Schmierer v Horan
[2004] FMCA 16
•3 February 2004
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| SCHMIERER v HORAN & ANOR | [2004] FMCA 16 |
| BANKRUPTCY – Antecedent transactions – whether transfer of real estate between a wife and husband void as against the trustee – husband providing partial consideration for the transfer – husband obtaining an equitable interest in the wife’s share of the property – undesirability of the Court making orders requiring the property to be sold where only a small amount is in issue – alternative relief considered. |
Bankruptcy Act 1966 (Cth), ss.120, 121
Family Law Act 1975 (Cth)
Official Trustee in Bankruptcy v Lopatinsky [2003] FCAFC 109
| Applicant: | TREVOR JOHN SCHMIERER |
| First Respondent: Second Respondent: | AMANDA HORAN ROBERT HORAN |
| File No: | SZ683 of 2003 |
| Delivered on: | 3 February 2004 |
| Delivered at: | Sydney |
| Hearing date: | 25 November 2003 |
| Judgment of: | Driver FM |
REPRESENTATION
| Counsel for the Applicant: | Mr B Skinner |
| Solicitors for the Applicant: | Koffels |
| Counsel for the Respondents: | Mr A Broadfoot |
| Solicitors for the Respondents: | Wollerman Shacklock |
ORDERS
The Court declares that the transfer of the first respondent’s 50 per cent interest in the property known as Certificate of Title volume 10023 Folio 331 (“the property”) to the second respondent in or around July 2000 is void as against the applicant pursuant to s.120 of the Bankruptcy Act 1966 (Cth).
The Court declares that the applicant is entitled to an interest in the property equivalent to the interest held by the first respondent immediately prior to the transfer to the second respondent, less consideration in the sum of $12,259.14 given by the second respondent.
The second respondent is to pay to the applicant the sum of $3,513.86 within 90 days.
In default of compliance with order 3, the first and second respondents are to do all acts and things necessary to transfer title to the applicant in accordance with order 2.
If title is transferred to the applicant in accordance with order 4, the applicant shall pay to the second respondent the sum of $12,259.14.
Each party has liberty to apply for costs within 14 days.
Any submissions in support of a costs application are to be filed and served within 14 days.
Any response to an application for costs and submissions in support are to be filed and served within 14 days of receipt of an application for costs.
Any affidavits and submissions in reply are to be filed and served within seven days after receipt of the response.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SZ683 of 2003
| TREVOR JOHN SCHMIERER |
Applicant
And
| AMANDA HORAN |
First Respondent
ROBERT HORAN
Second Respondent
REASONS FOR JUDGMENT
Introduction and background
The applicant is the trustee of the bankrupt estate of Amanda Horan, the first respondent. The second respondent, Robert Horan, is her husband. The respondents were the registered title holders of a house property in Melbourne. In around July 2000 Mrs Horan transferred her half interest in the property to her husband. By an amended application filed on 7 August 2003 the applicant seeks a declaration that the transfer is void as against the trustee pursuant to ss.120 or 121 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”). Alternatively, the trustee seeks a declaration that he is entitled to an interest in the property equivalent to the interest held by Mrs Horan immediately prior to the transfer to Mr Horan. The trustee seeks a consequential order to effect the transfer of the title sought and costs.
The property in issue is located at 19 Katrina Close, Hallam in Victoria. Mr and Mrs Horan became registered as joint proprietors of the property on 12 August 1992. The property was mortgaged in favour of the ANZ Bank in the form of a registered mortgage on 25 August 1992. A default judgment was issued against the bankrupt on 28 July 1995 in favour of the Myer Company, however it appears that that debt was paid off by the bankrupt on 9 February 1996. On 3 March 1997 the firm of Koffels Solicitors commenced to act on behalf of the bankrupt in relation to certain matters. She was sentenced in the Victorian County Court on 15 December 1998 for obtaining money by deception and ordered to pay her former employer, the National Australia Bank, $100,000. On 21 June 1999 another creditor, the Epsom Veterinary Centre issued a warrant of seizure and sale over the property. On 19 October 1999 another firm of solicitors, Rutherford & Co, informed the ANZ Bank (the mortgagee) that their clients were contemplating transferring the property into the name of Mr Horan alone. On 27 October 1999 Koffels obtained a certificate determining their costs incurred in acting for the bankrupt in the sum of $20,885.14 of which $17,975.64 remained owing. The costs certificate was registered and a judgment was entered by Koffels in the NSW Local Court against the bankrupt on 12 November 1999.
On 24 November 1999 Rutherford & Co informed the ANZ Bank that their clients had agreed to transfer the property into Mr Horan’s name only. On 10 December 1999 the bank asked Mr Horan to make an application to renew the mortgage loan in his name. On 13 December 1999 bankruptcy notice NN2405/99 was served on the bankrupt.
The trustee asserts that the bankrupt committed a first act of bankruptcy on 4 January 2000 in failing to comply with the bankruptcy notice. A creditor’s petition was presented by Koffels against the bankrupt on 16 February 2000. The petition was served on 1 March 2000. On the same day, the bankrupt was able to satisfy the Epsom Veterinary Centre in respect of its warrant of seizure and sale.
The property was valued by the respondents at $185,000 on 16 March 2000 and by the Bendigo Bank at $155,000 on 14 April 2000.
On 21 June 2000 agreement was reached between the bankrupt and Koffels for payment of the debt due to Koffels by instalments. Further action on the creditor’s petition was withheld. The petition was dismissed by consent on 23 June 2000.
On 3 July 2000 Rutherford & Co, acting on behalf of the respondents, forwarded a transfer of title to solicitors for the Bendigo Bank. On 7 July 2000 Mr Horan made application to the Bendigo Bank for a loan. The loan funds obtained comprised a mortgage loan and a personal loan of $10,000, which was used to pay outstanding rates and legal fees. $2,500 was paid to Mrs Horan. On 21 July 2000 there was a settlement of discharge of the mortgage to the ANZ Bank and granting of a mortgage in favour of the Bendigo Bank for the sum of $124,000. The mortgage to the ANZ Bank was discharged in the sum of $123,454.93. On 24 July 2000 the bankrupt transferred her interest in the property to her husband. The mortgage in favour of the Bendigo Bank was registered on 26 July 2000.
On 13 August 2000 bankruptcy notice NN5530/00 was served on the bankrupt. The trustee asserts that a second act of bankruptcy was committed on 4 September 2000 when the bankrupt failed to comply with that notice. On 25 September 2000 a second creditor’s petition was presented by Koffels. A sequestration order was made on the application of Koffels on 1 November 2000 and on the same day the applicant was appointed trustee of the bankrupt’s estate.
Another creditor of the bankrupt, Glen Busby International Tennis Coaching Academy, issued a warrant of seizure and sale over the property on 3 June 2002 and on 6 May 2003 a caveat over the property was lodged by the respondents’ present solicitors, Wollerman Shacklock.
There have been no proceedings under the Family Law Act 1975 (Cth) (“the Family Law Act”) between the respondents and no registered property agreement under that Act has been made between them.
The evidence
The applicant relies on his own affidavit filed on 30 April 2003. Mr Schmierer deposes as to the facts discovered by him concerning the dealing with the property following his appointment as trustee. He also deposes as to his knowledge of the bankrupt’s debt history.
I also accepted a bundle of documents into evidence tendered by the applicant.
The application is opposed by the respondents. They rely upon affidavits by Mr and Mrs Horan filed on 6 June 2003, 10 June 2003, 1 September 2003 and 18 November 2003. They depose as to the dealings between them and with creditors of the bankrupt and the ANZ Bank and the Bendigo Bank. The respondents also rely upon two affidavits by Philip Colman filed on 20 October 2003 and 18 November 2003 detailing payments made by Mr Horan on behalf of Mrs Horan to two creditors, the Cranbourne Equine Hospital and the Flemington Equine Clinic.
I also accepted into evidence a bundle of documents tendered by the respondents.
The legislation
Sections 120 and 121 of the Bankruptcy Act provide as follows:
Transfers that are void against trustee
(1) A transfer of property by a person who later becomes a bankrupt (the transferor ) to another person (the transferee) is void against the trustee in the transferor's bankruptcy if:
(a) the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and
(b) the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.
Exemptions
(2) Subsection (1) does not apply to:
(a)a payment of tax payable under a law of the Commonwealth or of a State or Territory; or
(b)a transfer to meet all or part of a liability under a maintenance agreement or a maintenance order; or
(c) a transfer of property under a debt agreement; or
(d)a transfer of property if the transfer is of a kind described in the regulations.
Transfers that are not void
(3) Despite subsection (1), a transfer is not void against the trustee if:
(a) the transfer took place more than 2 years before the commencement of the bankruptcy; and
(b) the transferee proves that, at the time of the transfer, the transferor was solvent.
Refund of consideration
(4) The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.
What is not consideration
(5) For the purposes of subsections (1) and (4), the following have no value as consideration:
(a)the fact that the transferee is related to the transferor;
(b)if the transferee is the spouse or de facto spouse of the transferor—the transferee making a deed in favour of the transferor;
(c)the transferee's promise to marry, or to become the de facto spouse of, the transferor;
(d)the transferee's love or affection for the transferor.
Protection of successors in title
(6) This section does not affect the rights of a person who acquired property from the transferee in good faith and by giving consideration that was at least as valuable as the market value of the property.
Meaning of transfer of property and market value
(7) For the purposes of this section:
(a)transfer of property includes a payment of money; and
(b)a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and
(c)the market value of property transferred is its market value at the time of the transfer.
Section 121 provides:
Transfers that are void
(1)A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee)) is void against the trustee in the transferor's bankruptcy if:
(athe property would probably have become part of the transferor's estate or would probably have been available to creditors if the property had not been transferred; and
(b)the transferor's main purpose in making the transfer was:
(i) to prevent the transferred property from becoming divisible among the transferor's creditors; or
(ii) to hinder or delay the process of making property available for division among the transferor's creditors.
Showing the transferor's main purpose in making a transfer
(2)The transferor's main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.
Other ways of showing the transferor's main purpose in making a transfer
(3) Subsection (2) does not limit the ways of establishing the transferor's main purpose in making a transfer.
Transfer not void if transferee acted in good faith
(4)Despite subsection (1), a transfer of property is not void against the trustee if:
(a)the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and
(b)the transferee did not know that the transferor's main purpose in making the transfer was the purpose described in paragraph (1)(b); and
(c)the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.
Refund of consideration
(5)The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.
What is not consideration
(6)For the purposes of subsections (4) and (5), the following have no value as consideration:
(a)the fact that the transferee is related to the transferor;
(b)if the transferee is the spouse or de facto spouse of the transferor—the transferee making a deed in favour of the transferor;
(c)the transferee's promise to marry, or to become the de facto spouse of, the transferor;
(d)the transferee's love or affection for the transferor.
Exemption of transfers of property under debt agreements
(7)This section does not apply to a transfer of property under a debt agreement.
Protection of successors in title
(8)This section does not affect the rights of a person who acquired property from the transferee in good faith and for at least the market value of the property.
Meaning of transfer of property and market value
(9)For the purposes of this section:
(a)transfer or property includes a payment of money; and
(b)a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and
(c)the market value of property transferred is its market value at the time of the transfer.
Reasoning
In order to succeed in his claim under s.120 of the Bankruptcy Act the trustee must prove that, within five years of the commencement of the bankruptcy, the bankrupt transferred property to Mr Horan and that he gave no consideration, or less than full consideration, for it. If that is proved then the transfer will be void as against the trustee unless the respondents can prove that the transfers took place more than two years before the commencement of the bankruptcy and at that time Mrs Horan was solvent. In respect of the claim under s.121, the trustee must prove that the property transferred was likely to become part of the bankrupt’s estate and that Mrs Horan’s main purpose in making the transfer was to prevent the property becoming divisible among her creditors, or to hinder or delay the process of making the property available for division among creditors. Section 121(2) provides that the transferor’s purpose can be established if it can be inferred from all the circumstances that at the time of the relevant transfer the transferor was, or was about to become, insolvent. The purpose can be proved in other ways but an element of subjectivity is involved in establishing what the intention of the bankrupt was at the material time. It is open to a transferee to resist a claim under s.121 if the transferee can establish that valuable consideration was given and that the transferee did not know of the illegitimate purpose of the transfer and did not know that the transferor was or was about to become insolvent.
Is the transfer void under s.120?
There is no doubt that the transfer from the bankrupt to Mr Horan of her interest in the property occurred less than two years before the bankruptcy. Accordingly, the solvency of Mrs Horan at the time of the transfer is not relevant for the purposes of s.120. The question to be answered is what consideration did Mr Horan give for the transfer to him of Mrs Horan’s interest in the property?
The respondents are married but separated in December 1999. The respondents gave evidence that sometime in 1999 and prior to Mrs Horan being sentenced in the County Court to a term of imprisonment, they discussed her financial circumstances and decided that in view of the financial support provided by Mr Horan to Mrs Horan, her interest in the property should be transferred to him. The only documentary evidence of the agreement asserted is a handwritten note prepared by Mrs Horan. The copy annexed to her affidavit carries a notation that the notes were written by her in early 1999. The copy annexed to Mr Horan’s affidavit contains no notation to that effect. The note refers to payments made by the husband, apparently to the ANZ Bank over the preceding two years on account of the mortgage totalling $12,000, plus car payments made by the husband made over two years totalling $11,520, apparently in respect of a debt over a car owned by Mrs Horan. The note also refers to utility bills paid by the husband and rates totalling $6,000 over two years and Mrs Horan’s use of her husband’s money to pay credit card and other bills.
All of the items identified in the note are payments apparently made by the husband prior to the note being prepared, sometime in 1999. However, Mr Horan’s evidence was that the agreement reached was that he would attempt to raise money in order to pay off his wife’s debts and that in consideration of his efforts his wife would transfer her interest in the property to him. The handwritten note is not consistent with that evidence. Mr Horan also deposed that the note was prepared in late 1999 and not early 1999 as appears on Mrs Horan’s copy of the note. There is an issue of credibility concerning the evidence of both respondents. Their evidence on the question of their alleged agreement for the transfer of the house was vague and inconsistent as to the time of the agreement and as to its terms. There is other evidence that at least by 19 October 1999 the respondents initiated moves to transfer Mrs Horan’s interest in the property to Mr Horan. The issuing of the warrant of seizure and sale by the Epsom Veterinary Centre on 21 June 1999 would have focused the respondents’ minds. I find that, on the balance of probabilities, the respondents agreed sometime between June and October 1999 that the property should be transferred into Mr Horan’s name alone and that Mr Horan should do what he could to stave off the risk of the house being lost to Mrs Horan’s creditors. That involved either giving money to her or paying debts for her. What then, did Mr Horan do to carry out the understanding that he reached with his wife?
The only money paid by Mr Horan to Mrs Horan directly at or around the time of the transfer of the property was a sum of $2,500 obtained as part of a loan from the Bendigo Bank. I accept that that payment was consideration for the transfer. I do not have any reliable evidence of any other payments directly by Mr Horan to Mrs Horan that could be consideration for the transfer.
I also accept, on the balance of probabilities, that Mr Horan made payments to the ANZ Bank over time in respect of the amounts due under the mortgage. I accept that he probably also made payments to a lender in respect of a debt due over Mrs Horan’s motor car. He probably also paid rates and utility bills in respect of the house property from time to time. The evidence about precisely what payments were made by Mr Horan is not as clear as it could be, but I accept that payments were made. I do not accept that those payments were made by Mr Horan as consideration for the transfer of the house property to him. He would have made payments to the ANZ Bank on account of the mortgage in any event as he was a joint debtor on that mortgage. He would have had a liability to meet rates and utility bills in any event. He provided financial support to his wife over time because she needed it and because he was a supportive husband. The financial support provided by Mr Horan to his wife during the course of their cohabitation would probably have supported a claim by him for an adjustment of property interests under the Family Law Act. However, he did not make such a claim. It is not open to this Court, sitting as a bankruptcy court, to assess the value of Mr Horan’s contributions as matrimonial contributions under the Family Law Act: Official Trustee in Bankruptcy v Lopatinsky [2003] FCAFC 109.
It is also clear from the decision of the Full Federal Court in Lopatinsky that consideration, for the purposes of s.120 of the Bankruptcy Act, could include an amount due to Mr Horan in respect of an equitable interest he acquired over the property as a result of payments in respect of the property in excess of his legal obligation. Mr Horan would also have to prove that he made disproportionate contributions without intending his wife to have the benefit of those contributions. The evidence presented by the respondents was, unfortunately, unsatisfactory in determining precisely what payments were made by Mr Horan. Further, the mortgage payments made by Mr Horan and identified in the note were made at a time when he was simply rendering financial assistance to his wife as a result of a perceived marital obligation. The payments were made well before the agreement to transfer the house to Mr Horan. Mr Horan did not intend when he made whatever payments he did make, to deny his wife the benefit of those payments. The same is true of the other payments referred to in the note. Accordingly, I find that the payments detailed in the handwritten note prepared by Mrs Horan sometime in 1999 do not establish an equitable interest enjoyed by Mr Horan in the property such as may give rise to a constructive trust over the proceeds of the sale of the property or otherwise to constitute consideration for the transfer.
I accept Mr Colman’s evidence that between 25 August 1999 and 30 November 1999 Mr Horan made payments totalling $3,700 to the Flemington Equine Clinic on account of a debt due to the clinic by Mrs Horan. I also accept that between 1 September 1999 and 26 July 2000, Mr Horan made payments totalling $3,300 to the Cranbourne Equine Hospital on account of a debt due to the hospital by Mrs Horan. These were payments made at a time when Mr Horan knew of his wife’s financial difficulties. He knew that she had committed a serious fraud against her employer. He must have had some knowledge of the bankruptcy proceedings against his wife. The payments were made at a time when the respondents were making efforts to have the house property transferred into Mr Horan’s name alone for his benefit and the benefit of their children. Various creditors at the time were pressing for payment and a warrant of seizure and sale had been issued on 21 June 1999 by the Epsom Veterinary Centre. I find that the payments made by Mr Horan to the Cranbourne Equine Hospital and the Flemington Equine Clinic were made in an effort to protect the house property in view of his wife’s dire financial circumstances. In view of the understanding reached between Mr and Mrs Horan that the property ought to be transferred into his name alone, Mr Horan was acting in order to protect his own interests. I find that the payments of $3,300 and $3,700 made by Mr Horan gave rise to an equitable interest in his favour over the property in respect of those amounts. I find that those payments were consideration for the transfer of Mrs Horan’s interest to Mr Horan for the purposes of s.120 of the Bankruptcy Act.
I also accept Mr Horan’s affidavit evidence filed on 18 November 2003 detailing payments of $2,759.14 made by him to the Sheriff’s Office of Victoria on account of the warrant of seizure issued on behalf of the Epsom Veterinary Centre. I find that those payments were made by Mr Horan to protect his own interest in the house property, giving rise to a further equitable interest in his favour for the amounts paid. The sum of $2,759.14 is also consideration for the purposes of s.120.
I find that no other consideration was given by Mr Horan for the transfer. The consideration given by Mr Horan totalled $12,259.14. Prior to the transfer the property was valued by the Bendigo Bank at $155,000. I accept that as a reliable valuation of the property at the time of the transfer. The mortgage in favour of the ANZ Bank was discharged for the sum of $123,454.93. Therefore, at the time of transfer, the respondents had an equity in the property of $31,545.07. Mrs Horan was entitled to a half share of that equity, namely $15,773. Mr Horan gave less than full consideration for the transfer of Mrs Horan’s interest in the property to him. It follows that the transfer is void as against the trustee.
It is unnecessary to consider whether the transfers might also be void under s.121 of the Bankruptcy Act. The trustee is entitled to relief on account of the transfers being void under s.120. It would, however, be unfortunate if the property had to be sold in order to satisfy the trustee’s claim upon it. Pursuant to s.120(4) of the Bankruptcy Act the trustee would be required to pay to Mr Horan the amount of his consideration for the transfer. That is the amount of $12,259.14 and, given that the Bendigo Bank holds security over the property for the amount of approximately $124,000, if the property were to be sold the trustee would get very little, if anything, out of it. The property provides a home for Mr Horan and his children and, in view of the very modest amount that the trustee stands to gain, I am loathe to make orders requiring that the property be sold.
I will order that Mr Horan pay to the trustee the amount of Mrs Horan’s interest in the property that he did not give consideration for, namely $3,513.86. If that amount is not paid within 90 days, then Mr Horan will have to transfer his wife’s interest in the property to the trustee, on payment to him of the amount due to him pursuant to s.120(4) of the Bankruptcy Act.
I will hear the parties as to costs.
I certify that the preceding twenty-nine (29) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 3 February 2004
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