Official Trustee v Pastro

Case [1999] FCA 1631

FEDERAL COURT OF AUSTRALIA

Official Trustee v Pastro [1999] FCA 1631

BANKRUPTCY - ss 120 and 121 of the Bankruptcy Act 1966 (Cth) - whether transactions voidable as against the Official Trustee - "purchasers or encumbrancers in good faith" - mortgages to secure debts - intent to defraud creditors - meaning of good faith - imputation of mental state - family relationship.

Bankruptcy Act 1966 (Cth), s 58(2), s 81, s 81(17), s 120, s 120(1)(a), s 121, s 255(2)
Bankruptcy Legislation Amendment Act 1996 (Cth)
Evidence Act 1995 (Cth), s 190

Colonial Mutual Life Assurance Society Ltd v Donnelly (1998) 154 ALR 417 referred
Re Schofield;  Ex parteRangott v P & B Barron Pty Ltd (1997) 72 FCR 280 referred
Browne v Dunn (1893) 6 R 67 discussed
Flower & Hart (a firm) v White Industries (Qld) Pty Ltd (1999) 163 ALR 744 followed
Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation (1983) 44 ALR 607 referred
PT Garuda Indonesia Ltd v Grellman (1992) 107 ALR 199 followed
Official Trustee v Mitchell (1992) 110 ALR 484 discussed
Re Hyams;  Official Receiver v Hyams (1970) 19 FLR 232 referred
International Harvester Company of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Company (1958) 100 CLR 644 referred
Barton v Official Receiver (1984) 4 FCR 380 referred
Lego Australia Pty Ltd v Paraggio (1993) 44 FCR 151 referred
Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267 referred
Beach Petroleum NL v Johnson (1993) 115 ALR 411 referred

Re Hatzimarcos;  Ex parte Dixon (FCA, 11 September 1984, unreported) distinguished

OFFICIAL TRUSTEE IN BANKRUPTCY v EMILIO PASTRO & ANOR
SG 7154 of 1998

FINN J
26 NOVEMBER 1999
CANBERRA (HEARD IN ADELAIDE)


IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY

SG 7154 OF 1998

BETWEEN:

OFFICIAL TRUSTEE IN BANKRUPTCY the trustee of the property of RODOLFO SAVERIO PASTRO (a bankrupt)
Applicant

AND:

EMILIO PASTRO
First Respondent

MARIA PASTRO
Second Respondent

JUDGE:

FINN J

DATE OF ORDER:

26 NOVEMBER 1999

WHERE MADE:

CANBERRA (HEARD IN ADELAIDE)

THE COURT DECLARES THAT:

1.the Memorandum of Mortgage Registered Number 7789769 granted by Rodolfo Saverio Pastro (also known as Rudolfo Saverio Pastro) in favour of Emilio Pastro and dated 9 September 1994 over the land situated at 45 Hancock Road, Campbelltown 5074 in the State of South Australia comprised in Certificate of Title Register Book Volume 5214 Folio 197 and the land situated at 10 Grandview Grove, Magill 5072 in the said State comprised in Certificate of Title Register Book Volume 5214 Folio 196 is void as against the Applicant, pursuant to ss 120 and 121 of the Bankruptcy Act 1966 (Cth);

2.the Memorandum of Mortgage Registered Number 7789770 granted by Rodolfo Saverio Pastro (also known as Rudolfo Saverio Pastro) in favour of Maria Pastro and dated 9 September 1994 over the land situated at 45 Hancock Road, Campbelltown 5074 in the State of South Australia comprised in Certificate of Title Register Book Volume 5214 Folio 197 and the land situated at…

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Official Trustee v Pastro [1999] FCA 1631
Case
[1999] FCA 1631
Decision Date

CaseChat Overview and Summary

In the matter of Official Trustee v Pastro, the dispute centred on the validity of mortgages granted by Rodolfo to Emilio and Maria, which the Official Trustee sought to have declared void under sections 120 and 121 of the Bankruptcy Act 1966 (Cth). The court was tasked with determining the proper character of these mortgages, specifically whether they were intended to defraud Rodolfo's creditors, and if either Emilio or Maria acted in good faith. The decision hinged on whether the mortgages were part of a scheme to prefer Rodolfo's family over his other creditors. Rodolfo's affidavit and examination revealed that he intended to defraud his creditors by granting the mortgages to Emilio and Maria. Emilio, who acted on behalf of Maria, was found to be privy to this scheme and thus not acting in good faith.

The court's reasoning involved a detailed analysis of the evidence provided, including the affidavits and testimonies of Rodolfo, Emilio, and Maria. It was determined that both Rodolfo and Emilio understood the magnitude of Rodolfo's debts and the necessity of the mortgages to protect Emilio and Maria's interests. The court concluded that Rodolfo intended to defraud his creditors, and Emilio was aware of and participated in this contrivance. Consequently, the mortgages were declared void against the Official Trustee under sections 120 and 121 of the Act. Maria, though not directly involved in the fraudulent scheme, was imputed with Emilio's knowledge due to their relationship, leading to a similar conclusion regarding the voidance of her mortgage.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

(vi) Emilio took the loan from Westpac and the purposes referred to were carried into effect. Insofar as Rodolfo was concerned the loan to him was, in the event, for $32,115.31, this being the sum referred to in Recital D of the 30 August agreement with Emilio.The Parties' Evidence The essence of the present application is the proper character, for s 120 and s 121 purposes, to be attributed to the granting of the mortgages by Rodolfo to Emilio and Maria respectively. An agreed bundle of documents was put into evidence. The preceding factual narrative is drawn from it. I would note that it included the transcripts of evidence given by Rodolfo, Emilio and Maria at their s 81 examinations. The latter two of these transcripts - though not Rodolfo's - were used in evidence under s 81(17) of the Act: see s 255(2) of the Act; Colonial Mutual Life Assurance Society Ltd v Donnelly (1998) 154 ALR 417; Re Schofield; Ex parteRangott v P & B Barron Pty Ltd (1997) 72 FCR 280. Rodolfo's transcript was admitted without objection as part of the agreed bundle: see Evidence Act 1995 (Cth), s 190. Affidavits were tendered by the applicant, and by Rodolfo, Emilio and Maria. I allowed the respondents to reopen their case to tender an affidavit from their solicitor, Mr Meyer. Oral evidence was given by Emilio, Maria and Mr Meyer. As I noted previously the application turns in large measure on the finding that I make as to Emilio's credibility.The Pastros' Evidence I should note at the outset that the Pastros are from Italy. All are now well into middle age. Emilio and Maria gave their evidence through an interpreter. They live together.(i) Rodolfo It is Rodolfo's affidavit evidence that he did not mention the insurance litigation at all to Maria and that, while Emilio knew of it, he did not discuss the case with him much as he (Emilio) was away in Victor Harbour at the time. In relation to the 30 August agreements with Emilio and Maria, he claims that:"I wanted to do something to help Emilio and Maria get repaid the money owing to them and wanted my liabilities to Emilio and Maria recorded, since they had lent me a lot of money, and I mentioned this to Emilio. Emilio made an appointment for us with his lawyers at Lynch & Meyer for this purpose. The lawyers advised Emilio that he should take mortgages over my properties at Magill and Campbelltown as security for my liability to him. I then discussed this with Emilio and I said I wanted to take the lawyers' advice and give him and Maria mortgages over my properties. We therefore asked the lawyers to prepare the agreements referred to in paragraph 10 above. Emilio's lawyers at Lynch & Meyer suggested that I seek advice from a solicitor in relation to the agreements before I signed them and they referred me to the legal firm of Belperio Clark. A lawyer from Belperio Clark gave me advice in relation to the agreements and I then signed them." In his s 81 examination Rodolfo admitted that in 1994 he knew he would not be able to pay all his debts. That state of affairs he related to the mortgage transactions. This is exemplified in the following two extracts from the s 81 transcript.1."MR RIGGALL: So you certainly knew in August of 1994 that you would have to pay a lot of money out.THE INTERPRETER: Yes.MR RIGGALL: And you said to Maria and Emilio, "Let's arrange that I'll leave the houses to you."THE INTERPRETER: Yes, because - - -MR RIGGALL: Because?THE INTERPRETER: Yes, because I could see that I was not able to have anything else any more.MR RIGGALL: Who raised that suggestion?THE INTERPRETER: I because I didn't want to cheat my brother with everything that they have done for me.MR RIGGALL: Yes. And the family came before the outside creditors, or course.THE INTERPRETER: Yes, but they gave me the money.MR RIGGALL: No. This question is kind of important to me. It was important for you to make sure that your family was paid ahead of the other creditors.THE INTERPRETER: They gave the money to me.MR RIGGALL: And because they had given the money to you it was very important to you to make sure that they got the money back.THE INTERPRETER: I didn't want to cheat my brother and my sister. They gave the money to me.MR RIGGALL: You told Maria and Emilio that you were not able to work any more in 1994.THE INTERPRETER: Well, I was in the house, they could see that.MR RIGGALL: And they knew of the problems that you had as a result of losing the court case.THE INTERPRETER: I think that they knew.MR RIGGALL: Well, they must have known, surely.THE INTERPRETER: Well, that's what I'm saying, of course they must have known. (Transcript, 15-16)…2. THE INTERPRETER: I said: now I'm ruined, I don't have anything any more. All the work that I have done, it's all disappeared.MR RIGGALL: Did you tell them why you were ruined?THE INTERPRETER: Because of the way things went.MR RIGGALL: And you told them that you would lose your houses?THE INTERPRETER: Yes.MR RIGGALL: And rather than lose the houses outside the family you wanted to leave them to Emilio and Maria?THE INTERPRETER: Yes, because they had given me the money.MR RIGGALL: You left them in no doubt that unless they could get the houses, they would not get their money back.THE INTERPRETER: That's what I said, that they had the houses and they could cover themselves with that for what they were owed.MR RIGGALL: Unless they got the houses they would miss out entirely.THE INTERPRETER: I haven't understood that.MR RIGGALL: If you told them that if they did not grab the houses they would miss out.THE INTERPRETER: Of course if I didn't have any money. What I could give them." (Transcript, 19)

Decision

Reasons for decision

FINN J
(viii) Whatever the precise extent of Rodolfo's debts, actual and anticipated, at the time of the 30 August agreements, I am satisfied that both Rodolfo and Emilio then understood these to be of such dimensions that, absent resort to the contrivance of the mortgages, Emilio and Maria would not have their debts repaid. "Family" was not to be so "cheated" to use Rodolfo's words - hence the agreements. I should add that I am satisfied both men then appreciated that the costs liability was likely to be of some magnitude - as it later proved to be - and that, following on the ANZ Bank debt and Rodolfo's inability to service that debt, protective measures were necessary if the debts owed Emilio and Maria were not to be lost. Accordingly I am satisfied that Rodolfo intended to prefer Emilio and Maria at the expense of his other creditors, actual and anticipated.Conclusions For the purposes of s 121 of the Act, I find that, when Rodolfo entered into the 30 August agreements and when he executed the two mortgages, it was his intent to defraud his creditors, actual and anticipated. I include in "anticipated" creditors, the successful defendant in the insurance litigation in that, on the date of the mortgages, the costs liability had not as then been quantified. Rodolfo was seeking unfairly to prefer his family creditors over others. I further find that Emilio was aware of, and participated in, this contrivance; he was "privy to the fraud": PT Garuda Indonesia Ltd v Grellman (1992) 107 ALR 199 at 212; see also Official Trustee v Mitchell (1992) 110 ALR 484 at 492ff; and that in consequence he cannot for the purposes of s 121 be said to have "acted in good faith". In making both of these findings, I acknowledge that the onus of proof in each instance is borne by the Official Trustee. My findings in relation to Emilio for s 121 purposes are sufficient as well to deny him the advantage of the "purchaser in good faith" proviso of s 120(1)(a) of the Act, whether or not for the purposes of the provision he had provided "valuable consideration": see Re Hyams;Official Receiver v Hyams (1970) 19 FLR 232 at 253ff. Accordingly I will declare that the mortgage granted Emilio is void as against the Official Trustee under both s 120 and s 121 of the Act. I have arrived at a similar conclusion in relation to the mortgage granted Maria but by a somewhat different route. I am prepared to assume for present purposes that at the time of the 30 August agreement and mortgage, Maria did not have actual knowledge or suspicion of the attempt on Rodolfo's part to defraud his non-family creditors. The case against her as pleaded and put is that her lack of good faith for s 120 and s 121 purposes derives from the imputation to her of Emilio's knowledge of the object and purpose of both mortgages, that imputation being a consequence of the agency role discharged by Emilio for her in relation to the 30 August agreement and the mortgage. In the execution of the 30 August agreement, Emilio did not act strictly as Maria's agent: he did not act, or purport to act, so as to effect legal relations between Maria and Rodolfo: see International Harvester Company of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Company (1958) 100 CLR 644; and see generally Bowstead and Reynolds on Agency (16th Ed, 1996), Ch 1. Nonetheless, as I have earlier found, Emilio performed a tutelary function for Maria in the transaction. Having participated in contriving the scheme for his own and Maria's benefit, he acted as her protector, advisor and functionary in the bringing about and then the carrying into effect of the steps necessary to put that scheme in place. He acted throughout with a knowledge of the purpose of the transaction that Maria, the beneficiary of the transaction, did not actually possess. But Maria, in my view, had put herself in a position in which it was unnecessary for her to acquire anything but the most rudimentary appreciation of the nature of the transaction itself. She had entrusted the preservation of her position to, had given her dependence and judgment to, Emilio in this matter. And she took the benefit of the transaction. The question this raises is whether in the circumstances, hers is a relationship with Emilio sufficient to justify the attribution to her of Emilio's knowledge of the nature and purpose of the scheme in which the mortgage was a part.

Ratio Decidendi

Legal Principle Established

Established by: FINN J

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