Case summary: Shepard (Trustee) v Behman [2019] FCA 18

BANKRUPTCY AND INSOLVENCY – transfer of property before bankruptcy – application by trustee for relief under ss120 and 121 of the Bankruptcy Act 1966 (Cth) and s37A of the Conveyancing Act 1919 (NSW) in relation to a Deed of Settlement and transfer of property –whether intention to defeat creditors – whether consideration was less than the market value – whether transfer made in good faith – consideration of the transferor’s “main purpose”

EQUITY – claim of equitable interest in property – constructive trust – based on common intention – money contributed to common pool of funds used for mortgage repayments and various other expenses 

Background: The trustee was appointed to the bankrupt estate of Mr Behman on 28 February 2018 consequent upon acceptance by the Official Receiver of a debtor’s petition. Of primary interest to the trustee was the family home registered in the name of Mr Behman and valued at some $1.5m (with a mortgage of some $900,000).  The father resided in the family home with his four sons; he had been granted sole custody in 2002 and one son had left to live with his mother in 2009.

The son’s prior action against his father: However Daniel, one of Mr Behman’s sons, had previously been successful in a legal action claiming the father held part of the property for him on constructive trust on the basis of agreement or common intention.  Of the $204,000 he earned (including tax refunds), Daniel retained $29,000 with the balance of the funds being used to pay expense for the family, including mortgage repayments. Contributions ceased when Daniel left the home in 2012 leaving the remaining two sons living with their father. The court had accepted that a common intention applied upon Daniel commencing a full time job in 2007; adding at [36] that ‘[t]here was in a sense a joint pooling of resources for the benefit of all family members much as a de facto might contribute their income to the needs of both themselves and their partner.’

The court gave judgment for Daniel in an amount of $120,000 and granted Daniel a charge over the property while setting a time period for payment.

Daniel granted indemnity costs: On 30 November 2015, Rein J delivered reasons for concluding that Daniel was entitled to indemnity costs from 1 April 2015 and to interest on the judgment amount of $120,000 from the date of commencement of the proceedings.

The father’s appeal dismissed: The father appealed the decision. On 3 November 2016, the NSW Court of Appeal dismissed the appeal, with costs. The judgment held at [18] that when Daniel commenced university and a new job and made clear that he wanted to be independent, to move out of the home and to manage his own affairs, the father persuaded him not to do so because the contribution of his wages was necessary to enable the repayment of the mortgage and retention of the family home in which he had a joint interest. 

The property is refinanced: The father gave evidence that in December 2016 he refinanced the property to pay Daniel the judgment amount and interest, totalling over $140,000.  He thought he borrowed about $1.1 million.  The equity in the property at that time was about $400,000.  Daniel’s costs had not been paid.

The ‘Deed of Settlement’: On 4 January 2017, the father entered into the “Deed of Settlement” with the two sons who had remained in the family home. By the Deed the father acknowledged that the two sons each had a proprietary interest in the property of which the father was the sole registered proprietor. A schedule to the Deed purported to show that the combined contributions of the two sons amounted to $1.4m. However, the court found the Schedule grossly overstated the contributions of the two sons and applied an interest rate far in excess of any relevant rate.

The Deed contemplated that the father would provide an executed mortgage in registrable form for the purposes of the father charging all of his interest in the property to the two sons for their proprietary interest in the property.  The two sons granted to their father a right to occupy the property “for the term of [his] life”.

The Transfer: A transfer of the property from the father to the two sons as joint tenants occurred on 27 June 2017.  The transfer was registered on 10 July 2017.  The transfer recorded that the father acknowledged receipt of consideration of $1,450,000.  Stamp duty of $67,880 was paid. The two sons borrowed $1,100,000 from a bank and granted that bank a mortgage over the property, dated 27 June 2017.  These funds were used to discharge the father’s loan in relation to the property.

Daniel seeks to void the transfer: In October 2017 Daniel commenced proceedings to have the transfer of the property to his two brothers declared void pursuant to s 37A of the Conveyancing Act.

Costs order in favour of Daniel: On 25 January 2018, the District Court of New South Wales issued an order for the payment of Daniel’s costs in the amount of $224,595.25. 

The father’s debtor’s petition accepted: In February 2018 the father was declared bankrupt upon acceptance by the Official Receiver of his debtor’s petition. 

Trustee takes action to void the transfer: The trustee filed an application in August 2018 to disturb the Deed of Settlement and void the transfer of property pursuant to ss120 and 121 of the Bankruptcy Act 1966 and s37A of the Conveyancing Act 1919 (NSW) (Daniel’s proceedings being stayed pending the determination of the trustee’s action). 

After reviewing the bankrupt’s evidence as to what he claimed to know leading up to the transfer of the property the court did not accept that the bankrupt thought he did not owe Daniel money; stating at [84] that he must have known that he owed Daniel in respect of the costs orders but that the amount so owed had yet to be formally quantified.

The interest of the two sons in the property: The court concluded that at least up until August 2015, the two sons contributed funds to the general expenses of the family, as members of the family, without expectation of having a proprietary interest in the property.  However, the court found at [88] that position changed at some point after the decision ordering the payment to Daniel.  At some point after that decision, the bankrupt and his two sons operated on the common assumption and with the common intention that, by the two sons continuing to contribute to the pool of funds as they had in the past, they would hold a beneficial interest in the property. 

The court held that there was a common intention they each hold an equal share in the property irrespective of the amount of their previous financial and non-financial contributions or the precise amount of their ongoing financial contribution to family expenditure. On the basis that the equity in the property was $400,000, each interest equated to a little over $133,000.

The court went on to indicate that s116(2)(a) of the Bankruptcy Act excludes property held on trust by the bankrupt from divisible property; and as a trustee takes property subject to all liabilities and equities which affect it in the bankrupt’s hands, it would be unconscionable for the trustee to deny those interests. This meant the divisible property was limited to the bankrupt’s one third interest in the family home.

The trustee’s claim under s120: In their submissions defending the transfer the two sons relied upon s120(6) of the Bankruptcy Act which provides:

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.

The court rejected a number of grounds relied upon as constituting consideration; mortgage repayments, pre-2013 payments to the ‘family pool’, renovation expenses, and utility and miscellaneous expenses, stating simply that the market value of the property was $1.5 million but the two sons did not give consideration in that amount.

Further, the court was not satisfied that the bankrupt’s one third equitable interest in the property was transferred in “good faith” within the meaning of s120(6), given the knowledge of all three parties that Daniel’s court costs had not been paid and the inflated amounts provided in the Schedule to the Deed. The court concluded the claim under s120 must succeed.

The trustee’s claim under s121: The court began by noting the section focusses attention on the “main purpose” on the part of the transferor in making the transfer; observing that the “main purpose” is the actual purpose of the transferor in making the disposition; and adding that purpose is different to motive - the motive for a person’s conduct is the person’s reason for engaging in it. By contrast, the purpose of a person’s conduct is the end that is sought to be accomplished by it. The “main purpose” may be proved directly or it may be inferred, including from the objective circumstances.

The court then set out the objective circumstances pertaining to the bankrupt who:

  • as at 4 January 2017, knew Daniel was still owed a large amount for his costs
  • must have known that he would not have be able to meet Daniel’s costs from his earnings
  • would not have been able to pay when due the costs owed to Daniel once demanded, and that he would become “insolvent”
  • did not believe he owed the two sons a debt in the amount shown in the Deed
  • secured the outcome that he could remain living in the property without having to pay Daniel the costs which Daniel would inevitably seek, and 
  • had a state of mind which did not relevantly alter between 4 January 2017 and 27 June 2017 when he transferred the property

The court concluded by inference at [127] from all of the circumstances that the bankrupt’s “main purpose” in making the transfer was “to prevent the transferred property from becoming divisible among the transferor’s creditors”: s121(1)(b). The court concluded the claim under s121 must succeed. The court also noted that had it not concluded that s121(1) of the Bankruptcy Act was engaged, it would have concluded that the claim under s37A of the Conveyancing Act had been made out.