no evidence from the husband about this aspect of his business.  One only knows the plans he had in 2006. 

22. In the circumstances, especially the advertisements for the sale of franchises, his failure to provide any realistic and complete evidence about the current situation is a deficit which leaves the Court quite dissatisfied with the extent of his disclosure about the need to sell the former matrimonial home.  This is particularly so because the figures provided do not include any profit or asset value of two companies which appear on the face of the Background Summary to be at the heart of the proposed franchises.  One holds the intellectual property to the manuals and agreements which ultimately would be used for the franchise arrangements, the other holds the trade marks and registered names which would, it seems to me, be used to the same end.  Franchise sales, proposed sales and expected forecasted sales would be bound to give these assets a value.  It is significant that in the Background Summary these are not said to have no value, they are said to have “no assigned value”.  In the provision for trading profit for 2008, the franchising company has not registered any, but it is said that it “does not yet trade”.  The inclusion of “yet” is very significant.  It is clear evidence of the intention to sell franchises in light of the advertisements and the husband’s 2006 plans.

23. Exhibit “A” in these proceedings is a bundle of financial statements.  It is far from complete and quite unenlightening on the real value and profitability of the husband’s overall business.  It discloses a 10^th entity not mentioned in either the Background Summary or the index.  The financial records of two of the other entities are not included.

24. In all the circumstances, I am not satisfied that the husband has established the hardship he claims or the need to sell the former matrimonial home.  I am not satisfied that the bank which holds the home as security will force a sale.  In that event, it is irrelevant that the wife may be asking for less than she previously sought despite her claims to believe the husband’s worth is greater than she previously believed.

25. The material supplied to the wife is quite insufficient to allow her to really appreciate the husband’s financial circumstances and she is entitled to keep her options about the property she seeks open until she has a better idea of his position.  To do that, the former matrimonial home needs to be maintained.  As no pressing need to sell it has been established, the home should be kept and I should refuse the husband’s application for sale of the home at U contained in his Amended Reply filed 12 June 2009, and dismiss so much of the application as relates to sale. I should reserve costs.  I shall make orders accordingly.

I certify that the preceding twenty five (25) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Cohen.

Associate: 

Date:  2 October 2009