Popescu, A v Official Trustee in Bankruptcy
[1995] FCA 132
•8 FEBRUARY 1995
IN THE FEDERAL COURT OF AUSTRALIA )
BANKRUPTCY DISTRICT OF THE STATE ) No. WB 327 of 1993
OF WESTERN AUSTRALIA )
Re:ALEX POPESCU
Bankrupt
Ex Parte:ERNA OTILIA POPESCU
Applicant
And:OFFICIAL TRUSTEE IN BANKRUPTCY
Respondent
REASONS FOR JUDGMENT
EINFELD J SYDNEY 8 FEBRUARY 1995
(heard in Perth)
By notice dated 22 February 1994 issued pursuant to section 139ZQ of the Bankruptcy Act 1966 (the Act) the Official Receiver on behalf of the Official Trustee in Bankruptcy (the trustee) required the applicant to pay to the trustee the sum of $34,978.80 being "the property received by you from Alex Popescu of 307 Fulham Street, Cloverdale ("the Bankrupt"), pursuant to a transaction that is void against the Official Trustee under Section 120(2) of [the Act]". By this application the applicant seeks to have that notice set aside under section 139ZS of the Act. The applicant is the wife of the bankrupt.
Background
The applicant was born in Yugoslavia on 22 December 1923 and was 70 years old at the time of the hearing. Since 1949 she has
lived in Australia where she married her first husband in 1951. She worked during this period in a shoe factory, until the birth of their daughter in late 1951. She resumed work some time later. Her husband died in 1955, leaving her a house in Brisbane and the proceeds of a worker's compensation payment, as well as a coin collection of unknown value. Half the estate went to their daughter in accordance with intestacy provisions.
After the applicant married the bankrupt in 1957, she continued to work until the birth of her second child (their first) in 1958, with all her wages going to the upkeep of the family. After the applicant stopped working, the bankrupt was left to provide for the family alone, but he had poor business acumen and a gambling habit which depleted the available funds. As a consequence the applicant's savings were expended including the coin collection which was sold by the bankrupt, who retained the proceeds. In 1959 the applicant's house in Brisbane was sold, the proceeds being used partly to pay gambling debts of the bankrupt, and partly to pay the deposit on a house in Kensington, Sydney bought in the names of both the applicant and the bankrupt. The remainder of the Kensington purchase was financed by mortgage.
The family rented out rooms in the Kensington house to boarders. As well as looking after her own family, the applicant cooked meals for the boarders, washed their linen, and cleaned the premises. The family lived from the money collected from the boarders. The bankrupt conducted a shoemaking business, but was
never able to clear enough from the business, after his gambling expenses, to contribute to the mortgage repayments. Difficulties in servicing the mortgage led the couple to sell the Kensington house in 1960 and buy a house in North Bondi, again in both their names. After less than a year this house also had to be sold for inability to finance the mortgage.
In November 1960 the bankrupt obtained a job in Mt Isa and the family moved into rental accommodation there. Whilst at Mt Isa the applicant had another child. In 1962 the family moved to Brisbane where the Popescus rented a boarding house. Again the applicant did all the work to run the house and the family. In 1963 another child was born and the family rented a normal residential house, relying for income on the bankrupt's latest shoe repair business. In 1965 their fourth child was born. The applicant now had five young children.
In 1965 the family moved to Adelaide where they rented accommodation for about four years. In early 1969 they jointly purchased another house in Black Forrest in Adelaide. The only income came from the bankrupt's job, while the applicant looked after the family. After yet another inability to finance a mortgage, they were forced to sell that house and the applicant and children moved to a rented property in Perth, while the bankrupt remained in his job in Adelaide. The applicant worked as a cleaner, putting her earnings towards furniture, the children and household expenses. The bankrupt occasionally sent the family some money for housekeeping.
In 1975 a property was purchased by the bankrupt and his son John Popescu in North Perth as the family home. The bankrupt was only able to afford to pay the deposit on this house because his wife was working to pay the family expenses. The mortgage on this house was paid off in about two years, and improvements were made.
In 1982 the bankrupt had an accident at work and received a lump sum compensation payout. This was spent on gambling and on a trip to Romania for himself. When he returned from Romania he went on the invalid pension. The applicant's only source of income became the aged pension, which she spent on the upkeep of the North Perth house and household expenses. Meanwhile the bankrupt continued to incur debts, which he financed by mortgaging the North Perth house. The applicant was at this time unaware of the extent of her husband's indebtedness, although she had some suspicion that he was incurring large debts, and securing loans on the house. She stated on affidavit (affidavit 9 June 1994 p.8):
As I was getting older I became more and more concerned about Alex's ways especially his gambling and not informing me of the details of the mortgage on the North Perth property. I telephoned the Bank Manager on 2 occasions about 1 to 2 years before the North Perth house was sold inquiring about the mortgage, but he refused to tell me the details and told me to ask Alex. Alex when questioned always replied "just a little bit".
During 1987 and 1988 John Popescu expressed a desire to sell the North Perth house to allow him access to his capital. With the exception of one 18 month period, he had not lived in the house,
and wanted to buy his own house for his own family. The bankrupt and the applicant discussed using the proceeds of sale to buy another house in their joint names. It would appear that for some time the bankrupt had expressed his desire to give the applicant some benefit when the house was sold.
The North Perth house was sold on 24 January 1989, and the bankrupt gave the applicant $34,978.80 which was what was left of his share of $72,266.90 after payment of some of his debts. She used this amount to buy the house in Cloverdale jointly with John Popescu. The bankrupt had no interest in this house, although he paid the deposit on it of $8,500. No claim is made for this amount. The applicant and the bankrupt currently live in the Cloverdale house. According to the evidence it was a feature of the marriage that the applicant and bankrupt always maintained separate bank accounts. Except for the purchases of the various houses they have never pooled their assets.
On 26 November 1992 a bankruptcy notice was issued by a firm of lawyers against the bankrupt for $31,925 and on 8 March 1993 a sequestration order was pronounced against his estate.
The issue
The trustee said that the money was a settlement within section 120(2) of the Act. This section relevantly provides:
(1)A settlement of property, whether made before or after the commencement of the Act, not being --
(a)a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or
(b)a settlement made on or for the spouse or children of the settlor of property that has accrued to the settlor after marriage in right of the spouse of the settlor,
is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy.
(2)A settlement of property, whether made before or after the commencement of this Act, not being a settlement referred to in paragraph (1)(a) or (b) or a settlement that is void as against the trustee by reason of the operation of that sub-section, is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 5 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy, unless the parties claiming under the settlement prove --
(a)that the settlor was, at the time of making the settlement, able to pay all his debts without the aid of the property comprised in the settlement; and
(b)that the settlor's interest in the property passed to the trustee of the settlement or to the donee under the settlement on its execution.
There was no suggestion by the applicant that at the time of the settlement the bankrupt was able to pay all his debts, so subsection (2)(a) does not apply. The issue is whether when the bankrupt gave his wife $34,978.80 he was merely recognising an existing interest or debt, or whether she had no interest or other equity in the house and the $34,978.80 was a settlement on her. Specifically, the applicant argued that the bankrupt held his share in the North Perth house in trust for her. In the absence of any express or formal trust the argument was that the
Court should find a constructive trust to have existed at the time of its sale.
The problem is similar to that confronting Justice Pincus in Re Osborn; ex parte Trustee of the Property of Osborn v Osborn and anor [1989] 25 FCR 547. In that case the respondent and the bankrupt had been living in a de facto relationship for 20 years. Within two years before his bankruptcy, the bankrupt executed a transfer of real property in favour of himself and the respondent as joint tenants. The respondent had worked for much of the relationship, contributing her earnings to the purchase price of the property and the household furniture. When the bankrupt's health deteriorated she nursed him. She also performed housework and raised his children. On the basis of these facts it was argued in that case that the respondent was the equitable owner of a half interest in the property at the date of transfer and that there was therefore no settlement.
His Honour considered the case of Baumgartner v Baumgartner [1987] 164 CLR 137 in which, according to a majority of the High Court (Mason CJ, Wilson and Deane JJ) at 148:
... the parties pooled their earnings with a view to meeting all the expenses and outgoings arising from their living together as a family. The individual contributions of each party were not allocated to a particular category or particular categories of expenses or outgoings. The pool of earnings was used to pay outgoings associated with accommodation - mortgage instalments on the unit at Cabramatta and the property at Leumeah - as well as other living expenses. There was no suggestion that the respondent's contributions were paid and received by way of rent or a charge for use and occupation and for living expenses. Such a suggestion would be inconsistent with the relationship that came into existence between the
appellant and the respondent, a family relationship which was for the most part until 1982 a long-term stable relationship in which marriage was under continuous contemplation. The land at Leumeah was acquired and the house on it was built in the context and for the purpose of that relationship. Together they planned the building of the house. Together they inspected it in the course of its construction. Together they moved out into it and made it their home after it was built.
...
The case is accordingly one in which the parties have pooled their earnings for the purposes of their joint relationship, one of the purposes of that relationship being to secure accommodation for themselves and their child. Their contributions, financial and otherwise, to the acquisition of the land, the building of the house, the purchase of the furniture and the making of their home, were on the basis of, and for the purposes of, that joint relationship. In this situation the appellant's assertion, after the relationship had failed, that the Leumeah property, which was financed in part through the pooled funds, is his sole property, is his property beneficially to the exclusion of any interest at all on the part of the respondent, amounts to unconscionable conduct which attracts the intervention of equity and the imposition of a constructive trust at the suit of the respondent.
In Falconer v Falconer [1970] 1 W.L.R. 1333 at 1336, as in a number of his other decisions at the time, Lord Denning MR extended the circumstances in which a trust should be found:
The financial contribution may be direct, as where it is actually stated to be a contribution towards the price or the instalments. It may be indirect, as where both go out to work, and one pays the housekeeping and the other the mortgage instalments. It does not matter which way round it is. It does not matter who pays what. So long as there is substantial financial contribution towards the family expenses, it raises the inference of a trust. But where it is insubstantial, no such inference can be drawn.
In the present case there was no pooling of earnings in that the applicant did not contribute directly to the fund used to buy the
North Perth house. However, the applicant spent over thirty years in marriage with the bankrupt. Throughout that time she raised his children and tended his house. She contributed financially to the relationship both by what she put in at the beginning, and by contributing her wages and pension to household expenses. Meanwhile much of his earnings were frittered away gambling and indulging himself. When he did receive a lump sum payment, he spent it on gambling and an overseas trip for himself. It is significant that the contributions of the applicant were often specifically directed towards accommodation. She contributed a house at the beginning of the relationship, which, when sold, provided the funds for the settlement of his gambling debts, and provided for the deposit on their next home. Three houses were later purchased in their joint names.
There was no argument that but for the applicant's direct financial contributions to the capital and daily expenses of the bankrupt, he could not have afforded to purchase the North Perth house. In other words, its purchase would have been impossible if not for the fact that the applicant's income enabled the bankrupt to save. It was clearly a joint venture, notwithstanding that when purchased their share was put in his name. It was purchased as a home for the bankrupt and the applicant in a context of a lifelong relationship. The applicant continued to apply her savings and wages to its upkeep, and all household expenses.
The special circumstances of this relationship make a strong case that as between husband and wife, notwithstanding the lack of an
intention to create a trust, equity would not have allowed the bankrupt to assert his sole title to the property to the exclusion of any separate or personal interest claimed by the applicant. However, the cases in which constructive trusts have been found to exist between husband and wife, or between de facto couples, have always arisen after the collapse of the relationship where one party is denying the title of the other contrary to the dictates of conscience. In Morris v Morris [1982] 1 NSWLR 61 where an analogous equity was ordered, the relationship between a woman and her father-in-law had also broken down completely, forcing his departure from the house to which he had substantially contributed.
This case is not a husband and wife division or share of property upon a separation of assets but the status of what may be presumed to be joint property as against the outside world, specifically creditors of the bankrupt husband. In Osborn Justice Pincus expressed his reasons why a payment such as this should be considered a settlement under the Act (at 553):
It appears to me that where the law is not quite settled, Courts should lean in favour of results which conduce to certainty in bankruptcy administration. No one could pretend that the doctrine espoused in Baumgartner v Baumgartner is likely to lead, in the ordinary case, to a simple resolution of the problem of ascertaining the precise equitable interest.
At 554, his Honour continued:
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 cause of the break-up of the relationship.
Justice Pincus concluded:
I do not think the Court should declare a constructive trust in circumstances of this sort, to operate at a date prior to bankruptcy.
There is a further difficulty in accepting that equity should intervene in favour of the applicant in this case. In Muschinsky v Dodds [1985] 160 CLR 583 at 619-620, Justice Deane outlined the rules which will trip the conscience of the Court:
The prima facie rules respectively entitling a fixed term partner to a proportionate refund of his or her premium and a contractual joint venturer to a proportionate repayment of his or her capital contribution on the premature dissolution of the partnership or collapse of the joint venture are properly to be seen as instances of a more general principle of equity... Like most of the traditional doctrines of equity, it operates upon legal entitlement to prevent a person from asserting or exercising a legal right in circumstances where the particular assertion or exercise of it would constitute unconscionable conduct... The circumstances giving rise to the operation of the principle were broadly identified by Lord Cairns LC, speaking for the Court of Appeal in Chancery, in Atwood v Maude (1868) L.R. 3 Ch. App. at 375: where "the case is one in which, using the words of Lord Cottenham in Hirst v Tolson (1850) 2 Mac & G 134 [42 ER 52], a payment has been made by anticipation of something afterwards to be enjoyed [and] where ... circumstances arise so that future enjoyment is denied". Those circumstances can be more precisely defined by saying that the principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in
circumstances in which it was not specifically intended or specifically provided that the other party should so enjoy it. The content of the principle is that, in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do.
In the present case, as in Osborn, it is not alleged that any conduct of the bankrupt was unconscionable, or otherwise of a character to attract the intervention of equity. As Justice Pincus said at 554:
.... 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.
A broader view of the principle would take in the 'joint venture' or partnership cases where the common element of premature and unanticipated breakdown in the relationship also exists. But the applicant's contention in the current case would require two further significant extensions of the principle. First it seeks to protect the "innocent" party to a subsisting relationship from the creditors of the other party. 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. Moreover, because he would gain a benefit from his wife's money, the validation of this payment would actually protect and assist the bankrupt as well. Such a result would be the very antithesis of the intent of bankruptcy.
In my opinion a court will be reluctant to declare a constructive trust to commence before settlement in a case such as this where there is no dispute between the applicant and the bankrupt about the ownership of the property needing to be resolved. To decide otherwise would greatly interfere with the administration of bankrupt estates generally, especially in the frequent occurrence of settlements in favour of spouses. Although there must be significant sympathy for the wife's position in this particular case, I am bound to conclude that the transfer of $34,978.80 to her should be treated as a settlement within the terms of s 120(2) of the Act.
Section 120(1)(b)
The applicant argued that she fell within the exception in 120(1)(b), which subsection (2) imports into its terms. The argument in this regard was that the property in the North Perth house accrued to the bankrupt in right of the applicant. Apart from the matters raised earlier, in the terms of which this argument was presented, there was no sense in which the house
accrued to the bankrupt in right of his wife. He bought his share of it on his own account.
The construction of 120(2)
Counsel for the applicant put a novel argument relating to the construction of section 120(2). In written submissions, he stated:
It is submitted that s120 (2) of the Bankruptcy Act ... provides, inter alia, three exceptions to its operation which are:
(a)Settlement within the provisions of 120(1)(a)
(b)Settlement within the provisions of 120(1)(b)
(c)A settlement that is not void against the trustee by the operation of s120(1) (my emphasis).
This submission was also the subject of considerable address at the hearing, with the third of the exceptions being the principal focus of attention. It was said to follow that, since the settlement in question was clearly not void under subsection (1), it having been made more than two years before the bankruptcy, it fell within an exception to subsection (2). This submission, had it been accepted, would have had considerable impact on the utility of subsection (2), to say the least. However, in my opinion it has no merit whatever. The section quite clearly provides that the third exception, to adopt the approach of the applicant's submission, is in fact a settlement that is void against the trustee by the operation of s 120(1). This is not only sensible but obvious from the subsection.
Conclusion
I dismiss the application to set aside the notice, and order that the costs of the trustee be paid by the applicant.
CATCHWORDS
BANKRUPTCY - payment of half of proceeds of property sale to wife of bankrupt - whether bankrupt held property in trust for wife -whether payment a settlement void against trustee - applicability of constructive trusts to administration of bankrupt estates - situation where marriage or partnership subsists and no division or separation of joint property is envisaged
TRUSTS - constructive trust in favour of wife of bankrupt where marriage persists
Muschinsky v Dodds [1985] 160 CLR 583
Baumgartner v Baumgartner [1987] 164 CLR 137
Re Osborn; ex parte Trustee of the Property of Osborn v Osborn and Anor [1989] 25 FCR 547
Morris v Morris [1982] 1 NSWLR 61
Falconer v Falconer [1970] 1 WLR 1333
RE ALEX POPESCU; ERNA OTILIA POPESCU v OFFICIAL TRUSTEE IN BANKRUPTCY
WB 327 of 1993
EINFELD J
SYDNEY (heard in Perth)
8 FEBRUARY 1995
IN THE FEDERAL COURT OF AUSTRALIA )
BANKRUPTCY DISTRICT OF THE STATE ) No. WB 327 of 1993
OF WESTERN AUSTRALIA )
Re:ALEX POPESCU
Bankrupt
Ex Parte:ERNA OTILIA POPESCU
Applicant
And:OFFICIAL TRUSTEE IN BANKRUPTCY
Respondent
MINUTE OF ORDERS
Applicant's application to set aside notice under section 139ZQ dismissed.
Applicant to pay respondent's costs.
Note: Settlement and entry of orders are dealt with in accordance with Rule 124 of the Bankruptcy Rules.
EINFELD J
SYDNEY (heard in Perth)
8 FEBRUARY 1995
For the applicant Mr C. Clarke of Clarke & Co
Barristers and Solicitors
For the respondent Mr F. Carles of the Australian Government Solicitor, Perth
Date of Hearing 16 August 1994
Written submissions 30 August 1994
completed
Date of Judgment 8 February 1995
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