Russo and Dorsey

[2012] FamCA 914

FAMILY COURT OF AUSTRALIA

RUSSO & DORSEY [2012] FamCA 914

FAMILY LAW – Interim hearing – Rights of a third party — preservation of property
FAMILY LAW – EQUITY – Injunctions – Injunction against a third party – whether the third party is an alter ego trust – where the trust has a default judgement against the respondent - where the applicant seeks an injunction restraining the trust from enforcing the judgement – whether the respondent controls the trust – where the respondent has resigned as trustee post separation

Family Law Act1975 (Cth) s 106B

American Cyanamid v Ethicon Ltd [1975] AC 369
Investments Pty Ltd v Harper and Harper (1981) 148 CLR 337
Yunghanns & Others v Yunghanns & Others (1999) FLC 92-386
Blueseas Investments Pty Ltd & Mitchell & McGillvray (1999) FLC 92-856

APPLICANT: Ms Russo

RESPONDENT: Mr Dorsey

FILE NUMBER: BRC 3499 of 2012

DATE DELIVERED: 31 October 2012

PLACE DELIVERED: Brisbane

PLACE HEARD: Brisbane

JUDGMENT OF: Forrest J

HEARING DATE: 8 October 2012

REPRESENTATION

COUNSEL FOR THE APPLICANT: Mr James

SOLICITOR FOR THE APPLICANT: Buchanan Legal

FOR THE RESPONDENT: No Appearance

COUNSEL FOR DORSEY NOMINEES: Dr Wilson

SOLICITOR FOR DORSEY NOMINEES: Cleary Hoare

Orders

IT IS ORDERED THAT

1. Dorsey Nominees Pty Ltd ACN 130 492 401 as trustee for the B & C Dorsey Trust (“Dorsey Nominees”) be joined as a respondent to these proceedings with the applicant to file and serve an Amended Initiating Application within 14 days of the date hereof naming Dorsey Nominees as the second respondent and particularising the orders the applicant seeks against the respondent and the second respondent on a final basis.

IT IS FURTHER ORDERED, UNTIL FURTHER ORDER, THAT

1. Dorsey Nominees is restrained from taking any steps to enforce judgment against the respondent, Mr Dorsey, in proceedings 5713 of 2012 filed in the Brisbane Registry of the Supreme Court of Queensland.

IT IS NOTED that publication of this judgment by this Court under the pseudonym Russo & Dorsey has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

FAMILY COURT OF AUSTRALIA AT BRISBANE

FILE NUMBER: BRC 3499 of 2012

Ms Russo

Applicant

And

Mr Dorsey

Respondent

REASONS FOR JUDGMENT

Introduction  

1. Ms Russo (“the applicant”) has substantive proceedings in this Court for property division and maintenance against Mr Dorsey (“the respondent”) following the end of their de facto relationship in late 2010.

1. The applicant’s substantive proceedings were commenced in the Federal Magistrates in Brisbane on 26 April 2012. She made interim application for periodic maintenance, injunctions to preserve property and a “Hogan” style order for provision of funds to pay for her legal representation in the proceedings. The matter came before a Federal Magistrate on 3 July, 2012 and was transferred to this Court as a complex matter.

1. On Monday 10 September, I heard and determined the interim applications. On that same day, the applicant filed a further application in a case in which she sought an order that a third party, Dorsey Nominees Pty Ltd as trustee for the B & C Dorsey Trust (“the trustee”), be added as a Respondent to these proceedings and for an interim injunction restraining that third party against taking any further steps to seek or enforce judgment against Mr Dorsey in proceedings in the Supreme Court of Queensland. I was asked by the applicant to hear and determine that application ex parte as against the trustee but that was opposed by the respondent. After considering the provisions of Rule 5.12 of the Family Law Rules 2004 (“the Rules”), I was not persuaded that I should accede to that request and adjourned the hearing of that application to Monday 8 October after service on the trustee of the application and supporting evidence had been effected.

1. On 8 October, the respondent did not appear but the trustee appeared, represented by counsel and solicitors.

1. I reserved my decision at the conclusion of hearing submissions on the undertaking of the trustee, given by its director, to take no further steps to enforce the default judgment and not to take steps to enforce the debt said to be owed to it by the respondent until further order.

Some relevant background

1. The applicant and respondent commenced a de facto relationship (as that term is defined in s4AA of the Family Law Act 1975) in October 2007.

1. The applicant has 1 adult child of a previous relationship. The respondent has 3 adult children of a previous relationship. There were no children of their de facto relationship.

1. When they began living together the applicant was 42 years of age and working in the restaurant industry. The respondent was 47 years of age and a self-employed civil engineer. The respondent was a wealthy man, owning about $29,000,000 in assets, $1,800,000 in self-managed superannuation and having minimal liabilities. The applicant had minimal assets and liabilities.

1. About 6 months after the commencement of their de facto relationship, the respondent was involved in the establishment of what is called a “bloodline trust” but which, for present purposes, I understand the applicant and respondent agree is akin to a discretionary family trust. Cleary Hoare Solicitors assisted the respondent in this process. It is the B & C Dorsey Trust (“the trust”).  In the schedule to the applicable Trust Deed, Mr D is named as the Settlor. The trustee is named as the Trustee. The respondent is named as the Principal Beneficiary and also as the First Principal. The respondent’s children, grandchildren, great grandchildren and parents are named as Primary Beneficiaries, amongst others who are included in that class by reference to their relationship with the respondent and members of his immediate family. The spouses, de facto partners, widow or widower of any Primary Beneficiary are listed as being included as Secondary Beneficiaries.

1. The Trust Deed gives the Principal power to appoint any person or entity as a Secondary or Tertiary Beneficiary as well as the power to remove the Trustee from office and/or to appoint any person to be a Trustee.

1. When the trust was established, the respondent was the director of the trustee.

1. According to the evidence of the respondent, upon the creation of the trust, he immediately gifted to the trust the sum of $29,200,000 which he deposes was “a reasonable estimate of the value of my assets”.  He then immediately borrowed back from the trust an equal amount, evidenced by Loan Agreement dated the same day as the relevant Trust Deed. The debt is said to be secured by mortgages over his properties and charges over his business interests. As I understand the evidence, no property or money was actually transferred to the trust at the time of the “gift” to the trust and no property or money was actually transferred back to the respondent at the time of the loan made by the trust to the respondent.  

1. The respondent does not depose to having informed the applicant of the creation of the trust or the gift and loan transactions between him and the trust at the time those events happened or at all during the course of their de facto relationship. The applicant does not depose to having been informed of those things.

1. The couple lived in rental premises throughout 2008 and 2009. The applicant asserts that she gave up employment at the commencement of their de facto relationship to provide homemaking services to the respondent and all of the adult children who lived with them from time to time, but that in early 2008 she began some part-time work as a fitness instructor at a local fitness centre, contributing her income to the needs of the couple and their household. The respondent takes issue with the applicant in respect of her claims as to direct financial contribution during their relationship. That dispute simply cannot be determined at this point in the proceedings.

1. The applicant asserts that in or around May 2009 she and the respondent commenced looking around to purchase a fitness centre business that she could operate. Some months thereafter, a golf course was purchased and the rights to conduct a fitness business under a nationally franchised brand were also acquired. The golf course was purchased by the trust. The fitness business purchased by the applicant.

1. In December 2009, a residential property was purchased for $2,510,000. It was registered in the name of the respondent and the couple and the 4 adult children moved into it.

1. The fitness business was opened by the applicant in premises at the Golf Course in March 2010 and around this time the couple’s de facto relationship began to break down. By September, 2010, the couple were sleeping in separate rooms in the house.

1. In October, 2010 lease documentation in respect to the lease of the premises from which the fitness business was conducted at the Golf Course was executed as between a company controlled by the applicant and the trust, still then controlled by the respondent.

1. In early December, 2010, documentation confirming that the applicant owed the respondent $200,000 for money advanced to her at different times during the de facto relationship was executed by the applicant and the respondent. 

1. The circumstances under which these two documents were signed are contentious between the parties but at this time in the proceedings no findings can be made in respect of them.

1. About a week later in December, 2010, the respondent told the applicant “that she would have to move out.” The applicant asserts that she was handed a letter by the respondent telling her to leave the house with her clothes and that the respondent was having the locks changed. The applicant moved out of the residence and the applicant and respondent have remained separated ever since.

1. A few weeks later, on 22 December, 2010, the respondent resigned as the director of the trustee and around the same time executed a deed in which he resigned and renounced his position as First Principal of the trust. One of the respondent’s adult sons is now the sole director of the trustee and it would seem that all 3 of the respondent’s adult sons, named in the Trust Deed as Successor Principal, jointly, now have the powers conferred upon the Principal of the Trust by the Trust Deed.

1. Since the applicant and the respondent separated, the fitness business of the applicant has closed and the respondent has complained to the Police Service that the applicant has stolen money from him. After the applicant commenced these substantive proceedings in the Federal Magistrate Court in April this year, the respondent sued the applicant in the District Court in respect of the sum of $200,000 he asserts she owes him, and, significantly, in so far as this application is concerned, the trustee sued the respondent in the Supreme Court for the debt of $29,200,000 said to be owing by him to it. Upon the respondent’s failure to file a defence in those proceedings, the trustee entered judgment by default against him. Notably, default judgment was entered against the respondent on the application in this Court of the trustee on 17 September 2012, after the date the applicant filed the application for the injunction against the trustee seeking to restrain it from taking that step and before the date that I had set for the hearing of the application.

1. The respondent deposes that the totality of his assets, including the residential property (said to be worth $1,800,000) and the loan to the applicant (said to be $222,467), are worth $8,101,394. Further, he deposes that he owes the Bank of Queensland $1,703,639 in respect of the residential property, miscellaneous debts of $83,840 and, most significantly, that he owes the trust and the Bank of Queensland a total of $30,743,556. He still deposes to having self-managed superannuation of $1,800,000.

1. Clearly, the respondent presents a case to this Court that he is in a net debt situation of $24,429,641.

The issue of joinder of the trust as a respondent

1. Counsel for the applicant began by referring to Rule 6.02(1) of the Rules. It provides:

A person whose rights may be directly affected by an issue in a case, and whose participation as a party is necessary for the court to determine all issues in dispute in the case, must be included as a party to the case.

1. He went on to inform the Court that it will be the applicant’s case that the assets “purported gifted by the respondent to the Trust should form part of the property pool and should be available for distribution.” He submitted that any order to this effect will directly impact upon the trust and as such it is appropriate for the trustee to be added as a party in the proceedings.

1. One of the orders sought by the applicant is for her to be permitted to amend her application for substantive final relief so as to include the trustee as a respondent to the proceedings.

1. Pursuing these matters, as I did, in discussion with counsel for the applicant on the hearing of the application, in order to seek some further particularity as to the nature of the final relief that the applicant would be seeking, it became clear that the applicant intends to seek appropriate just and equitable property division orders against the respondent but only after the determination of her case that the assets of the trust should be considered as part of the property to be divided between the applicant and the respondent because the trust is actually the puppet or alter ego of the respondent and its assets, therefore, are truly his. This would, it seems plain, probably involve orders being sought as against the trust, or assets of the trust, perhaps pursuant to the provisions of s 90TA, s 90AE, s 90AF, or otherwise, having regard to the decision of the High Court in Ascot Investments Pty Ltd v Harper and Harper (1981) 148 CLR 337.

1. After further discussion, it became clear that the applicant will also be giving consideration to seeking alternative relief in the form of orders pursuant to s 106B of the Family Law Act 1975 seeking to:

·set aside the disposition of property by the respondent by the gift to the trust in April 2008;

·set aside the loan agreement between the respondent and the trust in April 2008;

·set aside the mortgages over his property granted to the trustee to secure the debt owed by the respondent to the trustee pursuant to that loan agreement;

·set aside the December 2010 deed whereby the respondent renounced and resigned his position of First Principal of the trust.

1. The effect of those orders, if made, would effectively be, at best, that all of the property of the respondent would be his, unencumbered by any claim on it by the trust, or, at worst, that all of the property of the trust would be considered as property able to be made the subject of property division orders in favour of the applicant, if determined, ultimately, to be appropriate and just and equitable considering all of the matters required to be considered pursuant to s 90SM(4) of the Family Law Act 1975.

1. If the applicant does pursue her application for final relief in this way, as it seems probable that she will, then the submission made by counsel for the trustee that “there is no basis asserted by the applicant that the [trustee is a necessary party] for the court to determine all issues in dispute in this case” must be, with respect, incorrect. The trustee will, in such circumstances, be a necessary party.

1. Whether there is ultimately real merit in the applicant’s case that she is entitled to final relief by way of the route she currently proposes to go is, of course, a matter for the judge who finally hears the proceedings. However, I consider, at this point in the proceedings, that it is appropriate to join the trustee as a respondent and  to give the applicant some time, as she applies for, to file an amended application in which she names the trustee as the second respondent in the proceedings and particularises the orders she will be seeking as against the respondent and the trustee. I will order accordingly.

Should the trustee then be restrained from taking any steps to enforce the judgment debt it has recently obtained in the Supreme Court?

1. The applicant then seeks an injunction against the trustee restraining it from taking steps to enforce the judgment it has obtained against the respondent in the Supreme Court proceedings.

1. There is no doubt that before such an injunction can be granted the Court is required to find that there is a serious issue to be tried and that the balance of convenience supports the making of the order.[1]

[1]See American Cyanamid v Ethicon Ltd [1975] AC 369 and the other cases cited by the Full Court of this Court in Yunghanns & Others v Yunghanns & Others (1999) FLC 92-386 and also Blueseas Investments Pty Ltd & Mitchell & McGillvray (1999)FLC 92-856

1. I am satisfied, on the evidence, that there are serious questions to be tried, both in respect of the question of actual control of the trust and whether it is the respondent’s puppet or alter-ego, and, in respect of the matters that might cause the Court to exercise the power available to it pursuant to s106B of the Family Law Act to set aside dispositions and the making of instruments in certain circumstances.

1. As to the balance of convenience, the applicant submits that if the respondent is able to take steps to enforce the default judgment it has obtained there is “a real possibility of the asset pool being depleted such that any order that provides that there be a property distribution in favour of the applicant would be worthless.”

1. There is merit in that submission. Having obtained a default judgment for something like $29,200,000, against the respondent in circumstances where he asserts only around $8,000,000 in assets, including a residential property said to be valued at $1,800,000 already securing $1,703,000 in debt, and given all the currently unexplained circumstances surrounding the respondent’s post-separation renunciation of control of the trust and of the trustee and his default in respect of entering a defence to the trustee’s Supreme Court action, I am satisfied that left unrestrained, the trustee might secure transfer to it of all of the respondent’s remaining assets in part-satisfaction of the default judgment and be in a position to transfer them in specie to beneficiaries of the trust or even to sell them and distribute the proceeds to beneficiaries of the trust, creating serious risk that any order ultimately made in favour of the applicant would be worthless.

1. Counsel for the trustee submitted that the balance of convenience does not support the making of the order. He pointed to the apparent drop in value of the respondent’s assets from $29,200,000 in April, 2008 to $8,000,000 now and submitted that any further drop in value between now and a future time when the trustee might ultimately be able to enforce its judgment would prejudice the trustee, particularly in circumstances where an undertaking as to damages that might be given by the applicant is worthless as she has no assets.

1. Counsel for the applicant conceded the applicant has no capacity to offer an undertaking as to damages, but then relied on the decision of the Full Court of this Court in Blueseas Investments[2]as authority for the principle that a party’s incapacity to give an undertaking as to damages is not, by itself, sufficient grounds for refusing the grant of an injunction, particularly where the preservation of the only property to which that impecunious party might have recourse is concerned. I accept that submission.

[2]          Supra at [56]-[57]

1. In any event, it is mere speculation to consider that the value of the respondent’s property will continue to drop in the future. In my view, as economic cycles come and go in this region, State, Country and around the entire world, it is no less a possibility that the value of the respondent’s property may actually increase between now and the time in the future when these proceedings are finalised. The risk that they will reduce does not weigh heavily in my consideration of this matter.

1. In the circumstances, notwithstanding the applicant’s incapacity to give an undertaking as to damages due to her impecuniosity, I am satisfied that the balance of convenience in this case strongly favours the grant of the injunction sought by the applicant so that the property is preserved to which the applicant may ultimately have recourse if she is successful in her application for final relief.

1. Accordingly, I will grant the injunction and I will make the orders set out at the beginning of these reasons.

I certify that the preceding forty-three (43) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Forrest delivered on 31 October 2012.

Associate:

Date:  31 October 2012.