Re Bankrupt Estate of Zofia Rzepa; Ex Parte Lamb, Kenneth Wayne

[1997] FCA 1433

FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - voidable preference - informal second mortgage entered into by person without legal interest in the property - purported mortgagor becomes registered proprietor - later registrable mortgage executed within relation back period - registrable mortgage in different terms from informal mortgage - whether informal mortgage can be given effect in equity - whether registrable mortgage voidable preference.

Bankruptcy Act 1966 (Cth) s 122

RE:  BANKRUPT ESTATE OF ZOFIA RZEPA
EX PARTE:  KENNETH WAYNE LAMB
AND:  VALARIE RZEPA
VG 7316 of 1997

MURPHY JR
MELBOURNE
16 DECEMBER 1997

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 7316  of   1997

RE:

BANKRUPT ESTATE OF ZOFIA RZEPA

EX PARTE:

AND

KENNETH WAYNE LAMB
APPLICANT

VALARIE RZEPA
RESPONDENT

JUDGE:

MURPHY JR

DATE OF ORDER:

16 DECEMBER 1997

WHERE MADE:

MELBOURNE

THE COURT ORDERS AND DECLARES THAT:

1. The claim of the respondent as mortgagee under a mortgage dated 11 March 1996 over the land being Certificate of Title Volume 9659 Folio 707 and claimed in caveat No U130074T lodged in the Land Titles Office on 14 March 1996 is void against the applicant.

Note:Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 7316 of 1997

RE:

BANKRUPT ESTATE OF ZOFIA RZEPA

EX PARTE:

AND

KENNETH WAYNE LAMB
APPLICANT

VALARIE RZEPA
RESPONDENT

JUDGE:	MURPHY JR
DATE:	16 DECEMBER 1997
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

The applicant is the trustee of the bankrupt estate of Zofia Rzepa (“the debtor”). The respondent is the mother-in-law of the debtor. The respondent’s son Wieslaw Zbigniew Rzepa (“Mr Rzepa”) is married to the debtor. By application dated 15 May 1997 the applicant seeks a declaration under s 122 of the Bankruptcy Act 1966 (Cth) (“the Act”) “that the claim of (the respondent) as mortgagee under a mortgage created 11 March 1996 is void against the applicant”.  By Notice of Intention to Appear filed 25 August 1997 the respondent opposes the application on the grounds that the mortgage is not void against the applicant as it “was given for valuable consideration, in good faith and without notice of insolvency”.

BACKGROUND
The proceedings are concerned with establishing whether the respondent has any security interest in a property known as 80 Bellbrook Drive North Dandenong (“the property”).  Mr Rzepa became the registered proprietor of the property on 29 September 1987.  By a transfer registered on 26 April 1994 he transferred it to the debtor.  On 14 March 1996 the respondent lodged in the Land Titles Office a caveat No U130074T on the title of the property.  The caveat refers to the respondent’s grounds of claim as “Mortgagee under an instrument of Mortgage from [Mr Rzepa] and [the debtor] .... dated 11 March 1996”.  Although in the mortgage the mortgagors are named as Mr Rzepa and the debtor, it was only signed by the debtor.  The mortgage is in the sum of $41,000. 

The property has been sold.  After the discharge of the first mortgage to a bank the applicant’s solicitors hold the sum of $13,247.97, pending the outcome of these proceedings.  The applicant seeks to disburse those funds to the debtor’s creditors.  He submits that the mortgage is void under s 122 of the Act as it was executed within the six month relation back period prior to the debtor becoming bankrupt, and confers a “preference, priority or advantage over other creditors”.

Further background is that on 17 August 1994 proceedings were issued against Mr Rzepa and the debtor in the Melbourne Magistrates Court.  Judgment was entered against them on 20 February 1996 for the sum of $24,166 plus interest of $4,597.24 and costs of $5,099.20.  The judgment remains unpaid.  The debtor and Mr Rzepa were made bankrupt on 30 July 1996.

CREATION OF AN INFORMAL SECOND MORTGAGE.
These proceedings turn on the legal effect of a document headed “Agreement” dated 9 December 1993 (Exhibits VR1 and VR2 to Mr Rzepa’s affidavit sworn 11 September 1997) (“the agreement”).  The original of the agreement is in Polish.  It was written by Mr Rzepa who also wrote a duplicate in English.  The English version, accepted in the proceedings as a translation of the Polish, reads as follows:

“  AGREEMENT  Dandenong, 9.12.93

We, Wieslaw and Zofia RZEPA of 80 BELLBROOK Dve, Nth DANDENONG, agree to repay Mrs Walerin RZEPA of 8/1 Peace Crt., DOVETON the loan taken out in 1989 to 9.12.93 of the amount of $35,000.00 (Thirty five thousand dollars).

We agree, that if we cannot repay this amount, she is entitled to hold the second mortgage of our property of 80 BELLBROOK Dve, Nth DANDENONG.
Also we agree to repay $5000.00 (five thousand dollars) every six months.

1.        Wieslaw RZEPA  2.        Zofia RZEPA
           (sgd.)  (sgd.)”

The circumstances of the generation of the agreement did not emerge clearly in the evidence.  It appears however that Mr Rzepa was involved in the building industry and his business was supported financially by the respondent.  The respondent gave evidence that she advanced cash sums of various amounts to Mr Rzepa and the debtor over the period 1989 to 1993.  While the amount of the loan referred to in the agreement is $35,000, in her affidavit the respondent deposes that she advanced a total of $41,000 over a period of time to the debtor.  She further deposed that the debtor acknowledged the advance and that it was due and payable.  The respondent deposed that the “original agreement was verbally verified by [her] making further advances to the debtor in the sum of $6,000”. 

The applicant annexed to his affidavit some correspondence received from the debtor.  Exhibit KWL8 to the applicant’s affidavit sworn 30 May 1997, was a list of amounts totalling $14,755 that the debtor said the respondent advanced to her over the period 30 November 1990 to 14 May 1993.  Over the same period, in Exhibit KWL13, the debtor identified entries in a bank passbook of the respondent.  These totalled $22,400, and the debtor said they constituted cash advances by the respondent to her.  There was no detailed explanation to account for the difference between the $35,000 in the agreement and the identified amounts.  Nor was there any evidence when the additional $6,000 was advanced.  This amount took the alleged advances to the $41,000 amount of the mortgage.

The respondent gave evidence that she went to her son and the debtor because she was worried about the money that was owing.  Her son and daughter-in-law then wrote out the agreement.  The respondent said she took the document to a solicitor on the day she received it.  She further stated that the solicitor told her she had to sign the mortgage because her son and daughter (in-law) were in financial trouble.

Mr Rzepa was vague as to the circumstances of the creation of the document.  He said his mother had a better recollection of what had happened.  His evidence was that his mother may have been afraid because his business was in financial difficulties at the time the document was created.  He said that when the business got into difficulties he arranged to transfer the title of the property to the debtor, and also to consolidate amounts owing.  He further stated that after he lost the Magistrates’ Court proceedings in February 1996 he then advised his wife and the respondent to sign the mortgage.

THE LEGAL EFFECT OF THE AGREEMENT
For the purpose of these proceedings it is unnecessary to make any finding as to whether the agreement was actually executed on the date it bears.  The evidence of both the respondent and Mr Rzepa on this issue was vague and at times evasive.  The respondent failed to call the debtor.  She also failed to call the solicitor who she said she took the agreement to on the day that it was given to her by her son and the debtor. 

The respondent’s case proceeded on the basis that the registrable mortgage entered into on 11 March 1996, and the subject of the caveat lodged 14 March 1996, was not a disposition of property within the terms of s 122 of the Act. It was merely confirming an earlier agreement between the debtor and the respondent. The respondent submitted that the agreement constituted an equitable mortgage and that the respondent was entitled to rely on the equitable maxim that “equity looks on that as done which ought to be done”.  Counsel argued that the respondent had given good consideration for the agreement and that in those circumstances the registrable second mortgage merely replaced the agreement and was valid against the applicant.  He submitted that even if the registrable mortgage was set aside the earlier binding agreement should be given effect to.

The applicant submitted that on a proper construction the agreement could not give the respondent a security interest in the property.  Counsel submitted that it was uncertain, and at best was a loan agreement between the respondent and her son, and it certainly could not be said to be an agreement to create a mortgage.  Counsel also submitted that the registrable mortgage gave greater rights to the respondent than the “second mortgage” under the agreement and thus infringed s 122 of the Act.

Like many documents purporting to have legal effect drawn up by lay people, the agreement is difficult to characterise.  It purports to acknowledge a loan, and to provide for its repayment.  It also provides that, in the event of failure to repay, then a second mortgage is granted over “our property”.  Finally, it provides for the repayment of the loan by six monthly instalments of $5,000. 

The first difficulty with giving the document any legal effect in favour of the respondent and against the debtor is that at the time it was made the debtor had no legal interest in the property.  There was also no evidence that the debtor was entitled to any equitable interest in the property.  Mr Rzepa’s evidence was that the transfer of the property to the debtor took place when his business was in financial difficulties.  He acknowledged that the debtor did not pay for the property.  He said “but she is my wife”.  What was expressed in the instrument of transfer of the property as the consideration was not disclosed in the evidence. 

The agreement makes provision for repayment of $5,000 every six months.  The respondent deposed that the moneys remained outstanding.  Presumably no repayments were made.  There was no evidence of any later agreement or arrangement linking the additional advance of $6,000 to the agreement, and thus providing a basis for the $41,000 registrable second mortgage.

The question also arises as to whether the respondent gave good consideration for the second mortgage referred to in the agreement.  Apart from assertion, the respondent provided no satisfactory evidence that the full sum of $35,000 had in fact been advanced.  The total of the entries in the bank passbook fall far short of that amount.  Further, the agreement refers to the loan having already been “taken out”.  This raises the question of past consideration.  The respondent’s evidence was that “slowly, gradually, the loan occurred because I helped my children with the sum of money”.  In her affidavit the respondent deposed that Mr Rzepa and the debtor confirmed that “they received the moneys which I had advanced to them and that it was everyone’s intention that the handwritten document signed by both me and the debtors would in conjunction with any formalisation of the arrangement secure the debt....”  In fact, contrary to the affidavit, the respondent did not sign the handwritten document.  Further, the agreement makes no explicit reference to the respondent providing consideration by way of agreeing not to sue for the debt in exchange for the second mortgage.  In these circumstances the agreement is perhaps best construed as an acknowledgment of a past debt by Mr Rzepa and the debtor, and not a mutual agreement between borrowers and a lender to provide security.

Finally, the agreement for a second mortgage is expressed to operate in the event of a failure to repay the loan.  There was no evidence of a demand by the respondent that would trigger the right to compel Mr Rzepa and the debtor to execute the second mortgage.  Rather, on their account, the financial dealings between the parties obviously became more complicated.  They asserted a further advance of $6,000, but failed to provide any explanation of a modification to the $5,000 half yearly repayment schedule provided in the agreement.

These matters show the difficulty I have in accepting the respondent’s submission that equitable principles should apply and the agreement ought to be given effect as an equitable second mortgage on the property.  First, the respondent has not satisfied the Court that the debtor had any equitable interest in the property when the agreement was made. Unless she had such an interest she had nothing to mortgage, and a court of equity could not assist the respondent to enforce the agreement in her favour. 

Second, I am not satisfied that the respondent advanced the $35,000 the subject of the agreement.  The amounts identified as cash advances in the bank passbook fell far short of the $35,000, and thus, even if consideration in the form of forbearance can be made out, do not provide consideration for the whole of the second mortgage.

Third, the terms of the registrable second mortgage are so different from the agreement that, if possible, they should be given effect as superseding the earlier informal agreement to create a second mortgage.  The respondent cannot have it both ways.  She cannot seek by the execution of a registrable mortgage, and by lodging a caveat on the title of the property, to claim the benefit of a registrable second mortgage and at the same time have the benefit of a different earlier agreement.

THE REGISTRABLE MORTGAGE AS A PREFERENCE
If I am wrong in my conclusion that the agreement has no legal operation as a second mortgage on the property, and the debtor was able, having held an equitable interest in the property, to give an equitable second mortgage to the respondent under the agreement, then there is a second basis on which the applicant should succeed in this application. This is that the registrable mortgage is, I am satisfied, caught as a preference under s 122 of the Act. The terms of the registrable mortgage executed between the debtor and the respondent are different from those that, on a construction most favourable to the debtor, can be discerned in the agreement. The registrable mortgage, which is in a standard form, provides that the moneys secured are repayable on demand, and are to carry interest. There is also reference to common provisions. These were not in evidence. The agreement does not provide for additional advances yet the registrable mortgage is for $6,000 more than the amount in the agreement. There was also no evidence that the debtor agreed with the respondent, prior to the commencement of the relation back period under s 122 of the Act, to a registrable second mortgage in the same terms as the agreement.

These features alone make the registrable mortgage more favourable to the respondent than the second mortgage referred to in the agreement.  Thus the execution of the registrable mortgage has the effect of giving the respondent a preference, priority or advantage over other creditors.  The respondent could only rely on the equitable maxim if the terms of the registrable second mortgage which she entered on 11 March 1996 matched those of the second mortgage referred to in the agreement.  Alternatively, if the terms matched an equitable second mortgage agreement entered into prior to the relation back period, the respondent may have called in the aid of equity.  Those bases are not made out here.  For these reasons I propose to make the declaration sought by the applicant.

THE COURT ORDERS AND DECLARES THAT:

1. The claim of the respondent as mortgagee under a mortgage dated 11 March 1996 over the land being Certificate of Title Volume 9659 Folio 707 and claimed in caveat No U130074T lodged in the Land Titles Office on 14 March 1996 is void against the applicant.

I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of  Judicial Registrar Murphy.

Associate:        KAREN HALSE
Dated:             16 DECEMBER 1997

Counsel for the Applicant:	MS F M MCLEOD
Solicitor for the Applicant:	DEACONS GRAHAM & JAMES
Counsel for the Respondent:	MR A MCNAB
Solicitor for the Respondent:	BELLELI KING & ASSOCIATES
Date of Hearing:	21 NOVEMBER 1997
Date of Judgment:	16 DECEMBER 1997