McBain v Parsons

Case [2000] FCA 935

FEDERAL COURT OF AUSTRALIA

McBain v Parsons [2000] FCA 935

BANKRUPTCY – transfer of matrimonial home by bankrupt to wife subject to existing mortgage – stated consideration entitlement in equity – claim by trustee to set aside transfer – financial contributions by wife to acquisition of home – whether common intention constructive trust – whether valid as against trustee – mortgage executed when title in bankrupt’s name – mortgage loan necessary for survival of business which provided family income – whether any benefit for wife – whether equity of exoneration applied

Bankruptcy Act 1996 (Cth) ss 120, 121

Baumgartner v Baumgartner (1987) 164 CLR 137 followed
Green v Green (1989) 17 NSWLR 343 at 354-355 followed
Re Osborn; Ex parte Trustee of the Property of Osborn (A Bankrupt) v Osborn (1989) 25 FCR 547 followed
Farrugia v Official Receiver (1982) 43 ALR 700 at 702 distinguished
Re Popescu; Popescu v Official Trustee in Bankruptcy (1995) 55 FCR 583 applied
Re Pittortou [1985] 1 All ER 285 at 288 applied
N.A. Kratzmann Pty Ltd (In Liquidation) v Tucker [No 1] (1966) 123 CLR 257 at 283 applied

ROGER GEOFFREY McBAIN The Trustee of the estate of Peter Frederick Parsons (A Bankrupt) v BRONWYN ALICE PARSONS
NO. T 7006 of 2000
ROGER GEOFFREY McBAIN The Trustee of the estate of Geoffrey James Parsons (A Bankrupt) v CATHRYN MAREE PARSONS
NO. T 7007 of 2000

HEEREY J
11 JULY 2000
HOBART


IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

T 7006 of 2000

BETWEEN:

ROGER GEOFFREY McBAIN The Trustee of the estate of Peter Frederick Parsons (A Bankrupt)
Applicant

AND:

BRONWYN ALICE PARSONS
Respondent

T 7007 of 2000

BETWEEN:

ROGER GEOFFREY McBAIN The Trustee of the estate of Geoffrey James Parsons (A Bankrupt)
Applicant

AND:

CATHRYN MAREE PARSONS
Respondent

JUDGE:

HEEREY J

DATE OF ORDER:

11 JULY 2000

WHERE MADE:

HOBART

THE COURT ORDERS THAT:

T 7006 of 2000

1.Declare the transfer by the bankrupt Peter Frederick Parsons to the respondent of his interest in the property situate and known as 80 King Street, Smithton in Tasmania as comprised in Certificate of Title Vol. 22152 fol. 9 of the Register is void.

2.Order that the respondent take such steps as may be required by the applicant and/or the Recorder of Titles to rectify the register maintained by the Recorder of Titles pursuant to the Land Titles Act1980 (Tas) as a consequence of such declaration.

3.Order that the respondent indemnify the applicant in respect of all liability incurred by the respondent pursuant to mortgage B882598 executed in favour of the Commonwealth Bank of Australia on or about 24 November 1995.

4.Order that the respondent pay the applicant’s costs, including  reserved costs.

T 7007 of 2000

1.Declare the transfer by the bankrupt Geoffrey James Parsons to the respondent of his interest in the property situate and known as 2 Leesville Road, Smithton in Tasmania as comprised in Certificate of Title Vol. 213233 fol. 1 of the Register is void.

2.Order that the respondent…

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McBain v Parsons [2000] FCA 935
Case
[2000] FCA 935
Decision Date

CaseChat Overview and Summary

In the case of McBain v Parsons, the dispute arose between the trustee in bankruptcy of two brothers, Peter and Geoffrey Parsons, and their respective wives, the respondents. The central issue was whether the wives had equitable interests in the matrimonial homes of their husbands that could defeat the trustee's claims under the Bankruptcy Act 1966 (Cth). The Court was required to determine whether a common intention constructive trust existed and if the equity of exoneration applied to the wives' interests.

The Court examined the principles of common intention constructive trusts as established in Baumgartner v Baumgartner and Green v Green, which recognise that contributions to the home purchase can create a beneficial interest for the contributor. However, the Court found that the wives' interests did not defeat the trustee's claims under sections 120 and 121 of the Bankruptcy Act, which allow the trustee to set aside certain property transfers made within two years prior to bankruptcy. The Court held that the constructive trust did not exist prior to the transfer of the properties to the wives, as there was no unconscionable conduct by the bankrupts at that time. Consequently, the trustee's claims were upheld, and the transfers were declared void.

The Court further determined that the equity of exoneration did not apply because each wife had obtained a tangible benefit from the loans secured by the properties, which negated the presumption that they intended to charge their property merely as a surety. The Court concluded that the wives must bear the burden of their husbands' indebtedness, aligning with the principle that an "innocent" spouse must share in both the benefits and burdens of the marital relationship.

The final orders declared the transfers of the properties to the respondents void, required the respondents to rectify the register of titles, and mandated that the respondents indemnify the trustee and pay the costs associated with the proceedings.

Orders

Orders of the court

T 7006 of 2000

1. Declare the transfer by the bankrupt Peter Frederick Parsons to the respondent of his interest in the property situate and known as 80 King Street, Smithton in Tasmania as comprised in Certificate of Title Vol. 22152 fol. 9 of the Register is void.

2. Order that the respondent take such steps as may be required by the applicant and/or the Recorder of Titles to rectify the register maintained by the Recorder of Titles pursuant to the Land Titles Act 1980 (Tas) as a consequence of such declaration.

3. Order that the respondent indemnify the applicant in respect of all liability incurred by the respondent pursuant to mortgage B882598 executed in favour of the Commonwealth Bank of Australia on or about 24 November 1995.

4. Order that the respondent pay the applicant’s costs, including reserved costs.

T 7007 of 2000

1. Declare the transfer by the bankrupt Geoffrey James Parsons to the respondent of his interest in the property situate and known as 2 Leesville Road, Smithton in Tasmania as comprised in Certificate of Title Vol. 213233 fol. 1 of the Register is void.

2. Order that the respondent take such steps as may be required by the applicant and/or the Recorder of Titles to rectify the register maintained by the Recorder of Titles pursuant to the Land Titles Act 1980 (Tas) as a consequence of such declaration.

3. Order that the respondent indemnify the applicant in respect of all liability incurred by the respondent pursuant to mortgage C34411 executed in favour of the Commonwealth Bank of Australia on or about 30 July 1997.

4. Order that the respondent pay the applicant’s costs, including reserved costs.

Background

Background to the litigation

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Evidence

Evidence Before The Court

As to the suggested equity of exoneration, senior counsel for the respondents relied on the following passage from the judgment of Deane J when a judge of this Court in Farrugia v Official Receiver (1982) 43 ALR 700 at 702:“Where the property of a married woman is mortgaged or charged in order to raise money for the benefit of her husband, it is presumed, in the absence of evidence showing an intention to the contrary, that, as between her husband and herself, she meant to charge her property merely as a surety. In such a case, she is, as between her husband and herself, in the position of surety and entitled both to be indemnified by the husband and to throw the debt primarily on his estate to the exoneration of her own.” (Emphasis added) However, on the facts of Farrugia part of the loan ($12,500) was applied to discharge a previous mortgage under which they were jointly liable. It was only the balance of $10,500 which was applied for the benefit of the husband alone. Deane J held (at 702) that the one borrowing could, for the purposes of the application of the relevant equitable principles, be subdivided into what was borrowed for the joint benefit of husband and wife and what was borrowed and applied for the husband’s benefit alone. It was only the latter part to which the equity of exoneration applied. Thus the question whether the equity applies turns on the circumstances of the case, and in particular whether the wife in fact obtained a benefit from the loan. In the present case, as I have found, each respondent obtained a tangible benefit from the CWS loan. The rationale for the equity of exoneration is absent. As Einfeld J said in Popescu (at 589):“Where equity might interfere in favour of one party to a marriage or partnership suffering from the unconscionable behaviour of the other party, it will, in my opinion, be less energetic where, in the absence of unconscionability towards the other party by the legal owner, the competition is between the creditors of the legal owner and the ‘innocent’ partner. This is particularly so where the couple have remained together as the debts accumulated. Just as the ‘innocent’ wife would have gained from improvements in her husband’s financial position, she must also bear the burden of his indebtedness.” Reference might also be made to what was said by Scott J in Re Pittortou [1985] 1 All ER 285 at 288:“… the equity of exoneration is a principle of equity which depends on the presumed intentions of the parties. If the circumstances of a particular case do not justify the inference, or indeed if the circumstances negate the inference, that it was the joint intention of the joint mortgagors that the burden of the secured indebtedness should fall primarily on the share of them who was the debtor, then that consequence will not follow.” I am satisfied that the criteria of ss 120 and 121 have been established. Indeed that was not really disputed. Since I find that there is no equity of exoneration in respect of the 1992 CWS mortgages and that the common intention constructive trust does not defeat the trustee’s claims, the relief sought by the trustee must be granted.

Decision

Reasons for decision

HEEREY J
Likewise, there can be no doubt that the 1993 transfers were made for the purpose of putting the respective homes out of the reach of Peter and Geoffrey’s creditors.Conclusion I accept that in each case there was between the respondent and her husband a common intention that they should acquire a joint interest in the matrimonial home and that each respondent acted pursuant to that common intention in making financial contributions. A common intention constructive trust came into existence: Baumgartner v Baumgartner (1987) 164 CLR 137, Green v Green (1989) 17 NSWLR 343 at 354-355. However, the conflict in the present case is not that of one spouse who is the sole legal owner denying the beneficial interest of the other. Leaving aside for the moment the effect of the 1992 CWS mortgages, it will be convenient to consider first the issue raised by the 1993 transfers. Is the trustee’s claim to the properties met by any pre-existing equitable interests of the respondents? This issue arose in Re Osborn; Ex parte Trustee of the Property of Osborn (A Bankrupt) v Osborn (1989) 25 FCR 547. In that case the bankrupt had transferred within two years prior to sequestration the title in the matrimonial home to himself and his wife as joint tenants. In upholding the trustee’s claim to set aside the transfer under s 120 of the Act (as it then stood) Pincus J said (at 553):“Mr Dutney [counsel for the respondent] was unable to refer me to any authority in which a constructive trust based on imputed intention was held good against a trustee in bankruptcy. One conceptual difficulty in doing so is that it cannot be suggested that the trustee is himself acting unconscionably in attempting to recover property which, on the face of it, is recoverable; the argument has to be that the trustee take subject to equities good against the bankrupt: see s 116(2)(a) of the Bankruptcy Act. That provision excludes from the divisible property:‘property held by the bankrupt in trust for another person.’Assuming all else in favour of the respondent, did the constructive trust relied on exist when the property vested in the trustee? It is necessary to refer again to what was said by Deane J in Muschinski v Dodds. His Honour said that the constructive trust:‘… has not outgrown in formative stages as an equitable remedy and should still be seen as constituting an in personam remedy attaching to property which may be moulded and adjusted to give effect to the application and interplay of equitable principles in the circumstances of the particular case. In particular, where competing common law or equitable claims are or may be involved, a declaration of constructive trust by way of remedy can properly be so framed that the consequences of its imposition are operative only from the date of judgment or formal court order or from some other specified date.’His Honour referred to ‘competing common law or equitable claims’; plainly the competing claim of the trustee deriving title from the Bankruptcy Act is within the spirit of this dictum. If a declaration of constructive trust were made in this case, it would seem to me inappropriate to predate it to August 1987 (when the transfer was executed). There is a dilemma: before the transfer was executed, there was, so far as the evidence shows, nothing unconscionable about the bankrupt’s conduct; the respondent does not suggest that she asked for and was refused recognition of her interest. At the time of and after the execution of the transfer, there was no unconscionable conduct on the part of the bankrupt either; if the respondent’s argument is correct, the bankrupt acted in accordance with the dictates of his conscience and established equitable principle by transferring the legal interest. It appears to me, therefore, that the principle of Baumgartner v Baumgartner cannot assist the respondent against the trustee, unless the Court is obliged to extend it to cover cases where there is no unconscionable conduct alleged against the legal owner – as here. Apart from doubting the propriety of making that extension of the doctrine as defined by the High Court, I am disinclined to do so for the reason indicated above. There is a degree of inconvenience attaching to the laying down of a rule which would require the trustee, in a case of this sort, to conduct an elaborate investigation of and perhaps litigate about the history of a relationship to determine whether property which is, on the face of it, divisible among the creditors is truly so divisible. It appears that in such an inquiry non-financial contributions would be relevant, as, perhaps, would be the question of the cause of any break-up of the relationship. More generally, keeping in mind the remedial character of the doctrine, I do not think the Court should declare a constructive trust in circumstances of this sort, to operate at a date prior to bankruptcy. I therefore hold that the property was not, and should not be declared to have been, subject to a constructive trust in favour of the respondent at a date prior to the transfer. That disposes of Mr Dutney’s principal argument, namely that there was no settlement under s 120 of the Act because the respondent had ownership in equity before the transfer.”

Ratio Decidendi

Legal Principle Established

Established by: HEEREY J

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