Loebenstein v Mitchell
[2008] FMCA 1711
•23 December 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| LOEBENSTEIN v MITCHELL & ANOR | [2008] FMCA 1711 |
| BANKRUPTCY – Transfer of property – section 120 and 121 of the Bankruptcy Act 1966 – application of trustee in bankruptcy to succeed in each instance. |
| Bankruptcy Act 1966 Federal Magistrates Court (Bankruptcy) Rules 2006 |
In the matter of the Bankrupt Estate of Dimitrios Katelis and Lemonia Katelis:
| Applicant: | JOSEPH LOEBENSTEIN |
| Respondent: | GEOFFREY MITCHELL & ANOR |
| File Number: | MLG 416 of 2008 |
| Judgment of: | Hartnett FM |
| Hearing date: | 28 August 2008 |
| Delivered at: | Melbourne |
| Delivered on: | 23 December 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr S. Tatarka |
| Solicitors for the Applicant: | Rudstein Kron Lawyers |
| Counsel for the Respondents: | Ms K.J. Knights |
| Solicitors for the Respondents: | Coleman Lawyers |
ORDERS
The court declares that the transfer by Adalia Pty Ltd as trustee for the bankrupts Dimitrios Katelis and Lemonia Katelis, of their interest in the property situate at and known as 39 Murray Road Ormond being the property described in Certificate of Title Volume 510 Folio 862 to the first respondent on 14 February 2006 is void, as against the applicant, pursuant to the provisions of section 120 and section 121 of the Bankruptcy Act 1966 (Commonwealth).
The first respondent do all acts and things necessary to transfer the said property to the applicant.
In the event that the first respondent refuses or neglects to comply with paragraph 2 of this order:
(a)a registrar of this court be appointed to execute all deeds and documents in the name of the first respondent and do all acts and things necessary to give validity and operation to the said order and;
(b)the first respondent in default is ordered to pay any and all foreseeable damages to the applicant caused by his default and;
(c)the first respondent in default is ordered to pay all reasonable solicitor-client costs incurred by the applicant for the purpose of enforcing this order.
The first respondent pay the applicant's costs of this application as agreed and paid in agreement or taxed in accordance with Part 13 of the Federal Magistrates Court (Bankruptcy) Rules 2006.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 416 of 2008
In the matter of the Bankrupt Estate of Dimitrios Katelis and Lemonia Katelis:
BETWEEN
| JOSEPH LOEBENSTEIN |
Applicant
And
| GEOFFREY MITCHELL |
First Respondent
| GEORGE KATELIS |
Second Respondent
REASONS FOR JUDGMENT
Proceedings were commenced on 10 April 2008. On 4 August 2008 the applicant amended his application. The application is pursuant to the provisions of the Bankruptcy Act (Commonwealth) 1966 to set aside a transfer of land. The amended application effectively added Mr George Katelis as a second-named respondent, the applicant discovering after the institution of proceedings that there had been a second but earlier in time claim of a transfer of the land. That land is property situate at 39 Murray Road Ormond in the State of Victoria (“the real property”) which was for almost 30 years the family home of George Katelis's parents. His parents are the bankrupts.
In the 1990s, the Katelis family had financial difficulties resulting in a mortgagee's sale of their family home in Ormond. The purchaser at sale was a company known as Adalia Pty Ltd which was a company effectively owned by a Mr and Mrs Matsakas. This family bought the property to assist the Katelis family. An arrangement was entered into between the families, such that the Katelises met the ongoing mortgage and other expenses arising from the company purchase of their former family home, whilst the Matsakases were the effective owners of the property. The families ended up in a dispute over the property with the Katelises claiming that the company or the Matsakases held the property on trust for them. Thus they were entitled to a transfer of it back to them. That dispute was determined by Nettle J in the Supreme Court of Victoria on 10 December 2002 in proceeding number 7121 of 1998.
Nettle J declared that Adalia Pty Ltd held 39 Murray Road Ormond on trust for Mr Dimitrios and Mrs Lemonia Katelis (George Katelis's parents). Nettle J ordered that conditional upon certain payments being made – which were made – the Katelises became beneficially entitled to the property.
The Katelises discharged their obligations pursuant to Nettle J's order on 14 March 2003 and on doing so became directors of Adalia Pty Ltd but not shareholders, Mr Matsakas remaining the only shareholder.
On 16 March 2003 an agreement was purported to be created between George Katelis and Adalia Pty Ltd which was guaranteed by George's parents, Mr and Mrs Katelis. Under the terms of the agreement, the purported loan which was the subject of the agreement was said to commence on 1 April 2003. It was a three-year loan but notwithstanding that, approximately two weeks after it was entered into, there occurred a purported assignment by the bankrupts to George Katelis of their beneficial interest in the real property.
At that time and on the evidence of Mr Mark Ruttner, the real property was valued in the sum of $380,000. The question for the court is whether the documents signed by Mr and Mrs Katelis effectively transferred the parents' interest in the real property to their son. The answer to that question the court finds is no as is dealt with below. If the answer to that question had been yes, then the applicant sought that transaction be set aside.
Notwithstanding that as at 1 April 2003 Mr and Mrs Katelis were supposedly no longer the beneficial owners of the real property, they engaged in a refinancing of the property with the Adelaide Bank. The total advance was of $330,600 but only $154,797.98 of that amount was used by the borrower to pay out the previous mortgage. The balance of the loan remained as an undrawn advance available for redraw. At that time, Mr and Mrs Katelis claimed the value of the home to be in the sum of $550,000.
Rudstein Kron Lawyers sued Mr and Mrs Katelis for legal costs associated with the earlier Supreme Court proceedings wherein they had acted on their behalf. Judgment was obtained on 1 April 2004 against Mr and Mrs Katelis in the sum of $130,342.96, including interest. That judgment has not been set aside and remains entirely unsatisfied.
There were attempts to serve a bankruptcy notice upon Mr and Mrs Katelis between 27 October 2005 and 7 November 2005. On 8 November 2005 and according to paragraph 10 of George Katelis's affidavit sworn 15 August 2008, he "instructed Adalia Pty Ltd to sell the property to Geoffrey Mitchell for $305,000". As at this date, Mr and Mrs Katelis commenced action to ultimately transfer their interest in the real property to their son's friend, Mr Mitchell.
Within six weeks of the attempts to serve the bankruptcy notice, the real property was sold and settlement had occurred. The date of contract of sale between Adalia Pty Ltd and Mr Geoffrey Mitchell was 21 November 2005 with the sale price at $305,000. The evidence of Mr Mark Ruttner, certified practising valuer (and managing director of First Valuation Group Property Valuers and Consultants) as to the valuation of the property as at 21 November 2005 and 10 February 2006 was that the property was valued in the sum of $425,000. Settlement was effected on 8 February 2006, and on 14 February 2006 the transfer of land from Adalia Pty Ltd to Mr Mitchell was registered by the Land Titles Office.
Mr Mitchell swore an affidavit in these proceedings on 28 June 2008 but he failed to attend court as required for cross‑examination. Mr Mitchell neither attended nor produced documents as requested by the applicant. On the evidence, it is clear that the sale price of $305,000 was low and at the time of transfer the property was worth considerably more. It was not sold at fair market value.
The basis upon which Mr George Katelis says he arrived at the value of the real property was to look at the council rate notice - the unimproved value as assessed by the council. A deposit of $30,500 was allegedly paid in cash. A further sum of $100,000 was allegedly paid in cash as an extension of settlement fee. Settlement occurred on 8 February 2006 when the Piccol Credit Union paid on behalf of Mr Mitchell the sum of $170,000 approximately, being sufficient to discharge the mortgage to the Adelaide Bank. The evidence of Mr George Katelis is that the purchase price moneys were all owed to him and were all paid in cash, save the moneys advanced by the Piccol Credit Union.
On 28 June 2006 George Katelis became the sole director and secretary of Adalia Pty Ltd. A sequestration order was made on that day against Mr and Mrs Katelis senior. Joseph Loebenstein was appointed trustee in bankruptcy of both bankrupts.
On 18 December 2007 Mr Loebenstein obtained leave to examine the bankrupts, Mr and Mrs Katelis, their son George and Mr Mitchell. Mr Mitchell failed to attend and Mr and Mrs Katelis senior claimed ill health. In the oral examination of 3 March 2008, Mr George Katelis gave evidence, denying that his parents owed at the time, or ever, monies to him. He claimed no loan agreement to exist. Mr and Mrs Katelis senior, in separately sworn affidavits on 21 February 2008, claimed there were no documents regarding any agreements and there were no loans in respect of the real property.
It had never been asserted by anyone, including Mr Mitchell, whose evidence is that he purchased the property from Adalia Pty Ltd, that George Katelis was the beneficial owner of the property until George Katelis swore an affidavit which he filed on 23 July 2008. George Katelis made no such claim at his public examination. The trustee in bankruptcy of Mr and Mrs Katelis requested of them both that they provide all relevant documents upon the sequestration order being made. No transfer of the beneficial interest in the property to their son was ever produced. It was not until 23 July 2008 that the applicant and his solicitors first became aware of the purported assignment of the bankrupts beneficial interest in the property to George Katelis.
The applicant relied upon the affidavit of Joseph Loebenstein (together with exhibits) sworn on 25 July 2008. That affidavit is admitted into evidence uncontested. Valuation evidence as provided by Mr Mark Ruttner, certified practising valuer and the managing director of First Valuation Group Property Valuers and Consultants, in two affidavits sworn 23 July 2008 and 20 August 2008 are relied upon by the applicant, again that being uncontested evidence. The latter affidavit addresses the question of the value of the property as at the date of the purported transfer between Mr and Mrs Katelis and their son. At that time, namely 1 April 2003, Mr Ruttner values the property in the sum of $380,000.
The second valuation date provided is 5 February 2007, but included in that valuation report is a valuation as at 10 February 2006, being around the contract and settlement dates in relation to the purchase by Mr Mitchell. Finally, an affidavit of Mr Craig Andrew Wirrell was relied upon, sworn 28 August 2008.
The second respondent relied upon two affidavits sworn by him, the first being on 17 June 2008 and the second on 15 August 2008. Mr Katelis's evidence is that there was a deed of assignment from his parents to him on 1 April 2003 of a beneficial interest in the real property for a consideration of $491,000 approximately. His evidence is that the assignment was for consideration of loans paid by him between 1 April 2003 and 14 February 2006 being mortgage payments, payments of rates and water charges and further payments of legal costs for his parents totalling some $491,000 and being a payment by the debtors to the creditor for more than market value as determined by looking at the rate notice from April 2004 with the site value being approximately $305,000.
Mr Katelis senior swore an affidavit on 17 June 2008. At the hearing the court was handed a note from Dr Margarita Di Carlo dated 27 August 2008 stating as follows:
This is to verify that Mr Katelis attended for an assessment today and he continues to be unfit for any oral examination.
Mr Katelis did not otherwise make himself available for cross‑examination. The medical report from Dr Margarita Di Carlo is not illuminating. It provides no nature of the illness suffered by Mr Katelis, no period of time in relation to which he would suffer such illness which would preclude him from attending at court, nor why it is that he is unfit for oral examination. That document is unsatisfactory and insufficient to preclude the attendance of Mr Katelis senior to be cross‑examined on the contents of his affidavit. The respondents' reliance on that material is therefore limited.
Mr George Katelis tendered in evidence two documents, the first an Adalia Pty Ltd receipt evidencing from Mr Mitchell the receipt of a sum of $100,000 dated 20 December 2005 and being for an extension of settlement. The second document was an Adalia Pty Ltd receipt in respect of the $30,500 said to be received from Mr Mitchell by way of deposit and dated 22 November 2005. In addition, Mr George Katelis relied upon bank deposit slips said to be loans from him to the company, being his making of deposits towards the mortgage account with respect to the real property.
Mr George Katelis conceded that Adalia Pty Ltd purchased the property effectively as a front for his family so that they could retain ownership of the family home. He claimed Adalia Pty Ltd, being his parents as directors, signed the contract of sale to Mr Mitchell. Nearly two years following Mr Mitchell's purchase, Mr George Katelis lives in the home rent-free with Mr Mitchell, whom he says is a good friend and a person who comes and goes.
When cross-examined at the hearing Mr George Katelis gave evidence that in fact, and contrary to what had previously been asserted by he and his parents, his parents assigned the real property to him in 1992. That transfer he claimed to be by way of verbal agreement and to occur at the same time as his parents assigned their business to him. His evidence was that his parents transferred both their business and interest in their family home to him because his father was sick at the time and could not run the pizza shop the family owned. He claimed that his parents at that time gave him their home and that he took over the repayment of the mortgage loans and supplied a roof over his family's head. Counsel asked of him, "You provided them with the roof that was the family home?" He replied "That's correct."
Mr George Katelis's evidence was that in the Greek culture, it was the son that took the family home and that the sisters got a donkey each or something similar. Mr Katelis has two sisters. He conceded that in the proceedings before Nettle J in the Supreme Court, there was no disclosure by either his parents, himself or any other persons that he beneficially owned the land. At the time that this alleged and earlier assignment occurred, Mr Katelis's sisters were residing in the home. His evidence is that they were happy that he became the beneficial owner of the family home. This was so because he had lost his education to run the family business and because he met the mortgage payments. When asked as to what he paid for this assignment of interest, George Katelis responded that he made no payment to his parents. He claimed in the running of these proceedings that it was he who effectively worked in the business and that he had advanced his parents his Austudy money, together with a $5000 loan taken out by him.
In the earlier proceedings in the Supreme Court, Mr George Katelis had given evidence that his whole family worked day and night and long hours to pay off their family debts. It was put to him in these proceedings that he was now giving evidence contrary to that. He then indicated that his family did work in a limited way in the business but that it was his business. He conceded that there had never been any mention at any time by any persons before this proceeding that in 1992 his parents had given him the family home.
In relation to the subsequent sale to Mr Mitchell in 2006, Mr George Katelis said that the pizza business was going badly and that for a period of some three and a half to four years, it had made no money. He said "I needed financial help."
In 2006, Mr George Katelis sold the pizza shop business and in the intervening period, although he has been unemployed, he has not been in receipt of unemployment benefits. He says that he has existed on handouts from family and friends. In relation to the sale to Mr Mitchell at the purchase price, he said he sold it at land value, having discovered that the land was not suitable for development.
In evidence as to the loan agreement which Mr George Katelis says he entered into with Adalia Pty Ltd, his evidence was that he entered a loan agreement with the company guaranteed by his parents as directors of the company, being a three-year loan agreement on the security of the real property. Some two weeks after the time at which this alleged loan agreement was entered into, Mr and Mrs Katelis senior entered into an agreement whereby they supposedly transferred the real property to their son. But at that point, according to their son, the 1992 transfer of the property to him had already taken place. The loan agreement was signed on 16 March 2003 with the assignment for the beneficial ownership of the property occurring on 1 April 2003. The loan agreement refers to payments made by George Katelis to Adalia Pty Ltd. The loan began on 1 April 2003 and was supposed to end on 1 April 2006.
At the time the loan was said to begin, the bankrupts signed an agreement stating they owed their son $491,000. This is the same sum that George Katelis said Adalia Pty Ltd owed him. Counsel for the applicant asked Mr George Katelis, "So who owed the funds, Adalia Pty Ltd or your parents?" The response was, "Well, that Adalia owed it but that his parents were directors of or guaranteed the loan to Adalia so they would be liable for it." George Katelis agreed with the proposition that the principal debtor was Adalia Pty Ltd and that it was to the company that he had lent the money. His parents guaranteed Adalia Pty Ltd’s performance under the loan agreement. As to the $490,000, Mr George Katelis gave evidence that the sum did not comprise simply loans to the company but also took into consideration legal and personal loans to his mother and father personally of approximately $25,000.
Mr George Katelis was then asked again, “So did Adalia owe you the money or did your parents owe you the money?” He replied, “I told you that the $491,000 included loans for legal fees, personal loans to mum and dad and loans to Adalia. It was all in the $491,000 in total”. He was then asked, "So when they transferred the property to you on 1 April 2003, that was in discharge of all of those loans, right?” He replied, “When they transferred, it was for consideration of $491,000, yes”. He was next asked, “According to you, you got their beneficial interest in the property and what they got out of it was a release of any obligation to pay you any further money. Is that right?” He replied “Well, they assigned – or that's what the assignment was for, for a value of $491,000, moneys that I lent to Adalia, them, until the date of 1 April 2003”.
In cross-examination the following thereafter occurred:
Counsel: Does that mean that neither your parents nor Adalia owed you any money as at 1 April 2003?
Mr Katelis:No, because I can - until Adalia sold the property, I contributed a further $35,000.
Counsel: But it's your property at this point?
Mr Katelis: It's in the name of Adalia.
Counsel: It's your property?
Mr Katelis:And I'm beneficially.
Counsel: It's your property?
Mr Katelis:Then I owe myself $35,000.
Mr Katelis's evidence was that the property was worth $300,000 to $330,000 on 1 April 2003 and yet he sold it for $305,000 in November 2006. He was asked whether his case was that the property either decreased in value or certainly did not go up in value in the three years in between, to which he did not effectively respond.
The evidence of Mr Katelis was that as a creditor of Adalia Pty Ltd, he was sick of waiting for the company to pay money back to him that it owed, this being the $35,000 he had advanced after the assignment and accordingly, he arranged for the company to sell the real property to Mr Mitchell.
It was put to Mr Katelis that at his public examination earlier in the year, the following was said:
Adalia was registered as the proprietor of the property. The court order was that Adalia held the property on trust for your parents. You said you attended the court on occasions. You knew what happened. Look at paragraph 1. You're being shown the court order? Mr Katelis replied – Yes.
Do you understand that it had been ordered that the company hold the property for your parents to which you say no? And Mr Katelis replied – My understanding was that the company owned the property and that mum and dad would be beneficiaries of that company, I guess, but then it's very complicated because the shares weren't even in their names. I remember they tried to put the shares in their names and they got rejected, so I don't understand. It's all theirs and no-one else's.
That's what you say.
In these proceedings and contrary to his earlier evidence George Katelis told this court that the property had since 1992 belonged to him.
In the earlier examination, Mr Katelis had said that his parents owed him approximately $90,000, being the shortfall from the money he had lent the company. It was however suggested to him that his parents in fact owed him nothing because they had already given to him in 1992 the real property. In the earlier examination, Mr Katelis was asked whether he owned any property and he responded "no". He was asked whether he had ever owned any property and he responded "no".
The court finds that Mr George Katelis's parents never considered, nor effected a transfer of their property to their son in 2003 nor in 1992. They had no comprehension of any documents placed before them for signature by their son at a time which it is impossible to determine. George Katelis's evidence is that as the beneficiary of the assignment, he became the interpreter, explaining to his parents everything that they were doing. The court accepts that as at 2006, when there was quick sale to Mr Mitchell, including a 30-day settlement on the contract that this occurred because the second-named respondent and his parents thought that the real property would be attached by the trustee of his parents' bankruptcy. Since that time, Mr George Katelis has reconstructed the exercise, going back to 2003, in order to try and put distance between the bankruptcies and the transfer of the real property.
When Mr George Katelis gave evidence in the Supreme Court he said that Mr and Mrs Matsakas were holding the real property on trust for his parents. On his evidence in these proceedings, he claims they were in fact holding it on trust for him.
I find the evidence of Mr Katelis to be wholly unreliable. He was evasive, not truthful and overall an unimpressive witness. His explanation of events is inherently implausible including, for example, the cash payments and their manner of payment said to be made to him by Mr Mitchell.
The court does not accept that any of the purported transfers were genuine or made at fair market value. The 2003 transfer is a series of documents which on any view Mr Katelis's parents had no understanding of, given the documents were required to be translated into Greek. There is no indication that Mr and Mrs Katelis understood anything they signed. It is only their son who says, "I translated it for them." There is no evidence to support the proposition that Mrs Katelis is unable to give evidence and they were both said to be other parties to this transaction. The fact that neither Mr or Mrs Katelis senior have attended at court to give evidence and be cross‑examined leads the court to draw an inference that their evidence would not have assisted the respondents case.
If Mr George Katelis made certain advances to the company, and I am not satisfied that he did, he on the evidence being impecunious throughout much of the period, those advances were not moneys given to his parents in consideration of the real property, a property which belongs and has always belonged to his parents. The 2003 transfer is rejected as being not a credible document that gives rise to any suggestion the real property was in fact alienated by the parents to the son. The alleged transfer was also in any event transferred for less than market value.
There is no plausible reason why Mr Katelis would sell to Mr Mitchell in 2006, other than that he truly contemplated it was his parents' property that was at risk, and indeed it was at risk. If it was his property and he was under economic pressure at the time and needed some funds, he would have sold the property on the open market and received $150,000 more than what he did from his friend. The court is not satisfied that anything more than the monies advanced by Piccol were in fact paid. The evidence given by Mr George Katelis is rejected in its totality by the court.
There is ample evidence to support the making of an order for the transfer to Mr Mitchell in 2006 to be set aside, with the real property to revert back to the bankrupts and effectively from the bankrupts to the trustee in bankruptcy to be dealt with in accordance with law.
I certify that the preceding forty-three (43) paragraphs are a true copy of the reasons for judgment of Hartnett FM
Deputy Associate: Kate Gray
Date: 23 December 2008
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