Schmierer v SMITH (No.2)

[2004] FMCA 856

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SCHMIERER v SMITH (No.2) [2004] FMCA 856

BANKRUPTCY – Void transfer – where bankrupt took out second mortgage over a property prior to becoming bankrupt – where the mortgagor had admitted to considerable indebtedness – where mortgage was taken out at high rate of interest – whether at the time of the transfer the transferor was, or was about to become, insolvent – whether any consideration was given for the mortgage – whether respondent should receive a refund of consideration paid – whether interest should be paid upon the refund.

Bankruptcy Act 1966 (Cth), ss.5, 30, 121
Land Titles Act 1994 (Qld), s.181

Reader v Schmierer [2003] FCA 386
Sutherland v Brien (1999) 149 FLR 321
Victorian Producers Co-operative Co Ltd v Kenneth [1999] FCA 1488
Prentice v Cummins (No 5) [2002] FCA 1503
Lewis & Anor v Doran & Ors (2004) 208 ALR 385 at 408
Quick v Stoland (1998) 157 ALR 615
Trustee of the Property of O’Halloran, in the matter of O’Halloran v O’Halloran [2002] FCA 1305
Issitch v Worrell & Ors (2000) 172 ALR 586
Anscor Pty Ltd  v Clout [2004] FCAFC 71

Applicant: TREVOR JOHN SCHMIERER

Respondent: BRIAN SMITH

File No: SYG 1571 of 2004

Delivered on: 1 December 2004

Delivered at: Sydney

Hearing date: 8 November 2004

Judgment of: Raphael FM

REPRESENTATION

Counsel for the Applicant: Mr S Wells

Solicitors for the Applicant: Thomson Playford

Solicitors for the Respondent: Corporate Business Lawyers Qld

ORDERS

1. The Court declares that the grant of mortgage identified by dealing number 706668011 dated 16 July 2002 by Norman Diano in favour of Ross William Murphy in respect of Lot 4 on SP 117620 (Queensland) is void against Trevor Schmierer Trustee of the Bankrupt estate of Norman Diano. The Court orders that:

   (1)There be paid to the applicant the balance of the sum of $100,528.44 plus interest held in the joint names of the applicant and the respondent after payment of the sum of $20,000 to the respondent.

   (2)The Respondent pay the applicant 80% of his total costs to be taxed if not agreed pursuant to the Federal Court Act and Rules.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 1571 of 2004

TREVOR JOHN SCHMIERER

Applicant

And

BRIAN SMITH

First Respondent

REASONS FOR JUDGMENT

1. These proceedings, which were commenced by application filed on 26 May 2004 proceeded on the basis of a statement of claim filed on 25 June 2004, and seek orders for a declaration under s.30 Bankruptcy Act 1966 that a second mortgage over property known as 4/40-42 Warne Terrace, Caloundra, Queensland having folio identifier Lot 4 in SP117620, Title no 5027506 is void against the trustee pursuant to s.121 Bankruptcy Act. The trustee also sought orders that the second mortgage was void against the trustee based upon common law unconscionability and on the grounds that there was no consideration for the deed. A sum of money, namely $100,528.44 being the net proceeds of sale of the property has been deposited in a joint account in the names of the applicant and the respondent. The applicant required orders paying this money out to him in the event that I make findings in his favour on the principle application.

2. The applicant is the trustee in bankruptcy of Norman Diano the purported mortgagor and the respondent is the assignee of the mortgage which was originally granted to a Ross Murphy, assigned by him to a company known as Mainvista Pty Limited and by that company to the respondent. It is not suggested that these assignments were anything but at arms length or that appropriate consideration was not paid. The attack by the trustee is on the original mortgage and it is accepted by the respondent that he has no greater rights thereunder than the original mortgagee, so that if the mortgage is declared to be void on any of the bases claimed relief will be given against him.

History

1. Prior to his bankruptcy Mr Diano was an electrical contractor living and working in South Australia. He was also a property investor in a small way. He had purchased four properties in South Australia and Queensland although he claims that one of those properties despite being registered in his name jointly with another was owned beneficially by that other joint tenant. Mr Diano had mortgages on all of the properties and whilst he says that he had a substantial equity in each of them, he accepted that the mortgagees were in the second line of lenders introduced to him by mortgage brokers and that the loan interest rates were generally speaking higher than would have been charged by a bank.

2. According to the Mr Diano’s statement of affairs he commenced having difficulties meeting his debts in about November 2001. As I understand his evidence, which was given without the aid of an affidavit pursuant to a subpoena, the difficulties arose when the term of one of his first mortgages expired and he was required to re-finance. This proved difficult. He blamed the problems on the mortgagee, Mr Glover, who on 7 September 2001 had issued a demand upon him which he did not pay. He claimed that his credit rating was then affected, which made it almost impossible to re-finance the loan on a property in Flagstaff Hill. Matters then proceeded in a downward spiral. On 7 November 2001 Mr Glover got judgment against him for $87,463.01. He says that at the same time he had about $40,000 in his bank account.

3. Although Mr Diano appreciated that he was in considerable financial difficulty by the beginning of 2002 he believed that this was not his own fault but it arose from an unreasonable attitude being taken by others. In his evidence he cast about to blame his mortgagees, his solicitors, the mortgage brokers and accountants with whom he did business. A number of other proceedings were issued against him by his former lawyers, by Hutchison Telecommunications and there was notification of a debt of approximately $9,000 due to the Child Support Agency. Mr Diano had a response to all of these claims and as they were not really the subject of these proceedings I am not prepared to say that any or all of those answers were not justified. But it did indicate, as Mr Diano said in an affidavit found at page 26 to exhibit WPC2 to the affidavit of William Paul Cotter sworn on 15 September 2004 and filed in these proceedings that:

   “By November 2001 I was really in a very desperate situation. The mortgagee on one of my properties was about to foreclose and sell the property from underneath me.”

4. That affidavit was given in certain proceedings against a company to which Mr Diano had applied for re-financing. The company was operated by a struck off solicitor and after Mr Diano had made his application (which the company was unable to proceed with successfully) he was sued for a sum in excess of $100,000. Mr Diano needed money to pay his lawyers to fight these proceedings and to have removed caveats that the company had placed on his remaining properties. He says that it was in this context that he borrowed the money from Murphy. He took a loan of $20,000 at the interest rate of 10% per month. He stated in his evidence that he had expected that he would be able to repay this money at the end of the month. There was some confusion in his evidence as to whether he fully understood the rate of interest he was paying. I am inclined to think that he did.

5. Mr Diano was successful in his proceedings. They were settled for about $1,000 and the caveats were withdrawn. To the extent that the trustee relied upon that proceeding to indicate Mr Diano’s indebtedness I will disregard it. I accept Mr Diano’s evidence that the whole claim was improper.

6. But the matter does not end there. Even though he was successful in the proceedings Mr Diano was unable to repay Mr Murphy. He never paid even the first month’s interest. He paid approximately $600 of it. I asked him whether he had considered selling any of his properties in order to assist in re-finance of the others. He said that he had in fact sold one of his other properties but he discovered that the mortgagee was holding on to the entire proceeds of sale on the basis that it was cross-collateralised against another of his properties.

7. The mortgage to Murphy was, on its face said to have been executed on 16 July 2002. There were claims by the trustee that in fact the mortgage had not been entered into until December 2002 because it was only stamped in January 2003 and was not registered until after Mr Diano had been made bankrupt on 14 April 2003. Mr Diano denied this. In his evidence he began by saying he thought he signed the mortgage around Christmas 2002 but he later changed that evidence to say that he signed it on the date that it purported to be executed. The mortgage itself was witnessed by a solicitor and faced with the revised evidence of the bankrupt I am not prepared to draw the inference from the stamping date that is sought of me by the trustee.

8. In any event by July 2002 Mr Diano was substantially in default under other mortgages. A statement of claim issued by his first mortgagee on the Caloundra property was the subject of a default judgment on 26 July 2002 for the sum of $236, 366.95 together with possession of the land. As I have noted, even though Mr Diano was successful in settling his dispute with the mortgage broker he was unable to repay the Murphy loan which had been taken out for the purpose of securing that very  result.

Discussion

1. Section 121 Bankruptcy Act is in the following terms:

   Transfers to defeat creditors

   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:

   (a)the 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 valueat the time of the transfer.

2. A mortgage is a transfer of property: Reader v Schmierer [2003] FCA 386; Sutherland v Brien (1999) 149 FLR 321; Victorian Producers Co-operative Co Ltd v Kenneth [1999] FCA 1488. It is not disputed that the property would have become part of the transferor’s estate if it had not been transferred. The trustee seeks to rely on s.121(2) in order to establish those matters required by s.121(1)(b). The effect of placing reliance on s. 121(2) was considered by Sackville J in Prentice v Cummins (No 5) [2002] FCA 1503 where at [95] his Honour said:

   “If reliance is placed on s.121(2), the transferor’s subjective intention is likely to be irrelevant: in other words if it can be reasonably inferred that the transferor was insolvent at the time of the transfer, it will not matter if his or her subjective intention was not to prevent, hinder or delay the process of making property available for division among creditors: Re Jury; Ashton v Prentice [1999] FCA 671 at [82]. On the other hand, if the trustee attacking a transfer does not rely on s.121(2), the trustee will need to establish that the transferor’s subjective purpose was that described in s.121(1)(b).”

3. Mr Cotter a partner of the trustee in his affidavit of 15 September 2004 after reciting the facts makes some conclusions upon the solvency of the bankrupt. It is clear that a decision as to solvency is a matter for the trial court based upon its consideration of the relevant facts: Lewis & Anor v Doran & Ors (2004) 208 ALR 385 at 408; Quick v Stoland (1998) 157 ALR 615 at 626.

4. Section 5(2) of the Bankruptcy Act is in the following form:

   A person is “solvent” if, and only if, the person is able to pay all the persons debts, as and when they become due and payable.

   The evidence from Mr Diano was that when he took this mortgage from Mr Murphy he thought he would only be able to pay it back if he received re-financing. At that time he was under severe pressure from at least two of his first mortgagees as well as other unsecured creditors. Mr Glover had a judgment against him unsatisfied in the sum of $87,4663.01, Liberty Funding were about to obtain another judgment against him. These were debts he could not pay as and when they became due and payable. I am satisfied from the evidence produced by the trustee and that which was given by Mr Diano himself (excluding evidence concerning the mortgage broker claim) that Mr Diano was or was about to become insolvent at the time he took the loan from Murphy.

5. The respondent, standing in the shoes of Mr Murphy, seeks to raise the defence set out in sub paragraph 4 of s.121. The onus of proving this defence rests upon the respondent. I was not provided with any written submissions by the solicitor for the respondent. What occurred in relation to the hearing of this case in contained in a separate judgment that I gave upon an application for an adjournment made by Mr Zaghini on behalf of the respondent. In the result Mr Zaghini represented his client throughout the hearing by telephone. He had the opportunity of cross-examining the witnesses and making submissions. He would have had the opportunity to call such evidence as he sought to do but he did not. In the absence of any evidence it would be open to me to find that the respondent had not made out the matters required under s.121(4), but I feel that more should be said than that.

6. Firstly, the trustee seeks to have me find that the $20,000 consideration for the second mortgage was never given. He says that I can infer this from a number of factors including the dates of stamping and registration, the fact that requests had been made under s.77 for documents establishing the payment which do not do so and the generally unsatisfactory nature of responses both by the lender and the bankrupt to these questions. The bankrupt says the money was paid in cash and used by him to pay his solicitors and make other payments associated with the proceedings that were being brought against him. There is a letter dated 16 August 2004 from Butler McDermott & Egan found at page 171 of WPC2. That firm represents Mr Murphy and the letter states inter alia:

   “We are instructed that the sum of $20,000.00 was paid from funds held by our client in a safety deposit box at the Maroochydore branch at the Commonwealth Bank. Our client withdrew those funds. Our client withdrew those funds and attended the National Australia Bank at Caloundra where the funds were deposited into an account at the direction of the Bankrupt. As we understand it, you have documentation in relation to the transfer of the money.”

   That understanding was wrong. The evidence given by the bankrupt was confusing. There was reference not to the National Australia Bank but to Westpac and also to an account in a credit union. I accept that this unsatisfactory state of evidence is such as to allow me to draw an inference that the money was not paid over but I am not prepared to do so.

7. I think it is highly unlikely that Mr Diano would borrow $20,000 at 10% per month interest which was to be used for a purpose that we know was successful and not receive that money. The only reason why this might happen would be if Mr Diano deliberately set out to create a situation in which the secured property (or at least part of it) was withheld from his creditors in some future bankruptcy. This would require some evidence of a conspiracy between the bankrupt and Mr Murphy and that has not been forthcoming. I think the better view is that Mr Murphy knew he was lending to a desperate borrower at a very substantial rate of interest and hoped that he would either get his money back in full within the month (including $2,000 interest) or if not, have his foot upon a property in which there was substantial equity. It was reasonable for Mr Murphy to have that inferred. Mr Diano was or was about to become insolvent. This finding would appear to exclude the further accumulative elements required by s.121(4) and thus a defence would not be available to the respondent even if I was satisfied that the respondent had made out those matters required by s.121(4)(a) and (b).

8. The findings which I have made above make it unnecessary to consider those matters raised by the trustee outside s.121 as grounds for finding the transaction to be void. But because I am of the view that the $20,000 had been paid I believe that it is appropriate for the respondent to receive the benefit of s.121(5) being the refund of the consideration that was paid.

9. In a lengthy and impassioned submission Mr Zaghini pointed me to no evidence which would suggest that the bankrupt was solvent at the relevant time. This is not to say that he had any onus of proof imposed upon him but in the face of the evidence produced by the trustee one would have expected some rebuttal. What I got was an assertion from the bankrupt that everything would have been alright if he had been able to re-finance. The bankrupt also asserted that he was able to pay his current mortgage payments from rents. But no evidence of the amounts received were given. Mr Zaghini also addressed the claim that the consideration had not been paid with which I have dealt. He did not make any submissions in relation to interest upon the refunded consideration. However after considering this matter I have reached the conclusion that it is not appropriate that an order for interest be made. This is because that from the moment the transfer was complete Murphy was entitled to interest which he can claim in the bankruptcy as an unsecured creditor (except to the extent that any statutory grounds or issues of unconscionability prevent it). Section 121 Bankruptcy Act makes a transfer of property voidable not void: Trustee of the Property of O’Halloran, in the matter of O’Halloran v O’Halloran [2002] FCA 1305 at [76]-[77]; Issitch v Worrell & Ors (2000) 172 ALR 586 at [36]. The transfer is effective up until the point that the trustee in bankruptcy takes steps to void the transaction. The fact that Murphy did not actually receive any benefit by way of interest payments does not change the fact that he had a legitimate claim against the bankrupt. By way of analogy, had the transaction involved the transfer of an income-producing property, the transferee would have been entitled to the rental income derived up until the time that the property is revested in the bankrupt’s estate. To order that the transferee should also receive interest on the refunded consideration from the funds held in trust would result in the transferee receiving a bonus payment.

1. I consider the comments of Lindgren J in Anscor Pty Ltd v Clout [2004] FCAFC 71 to be supportive of the view I have taken above. In that case his Honour considers the application of s.120 Bankruptcy Act and says in relation to s.120(4) (a provision comparable to s.121(5)of the Act) at [39]:

   “Subsection 120(4) does not provide for the transferee to become a creditor of a bankrupt but imposes an obligation to pay upon the trustee in bankruptcy. Moreover, the policy underlying s.120 is to enable the trustee in bankruptcy to recapture the amount of the ‘shortfall in consideration’; not to go further by, in effect, requiring the transferee to pay more for the property than its market value at the time of the transfer. These conditions lead me to think that his Honour and the parties were correct in their assumption, and that para 84.21 of the Explanatory Memorandum does not reflect s.120(4). However, this was not at issue on the appeal, and I need not decide the matter finally.”

2. The findings which I have come to also appear to relieve me of the necessity of considering the interesting point raised by Mr Wells on behalf of the trustee. He argued that as, pursuant to s.181 of the Land Titles Act 1994 (Qld), “An instrument does not transfer or create an interest in a lot at law until it is registered.” The transfer must be totally invalid against the trustee because it was not registered until after the trustee’s title to the land became registered. In other words, he asserts (without the benefit of authority) that s.121 does not apply to equitable transfers. Although I have serious doubts as to the correctness of this assertion anything I say in regard to it would be obiter and of little benefit.

3. I find that the grant of the mortgage, which I believe is dealing no 706668011 dated 16 July 2002 by Norman Diano as mortgagor in favour of Ross William Murphy in respect of lot 4 on SP 117620, is void against Trevor Schmierer as trustee of the bankrupt estate of Norman Diano. I will make the declaration required pursuant to s.30 Bankruptcy Act. I will order the refund of the $20,000 paid and that the trustee be paid the balance of the sum of $100,528.44 and any interest earned thereon after deducting the said sum of $20,000 currently in the joint account in the names of the applicant and the respondent within 14 days.

4. The applicant trustee has been substantively successful in relation to his application save in respect of this allegation regarding the non-payment of the $20,000. It appeared to me that this aspect of the matter took up approximately 20% of the time of the hearing. The order

   
   

   I would make in relation to costs is that the respondent pay the applicant 80% of his costs to be taxed, if not agreed, pursuant to the Federal Court Act and Rules.

I certify that the preceding twenty-three (23) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate: 

Date:  1 December 2004