Klewer v Official Trustee in Bankruptcy
[2008] FMCA 274
•10 March 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| KLEWER & ANOR v OFFICIAL TRUSTEE IN BANKRUPTCY | [2008] FMCA 274 |
| BANKRUPTCY – Property – divisible property – whether money used to purchase property constituted protected money – whether property held in trust. |
| Bankruptcy Act 1966 (Cth), ss.58(1)(a), 116 Family Law Act 1975 (Cth), s.79 Conveyancing Act 1919 (NSW), s.23C |
| Walton v Klewer [2005] FMCA 878 |
| First Applicant: | LUCY P KLEWER |
| Second Applicant: | ROBERT KLEWER |
| Respondent: | OFFICIAL TRUSTEE IN BANKRUPTCY |
| File number: | SYG 2205 of 2007 |
| Judgment of: | Raphael FM |
| Hearing date: | 27 February 2008 |
| Date of last submission: | 27 February 2008 |
| Delivered at: | Sydney |
| Delivered on: | 10 March 2008 |
REPRESENTATION
| Applicant in person |
| Solicitors for the Respondent: | Harris Freidman Hyde Page |
ORDERS
Application dismissed.
Applicant to pay the First Respondent’s costs in respect of the proceedings, to be taxed if not agreed in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 2205 of 2007
| LUCY P KLEWER |
First Applicant
ROBERT KLEWER
Second Applicant
And
| OFFICIAL TRUSTEE IN BANKRUPTCY |
Respondent
REASONS FOR JUDGMENT
Introduction
These reasons relate to an application filed by Lucy Klewer, a bankrupt, and Robert Klewer, her son, on 16 July 2007, seeking orders:
“1. That the applicant’s residence at 30 Coachmans Close, Korora be declared non-divisible to the trustee (the respondent).
2. Any other order the court deems fit.”
Mrs Klewer was made bankrupt on 20 September 2005. At the time she was living at the Korora property. The property was registered in her name with the Land Titles Office. The trustee is now the registered proprietor of the property pursuant to its vesting under s.58(1)(a) of the Bankruptcy Act 1966 (Cth). Mrs Klewer remains living in the property with her son Robert. She is paying the mortgage to the Commonwealth Bank. Mrs Klewer is a divorced woman who has obtained the benefit of orders in the Family Court of Australia and the Federal Magistrates Court of Australia relating to family property. Robert Klewer, who is now in his twenties, has suffered since childhood from a serious brain abnormality. The life-threatening nature of this condition was ameliorated by treatment in the United States of America. The result of the treatment is that Robert suffers from functional disabilities which affect his relationship with other people and severely limit the prospects of his ever obtaining gainful employment. Mrs Klewer has other children, all of whom are adults. Mrs Klewer receives carer’s benefits in respect of Robert, and Robert receives benefits through Centrelink associated with his disability.
The grounds upon which Mrs Klewer claims that the Korora property is not divisible amongst her creditors are articulated in two, possibly contradictory, ways. First, she claims that the moneys used to purchase the Korora property constituted “protected money” within the definition of that term in s.116 of the Bankruptcy Act. Second, she claims that the property is held in trust for her son Robert. For the reasons given below, I am of the view that neither of these claims can be sustained.
Section 116
The relevant parts of s.116 of the Bankruptcy Act are set out below:
116 (1) Subject to this Act:
(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and
(b)-(g) …
is property divisible amongst the creditors of the bankrupt.”
(2) Subsection (1) does not extend to the following property:
(a) property held by the bankrupt in trust for another person;
(b)-(ca) …
(d) subject to sections 128B, 128C and 139ZU:
(i) policies of life assurance or endowment assurance in respect of the life of the bankrupt or the spouse of the bankrupt
(ii) policies of life assurance;
(iii) the proceeds of such policies received on or after the date of the bankruptcy;
(iv) the interest of the bankrupt in:
(A) a regulated superannuation fund (within
the meaning of the Superannuation Industry
(Supervision) Act 1993); or(B) an approved deposit fund (within the meaning of that
Act); or(C) an exempt public sector superannuation scheme (within the meaning of that Act);
(iva) a payment to the bankrupt under a payment split under Part VIIIB of the Family Law Act 1975 where:
(A) the eligible superannuation plan involved is a fund or scheme covered by subparagraph (iii); and
(B) the splittable payment involved is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993;
(v) the amount of money a bankrupt holds in an RSA;
(vi) a payment to a bankrupt from an RSA received on or after the date of the bankruptcy, if the payment is not a pension or annuity within the meaning of the Retirement Savings Accounts Act 1997 ;
(vii) a payment to the bankrupt under a payment split under Part VIIIB of the Family Law Act 1975 where:
(A) the eligible superannuation plan involved is an RSA; and
(B) the splittable payment involved is not a pension or annuity within the meaning of the Retirement Savings Accounts Act 1997;
(e)-(f) …
(g) any right of the bankrupt to recover damages or compensation:
(i) for personal injury or wrong done to the bankrupt, the spouse of the bankrupt or a member of the family of the bankrupt; or
(ii) in respect of the death of the spouse of the bankrupt or a member of the family of the bankrupt;
and any damages or compensation recovered by the bankrupt (whether before or after he or she became a bankrupt) in respect of such an injury or wrong or the death of such a person;
(h)-(mb) …
(n) property to which, by virtue of subsection (3), this paragraph applies;
(2A)-(2C) …
(2D)In subsections (3) and (4):
"exempt loan money" , in relation to a particular time, means so much of the principal sum of a loan to the bankrupt, or to the bankrupt and another person or other persons, as was repaid, before that time, out of exempt money.
"exempt money" means money of any of the following kinds:
(a) an amount to which subsection (1) does not extend because of subparagraph (2)(d)(ii) or (iv);
(b) damages or compensation of a kind referred to in paragraph (2)(g);
(c) amounts covered by paragraph (2)(k), (l), (m), (ma) or (mb).
"outlay" , in relation to property, in relation to a particular time, means all of the following:
(a) the money paid for the purchase, or used in the acquisition, of the property;
(b) the money paid before that time in respect of the extensions, alterations and improvements, if any, of the property constructed or made since that purchase or acquisition.
protected money , in relation to a particular time, means:
(a) exempt money; or
(b) exempt loan money in relation to that time.
(2E)-(2F) …
(3) 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.
(4) Where, as at the time when the trustee realises particular property to which paragraph (2)(n) does not apply, the outlay in relation to the property is in part protected money and in part other money, the trustee shall pay to the bankrupt so much of the proceeds of realising the property as can fairly be attributed to that protected money.”
The evidence
Mrs Klewer swore affidavits on 25 July 2007 and 18 February 2008. Robert Klewer swore an affidavit on 18 February 2008. Mrs Klewer also tendered a bundle of documents which became Exhibit 1 and which was referred to in the transcript by her as “Exhibit M”, and some other documents which became Exhibit 2. The Trustee relied on two affidavits of Robert John Cruickshanks dated 14 August 2007 and 25 February 2008. Mrs Klewer also gave oral evidence. From that evidence I have compiled the following history which I do not believe is controversial, although the legal effect of it is the essential matter in dispute.
The first matrimonial home of Mr and Mrs Klewer was in Ringtail Place, Boambee Gardens. On 3 June 1998, Justice Chisholm of the Family Court of Australia made orders pursuant to s.79 of the Family Law Act 1975 (Cth) requiring the husband to transfer the Boambee Gardens property to Mrs Klewer free from encumbrances. Shortly thereafter his Honour made some further orders requiring the husband to make an application to the Insurance and Superannuation Commission for release of funds on compassionate grounds sufficient to discharge the mortgage over the Boambee property. That application was made, the funds were released and the Boambee property was transferred to Mrs Klewer on 26 June 1999. These orders were not ‘splitting orders’, as at that time no such orders existed.
By the time Mrs Klewer received the transfer of the Boambee Gardens property, she was already looking out for a larger property to purchase which would be more suitable for the care of Robert. She found a parcel of land, which later became known as 30 Coachmans Close Korora, that was being sold on a land and house package basis by a company known as Malcoy Pty Ltd trading as Hibbard Homes. Mrs Klewer entered into an agreement to purchase the land for $90,000.00 and for the building of the house at the cost of approximately $171,000.00. In order to fund the purchase of the Korora house and land, Mrs Klewer entered into mortgages with Poinciania Housing Co-operative Society Ltd to secure $150,000.00. The mortgage covered both the Boambee Gardens and the Korora property, which had been transferred into Mrs Klewer’s name on 28 July 1999. At that time the house had not been built. On 26 June 2000 the mortgage in favour of the housing society was discharged with regard to the Boambee Gardens property, and that property became the subject of a mortgage for the same amount, $150,000.00, to the Commonwealth Bank of Australia (“CBA”). On the same day the mortgage in favour of the housing society in regard to the Korora property was discharged, and the property became the subject of a mortgage to the CBA to secure $231,000.00.
The house on the Korora land was built, and Mrs Klewer moved in. The builder was paid. In a letter of 11 April 2000, contained in Exhibit 1, the builders set out the cost of the house and the land plus some variations and details of the funding used to effect payment. That document indicates that apart from bank funds two monetary payments were made: the first of $50,000.00 described as “client funds (Lucy Klewer)” and the second “solicitor payments”. The solicitor payments are said to be $44,202.00. There is produced in Exhibit 1 a letter to Mrs Klewer from Stacks, the law firm, addressed to Hibbard Homes, indicating that Mrs Klewer recently settled a personal injury claim for $50,000.00 plus costs:
“We confirm that the first $32,000.00 of the settlement moneys will be available to Mrs Klewer in the very near future … We would expect the balance payable to Ms Klewer to be in the vicinity of $13,000.00 - $18,000.00. The exact amount will be dependent on negotiations with the defendant. The total amount payable clear to Ms Klewer should therefore be in the vicinity of $45,000.00 - $50,000.00.”
Mrs Klewer says that the sum of $50,000.00 referred to in the Hibbard Homes letter of 11 April 2000 was the personal injury payment. On the other hand, the figure could be $44,202.00. Whilst this may be important at a later time if Mrs Klewer makes a claim under s.116(4), it is not relevant for the purposes of this application.
Mrs Klewer arranged for a number of improvements to be made to the Korora property. Invoices for some of these improvements are included in Exhibit 1. There is a spa ordered on 3 January 2003 in the sum of $11,595.00. There is some landscaping which also appears to have been paid for in 2003 in the sum of $25,900.00 and other work including a quote for an extension in the sum of $32,706.00 in 2003. To the extent that this work was carried out in 2003 it seems to have been paid for by the sale of the old matrimonial home at Boambee Gardens in the sum of $146,000.00 which was completed on 28 November 2002.
On 11 October 2004 the orders made by Justice Chisholm on 4 June 1998 pursuant to s.79 of the Family Law Act were varied pursuant to s.79A(1)(b) by including a minute of consent orders agreed by the parties. The relevant orders for the purposes of these proceedings are as follows:
“2. That in accordance with s 90MT(1)(b) of the Family Law Act 1975, whenever a splittable payment within the meaning of section 90 ME of the Act becomes payable to or on behalf of Thomas Klewer from his interest in the Military Superannuation and Benefits Scheme, the wife, Lucy Klewer is entitled to be paid by the trustee, that being, Military Superannuation and Board of Trustees No 1, Administered by ComSuper, 75% of the splittable payment and there shall be a corresponding reduction in the amount the member, Thomas Klewer would be entitled to receive but for those orders.
3. That order 4 of the Family Court made on June 4 1998 be varied by making subject to a splitting order under section 90 MT of the Family Law Act.
4. That the wife obtains a separate interest in the Military Superannuation and Benefits Scheme in accordance with the Superannuation Industry (Supervision) regulation 1994 (sis) until the wife reaches minimum preservation age.”
Mrs Klewer tells the court that she has had moneys released from those superannuation funds which she has used either to pay the mortgage on the Korora property or to effect improvements. She also said that she utilised the proceeds of a workers compensation commutation in the sum of $20,000.00 for the same purposes and the sum of $6,000.00 which she received as part of a settlement of a District Court action in which her ankle was hurt by a dog. Finally she says that she used the sum of $7,410.00 plus $654.00 interest in the same way, but told the court that this was damages from a property damage claim.
The amount outstanding currently to the CBA under the mortgage of the Korora property is about $211,000.00.
Mrs Klewer’s evidence in relation to the trust in favour of her son is that shortly after the Korora property was purchased, she told all her children that she proposed to leave the property to her son Robert and that they would not get any benefit from it. She said this was because of her son’s disabilities and the fact that after she had died there would be nobody who would look after him as she was doing. She told her eldest son that he would be the executor of the estate and that the estate would be left to Robert. Although she refers to these statements as “a living will”, she maintains that it was her intention to declare a trust over the property immediately and not upon death. There is no written evidence of the declaration of the trust. There was no admissible evidence of any of the conversations referred to other than from Mrs Klewer.
In her statement of affairs, in response to question 19, Mrs Klewer states that she is buying a property at 30 Coachmans Close, Korora. Later in the same document in response to the question: “Do you own or are you buying any land or buildings in Australia or overseas?” she says “Yes”, and in response to the question: “Are there any other owners?” she says “No”. In the letter dated 6 October 2005 written by Mrs Klewer to Mr Paul Fordyce of PMF Legal, under the heading “Re: Whether my residential property is divisible under s.116 of the Bankruptcy Act 1966”, she makes no mention of a trust, but refers only to payments made out of what she claims to be non-divisible funds. The letter indicates a sophisticated knowledge of the workings and effect of s.116 of the Bankruptcy Act and also the statement: “I know the difference between the meaning of ‘purchase’ and ‘acquisition’”. In another letter dated 11 October 2005 addressed to Mr Cruickshank as the Deputy Official Receiver she debates a distinction between her situation and the Matheson case, and again makes a reference to s.116 of the Bankruptcy Act, but makes no reference whatsoever to the trust. Finally, I note that in his decision in Walton v Klewer [2005] FMCA 878 on the making of the sequestration order in this case at [21] Federal Magistrate Driver notes:
“21. While formally present Ms Klewer’s written submissions on the first two grounds of opposition to the creditor’s petition, Mr Durston restricted his oral submissions to the question of solvency. Ms Klewer assets that she is a solvent but recalcitrant debtor. Mr Durston submits that the unchallenged evidence presented by Ms Klewer shows that she owns a house and land in which she has an equity of approximately $400,000. He further notes that at most, Ms Klewer’s debts could not exceed $100,00 and that Ms Klewer is taking steps to refinance the property to provide funds sufficient to pay her debts if Ms Klewer was willing to pay them. Ms Klewer refuses to pay Mr Walton. Instead, she plans to purchase another property and rent out her existing home, in order to increase her income. Ms Klewer also has a 75 per cent interest in a military superannuation fund with a value of over $100,000, as a result of a Family Court order. Mr Durston submits that I should not make a sequestration order against a solvent but recalcitrant debtor.
22. Mr Durston finally submits that I should take into account that Ms Klewer has a disabled child who would be disadvantaged by the loss of his home, which would almost certainly result from the making of a sequestration order. He submits that Ms Klewer is taking steps for the orderly disposition of her debts and that there is no policy reason why a sequestration order should be made.”
There is no mention here of a trust.
Discussion
The Trust
The Korora property was not conveyed to Mrs Klewer as trustee for her son Robert Klewer. It was conveyed to her as the legal and beneficial owner. No evidence has been provided of any existing trust to the assets of which the Korora property could have been added. The evidence is that at some time after the purchase of the property Mrs Klewer declared a trust to her children. Section 23C of the Conveyancing Act 1919 (NSW) states:
“(1) Subject to the provisions of this Act with respect to the creation of interests in land by parol:
(a) no interest in land can be created or disposed of except by writing signed by the person creating or conveying the same, or by the person’s agent thereunto lawfully authorised in writing, or by will, or by operation of law,
(b) a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by the person’s will,
(c) a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same or by the person’s will, or by the person’s agent thereunto lawfully authorised in writing.
(2) This section does not affect the creation or operation of resulting, implied, or constructive trusts.”
There is no suggestion from Mrs Klewer that in regard to the whole of the land there is a resulting, implied or constructive trust in favour of Robert. Mrs Klewer admits that there is no instrument in writing although she stated that the trust was declared in her will which she lost on her computer. Her statement in this regard and her evidence relating to what she told her children leads me to the conclusion that Mrs Klewer did at no time intend to create an existing trust for the property, only that she intended to leave the property to her son Robert through a trust, to be administered by one of her other children. The declaration of a trust by will does not take effect until the will takes effect. I am satisfied that there is no enforceable trust in favour of Robert Klewer.
The protected money claims
It will be seen that the scheme of s.116 is to exclude certain moneys from being divisible to creditors. Mrs Klewer claims that she has an interest in a regulated superannuation fund under a payment split under Part VIIIB of the Family Law Act (s.116(2)(d)(iva) or alternatively s.116(2)(d)(vii)). The first point to be made is that the money which was used by Mr Klewer to repay the mortgage on the Boambee Gardens property was not money subject to a payment split, because at the time the money was paid, payment splits were not part of the law of Australia. But in any event, it is clear that s.116(2)(d) relates to the original payments and not to the asset which the payment is used to purchase, save as under sub-ss.116(3) or (4). These subsections are the ones by which an indirectly acquired asset can be held to be non-divisible. The difficulty which Mrs Klewer has in utilising sub-s.116(3) is that she must satisfy the court that the whole or substantially the whole of the money paid for a purchase is protected money, so that sub-para.116(2)(n) shall apply. “Protected money” is defined as exempt money. That in turn is described as an amount to which sub-s.(1) does not extend because of sub-paras.(2)(d)(ii) or (iv). Sub-para (2)(d)(ii) is the proceeds of a life assurance policy, which is not relevant in this case, and sub-para.(2)(d)(iv) is a payment to the bankrupt from a superannuation fund received on or after the date of bankruptcy. The money used to pay off the mortgage of the Boambee Gardens property was neither of those.
The money used to buy the Korora property was raised on a mortgage first from the Housing Association and then from the CBA, although either $44,200.00 or $50,000.00 of that money came from money that would not be divisible by virtue of s.116(2)(g) and is therefore capable of being exempt money under s.116(2D)(b). This would, prima facie, and subject to proof, give Mrs Klewer a right to make a claim pursuant to s.116(4). This finding would apply to the workers compensation proceeds and the other settlement moneys to which I have referred earlier in these reasons, other than the settlement money paid before the property damage claim.
When the Boambee Gardens property was sold, Mrs Klewer says most of the money went into paying the mortgage or making improvements in the Korora property. But the proceeds of sale of the Boambee Gardens property is not exempt money. For the avoidance of doubt, I would make it clear that my finding in relation to the s.116(2)(g) moneys is that if Mrs Klewer can satisfy the trustee that those moneys were used either in the original purchase of the property or in paying back some of the mortgage loan (in which case they would become exempt loan moneys) or in affecting improvements of the property, then it would appear she has the right to make a claim under s.116(4) but because of the amounts involved I am unable to find that they constitute substantially the whole of the moneys paid for the purchase so that s.116(3) would not apply.
In the light of these findings the application of Mrs Klewer must be dismissed. Mrs Klewer must pay the costs of the trustee in respect of the proceedings, to be taxed if not agreed in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006.
I certify that the preceding nineteen (19) paragraphs are a true copy of the reasons for judgment of Raphael FM
Associate:
Date: 10 March 2008
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