Re (Brunner?)Bruner, Peter William Ex Parte The Official trustee in Bankruptcy

[1984] FCA 177

Re: PETER WILLIAM BRUNNER
Ex parte: THE OFFICIAL TRUSTEE IN BANKRUPTCY
And: PETER WILLIAM BRUNNER and JENNIFER ENID BRUNNER
No. 796 of 1978
2 FCR 6

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Morling J.(1)

CATCHWORDS

Bankruptcy - preference - "in good faith and for valuable consideration" - constructive trust - wife of bankrupt lent money by bankrupt: whether property held on constructive trust - rule in Chalmer v Pardoe (1963) 1 WLR 677

Bankruptcy Act, 1966 ss. 120, 121

Bankruptcy - Preference - "in good faith and for valuable consideration" - Constructive trust - Wife of bankrupt lent money by bankrupt: Whether property held on constructive trust - Rule in Chalmers v. Pardoe (1963) 1 W.L.R. 677 - Bankruptcy Act 1966, ss 120, 121.

HEADNOTE

Held: A husband who lends funds to his wife to enable her to pay for improvements to the matrimonial home, of which she is the sole owner, and who contributes his labour is not thereby entitled to an equitable charge or lien. Nor is it inequitable for the wife to retain sole ownership of the land.

Chalmers v. Pardoe (1963) 1 W.L.R. 677, followed.

Morris v. Morris (1982) 1 N.S.W.L.R. 61, referred to.

HEARING

Sydney, 1984, June 8; July 3. #DATE 3:7:1984

APPLICATION.

Application for declarations and consequential orders.

K. Mason Q.C. and P. Urquhart, for the applicant.

C. Roberts, for the respondent.

Cur. adv. vult.

Solicitors for the applicant: Dibbs Crowther & Osborne.

Solicitors for the respondent: Maxwell Eyers & Miller.

G.F.V.

ORDER

Application dismissed.

Applicant to pay respondents' costs.

Applicant dismissed with costs.

JUDGE1

This is an application by the Official Trustee who is the trustee of the bankrupt estate of Peter William Brunner ("the bankrupt"). The respondents to the application are the bankrupt and his wife, Jennifer Enid Brunner. The trustee seeks a declaration that Mrs Brunner holds land at Alstonville upon which is erected the respondents' matrimonial home upon trust for herself and the applicant in equal undivided shares as tenants in common subject to a mortgage by which the land is encumbered. The trustee also seeks a declaration that a purported loan transaction whereby the bankrupt advanced $10,000 to his wife pursuant to a deed of loan dated 21 March 1978 is void as against him. Orders are sought that Mrs Brunner execute a transfer of the land to herself and the trustee as tenants in common subject to the said mortgage and that she pay to the trustee the said sum of $10,000.

1. The application in respect of the purported loan is based upon s. 120(1) of the Bankruptcy Act 1966, as amended, ("the Act"), which provides as follows:
   
   

"120. (1) A settlement of property, whether made before or after the commencement of this 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."

1. The trustee claims that the loan was a settlement of property that was made within two years before the commencement of Mr Brunner's bankruptcy and that Mrs Brunner was not a purchaser in good faith and for valuable consideration.

2. As originally framed, the application was also based upon a further allegation that the loan transaction was a disposition of property with intent to defraud the bankrupt's creditors - vide s.121(1) of the Act. However in the course of argument counsel for the trustee conceded that no case had been made out under s. 121(1). In my opinion this concession was properly made. Both the bankrupt and his wife were examined at length as to the bankrupt's affairs and, in particular, as to the circumstances in which the loan was made and in which the matrimonial home became registered in the wife's name. It will be necessary to refer to these circumstances in some detail later in these reasons when dealing with the trustee's claim in respect of the matrimonial home. However, it is only fair to the respondents that I should observe that, having carefully considered the whole of the evidence, I do not think there is any evidence of fraud on their part.

3. The trustee claimed, in the alternative, that he was entitled to the relief sought because it would be inequitable, in the circumstances of the case, for Mrs Brunner to retain sole ownership of the land. Support for this basis of the claim was sought to be found in Chalmers v Pardoe (1963) 1 WLR 677 to which I shall later make reference.

4. The facts surrounding the acquisition of the land at Alstonville and the making of the loan can be shortly stated. On 22 October 1978 a sequestration order was made against the estate of the bankrupt. In 1974, prior to their marriage, the bankrupt and his wife purchased vacant land in Alstonville for the purpose of building their future matrimonial home. In due course a house ("the first house") was built upon this land and the respondents occupied it after their marriage.

5. In June 1977 one of the bankrupt's creditors, the Commercial Banking Company of Sydney Limited, commenced proceedings against the bankrupt claiming a sum in excess of $26,000 in respect of an overdrawn bank account operated by him with the bank. The bank obtained judgment in respect of this debt in May 1978. It was apparent to the bankrupt in November 1977 that he would have to raise money in order to pay the bank its debt. Accordingly the bankrupt and his wife sold the first house in order to raise money so that the bankrupt could partially repay the bank's debt from the proceeds of his equity in the house. The approximate net proceeds from the sale of the first house amounted to about $20,000, which was divided equally between the respondents.

6. Upon settlement of the sale the bankrupt instructed his solicitor to offer the bank $10,000 in full settlement of the debt due to it, but the bank declined the offer. After the offer had been declined the bankrupt loaned the sum of $10,000 to his wife. The loan was made on 21 March 1978. The purpose of the loan was to enable his wife to complete the construction of a house being constructed upon land in Alston Avenue, Alstonville ("the second house"). The land in Alston Avenue had been purchased by the wife for the sum of $6,000 in September 1977 out of her own moneys. At all relevant times Mrs Brunner was employed and in receipt of a separate income.

7. At the time the loan was made a deed of loan was executed. The deed provided for repayment of the principal sum upon demand. The deed also provided that "unless demand is made upon the Borrower interest will not be paid upon the Principal Sum but in the event that a demand is made interest will run at the rate of 5% yearly until repayment in full by the Borrower." The deed also provided that, if required by the husband, the wife would execute a memorandum of mortgage over the land in Alston Avenue.

8. At the time the loan was made construction of the second house on the land in Alston Avenue was half completed. Mrs Brunner paid out of her own moneys all the costs of construction associated with the building of the house. The bankrupt, who was a qualified carpenter, assisted in the building of the house, as did his wife. He received no payment for his work. There is no evidence as to the value of the gratuitous work carried out by the bankrupt. However there is evidence that during at least part of the time the house was under construction he worked full time on the job. He also drew up the plans for the house. His wife employed subcontractors, such as roof tilers, plumbers and the like, and paid their accounts out of her own moneys.

9. Before his estate was sequestrated the bankrupt discussed with his wife the best way in which to arrange their affairs so as to avoid any difficulties which might arise out of his possible future bankruptcy. It is clear that Mrs Brunner knew that her husband was in financial difficulties and that she did not wish her husband to have any interest in the house in case he should become bankrupt.

10. Mrs Brunner used her own earnings to meet mortgage repayments. She was not required by her husband to make interest payments on the loan of $10,000. The bankrupt paid the day-to-day housekeeping expenses in the running of the house hold.

11. Between April and December 1981 the second house was extended by the addition of a second storey. The cost of the extensions was met by the wife who borrowed further moneys from a bank to meet the expense. The work of construction was carried out by Mrs Brunner, her husband and relatives.

12. There is no doubt that the loan was made after the respondents had received legal advice. There was also no doubt that if the bankrupt had loaned the $10,000 to some person other than his wife, he could have obtained an interest rate in excess of 5%.

13. It was put to the bankrupt in cross-examination that his true intention was not to make a loan to his wife, but to become a joint owner of the house which she was building. His evidence included the following:
    
    

What I am suggesting to you is, that the loan which is set out in that document dated 21 March 1978, was not a true loan rather it - the intention was that that money should be put into the construction of the house in such a way as to avoid your creditors realising a future asset in payment of your debts? What do you say to that?---At that stage the house was half finished and she tried to raise money to finish it off and could not and then the other alternative was for me to lend her the money.

Yes, but the intention was at all times that it should effectively be an asset of yours and your wife's, the house in which you both lived as a family?---It was an asset whom? (sic)

See, I have suggested to you that the document, evidencing the loan you say you have made does not set out the true position, and I suggest further that the true position was that the intention of you and your wife was to put that money into the construction of the house to be used as the family home and to be effectively a joint asset of each of you? Would you agree with that?---It was not a joint asset, it was her house."

1. Mrs Brunner gave evidence that she did not pay wages to the bankrupt in respect of the work done on the house because he was her husband. She said that she used the loan from her husband to help pay for the cost of construction. She also said that it was her understanding that she could be called upon to pay interest on the loan upon demand.

2. I see no reason to doubt the evidence given by the respondents. Whilst some aspects of the loan transaction might appear to be unusual, I think that taken in the setting in which it occurred, the advance of the $10,000 should be seen as a genuine loan. I see nothing suspicious in the wife desiring to ensure that the second house was her sole property. Her husband's financial difficulties had already led to the sale of their first house, and it is understandable that she intended to make sure that the second house belonged to her alone.

3. When the bank declined to accept the bankrupt's offer of $10,000 in full settlement of its claim, he necessarily had to consider what to do with the money. It is true that he could have invested it to better advantage than by lending it to his wife on the terms set out in the deed of loan. However, the making of the loan did not deprive the bankrupt's creditors of any part of his assets. There is no suggestion that the $10,000 has been lost to the creditors.

4. The wife was not obliged, morally or otherwise, to give the bankrupt a half interest in the second house. I do not think that the evidence supports a finding that an arrangement was come to between the respondents that the bankrupt would have an interest in the second house. It would have been improvident for the wife to have entered into any such arrangement. I think this is a genuine case in which the wife, out of her own moneys, purchased land and erected thereon a new matrimonial home. She was assisted in achieving this object by the advance made to her by her husband. I think the advance was a loan, and was not part of an arrangement whereby he was given any equity in the house itself.

5. I turn now to consider whether the applicant has made out a claim to the relief sought. In my opinion, the claim based upon s.120(1) of the Act cannot be sustained. Counsel for the respondents argued that the loan transaction did not amount to a settlement of property within the meaning of s. 120(1). Since I did not hear full argument on this question it is inappropriate that I should express a final opinion on it. However, having regard to the provisions of s.120(8) which provides that a "settlement of property" includes any disposition of property, and to the decision of the High Court in McGain v Federal Commissioner of Taxation (1966) 116 CLR 172, there is much to be said for the view that the loan transaction was a settlement of property. But whether this is so or not, I am firmly of the opinion that the wife acted in good faith and gave valuable consideration for the loan. It was no part of Mrs Brunner's intentions to defeat the interests of her husband's creditors. Indeed, as I have pointed out, the creditors were not defeated. The $10,000 was not lost to the creditors. The trustee's real complaint in respect of the loan is that the money might have been invested to better advantage. But that is beside the point for present purposes. Further, the provision of an interest rate of 5% and an obligation on the borrower to repay the money on demand made it a loan for valuable consideration. Consideration may amount to valuable consideration although it falls short of full consideration. In Re Abbott (1982) 3 All ER 181 Sir Robert Megarry V-C. when considering the meaning of "valuable consideration" in s.42(1) of the Bankruptcy Act 1914 (Imp) (which is in almost identical terms with s.120 of the Australian Act) said at p. 187:
   
   

"The question, then, is what that meaning is. Plainly 'good consideration', in the sense of the natural love and affection that a man has for his wife and children, is not enough. Nor is a merely nominal consideration, even though it would suffice to support a simple contract at common law. In the context of the avoidance of settlements by a trustee in bankruptcy, a 'purchaser . . . for valuable consideration' must be someone who can not only be described as being a 'purchaser' but can also be said to have given a consideration for his purchase which has a real and substantial value, and not one which is merely nominal or trivial or colourable.

"It is in this sense that I understand the use of the phrase about providing a quid pro quo that is to be found in the authorities. In that phrase, I do not think that the word 'quid' is confined to some material asset which can or will replace in the hands of the debtor the asset of which he has disposed to the purchaser."

1. The same approach to the meaning of the term "valuable consideration" as used in ss. 120 and 121 of the Act has been taken in two recent decisions of judges of this Court - see Re Marchiori; Ex parte The Official Receiver (1983) 52 ALR 339 and Re Florance; Ex parte Andrew (1983) 52 ALR 339.

2. Accepting, as I do, that the $10,000 was advanced by the bankrupt to his wife as a genuine loan, I am of the opinion that the promise to repay the money with interest at 5% and upon demand constituted valuable consideration for the loan. An interest rate of 5% is real and not nominal or trivial. The fact that she was not called upon to pay the interest prior to her husband's estate being sequestrated did not negate her promise to pay it if it had been demanded of her.

3. Moreover the bankrupt obtained an additional indirect advantage from making the loan to his wife. By enabling her to complete the construction of the second house the bankrupt obtained the significant advantage of accommodation for himself as well as his wife. Taking into account all the circumstances surrounding the making of the loan and the obligations which the wife assumed under the deed of loan I am of the opinion that she provided valuable consideration for it. Accordingly, the claim for relief under s.120(1) fails.

4. I turn now to consider the claim that the trustee is entitled to relief because it would be inequitable, in the circumstances of the case, for the wife to retain sole ownership of the land. In Chalmers v Pardoe (1963) 1 WLR 677 at 681 the general equitable principle upon which the trustee relies was stated in the following terms:
   
   

"There can be no doubt upon the authorities that where an owner of land has invited or expressly encouraged another to expend money upon part of his land upon the face of an assurance or promise that that part of the land will be made over to the person so expending his money, a court of equity will prima facie require the owner by appropriate conveyance to fulfil his obligation; and when, for example for reasons of title, no such conveyance can effectively be made, a court of equity may declare that the person who has expended the money is entitled to an equitable charge or lien for the amount so expended ... It was said in Plimmer v Wellington Corporation (1884) 9 App. Cas. 699, 714 P.C. that the court must look at the circumstances in each case to decide in what way the equity can be satisfied."

1. As McLelland J observed in Morris v Morris (1982) 1 NSWLR 61 at 64 the principle is a flexible one and has been applied in a great variety of situations. But on no view of the facts of the present case would it be equitable to declare Mrs Brunner to hold the house in Alston Avenue upon trust for herself and the applicant in equal undivided shares. The house is now worth in excess of $100,000. There was never any arrangement between the bankrupt and his wife that he should have an interest in the land or in the house constructed upon it. If the loan is repaid (and there is no suggestion that this will not occur) the bankrupt's only contribution to the construction of the house will have been the value of his labour upon it. But in return for his labour he has been permitted to live in the house and it is a reasonable assumption that he will continue to do so.

2. The facts in this case are quite different from those considered by McLelland J in Morris v Morris (supra). In that case the plaintiff had paid a substantial sum of money towards the cost of an extension to a home jointly owned by his son and daughter-in-law to provide accommodation for himself. Subsequently the plaintiff left the home consequent upon the breakdown of his son's marriage and the deterioration of his relationship with his daughter-in-law. It was held that, on the facts of the case, it would be unconscionable and inequitable for the son and daughter-in-law to retain the benefit of the plaintiff's expenditure on their property free from any obligation of recoupment. In the present case no circumstances have arisen which would make it inequitable for Mrs Brunner to retain the benefit of her husband's labour in building the house which she owns. He continues to receive a real benefit from her in the form of free accommodation and there is nothing in the evidence to indicate that this benefit will not continue indefinitely. Moreover, although the work he put into the house was not inconsiderable, it would seem that the value of such work was not significant having regard to the present value of the house. Accordingly I think the alternative claim for relief also fails.

3. Since Mrs Brunner has never disputed her liability to pay to the trustee the $10,000 borrowed from her husband when called upon to do so, it is unnecessary to make any declaration or order in respect of that sum.

1. The application must therefore be dismissed with costs. Counsel for the respondents sought an order for costs on a solicitor and client basis but I do not think that the making of such an order would be justified. However, having regard to the charge of fraud levelled against the respondents and to the nature of the issues in the case, it may well be that, in the exercise of his discretion, the taxing officer will allow the respondents the costs of senior and junior counsel.