32. Where B wrongfully acquires monies from A, which B passes on to a third party, who uses such monies to purchase land of which it becomes registered proprietor – Or where B fraudulently transfers land owned by A to a third party who becomes registered proprietor – Caveat by A upheld if there is a constructive trust in A’s favour, but not if there is a mere equity to set aside the transfer – Contrast between AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd and Super Jacobs & Anor v Esera Faalogo & Ors.

In AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2019] VSC 688 (15 October 2019) Ginnane J. the facts were –

  • Esposito Holdings Pty Ltd (Esposito Holdings) agreed to sell and the first defendant (UDP) agreed to purchase the issued shares in a company. An arbitration occurred related to disputes arising under that agreement.  The arbitral award stated that Esposito Holdings had engaged in misleading and deceptive conduct contrary to s. 18 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) and director Mr Antonio Esposito was involved in the contravention within the meaning of s. 2(1) and for the purposes of s. 236 of Schedule 2.  The award also declared that on and from 31 January 2014 Esposito Holdings held the purchase price on constructive trust for UDP which had suffered loss of $54,144,847.
  • The plaintiff (AE Brighton) purchased and became registered proprietor of four properties.
  • There was prima facie evidence that, when Mr Esposito was also sole shareholder and director of AE Brighton, part of the purchase price received from UDP under the share sale agreement was paid by Esposito Holdings, possibly through another company controlled by Mr Esposito, to AE Brighton to purchase the properties, possibly in the case of one purchase through repayment of an earlier loan used for that purchase.
  • In 2018 the Supreme Court gave UDP leave to enforce the award and ordered that the award was given effect as a judgment of the Court.
  • UDP caveated over the properties on the grounds of an implied, resulting or constructive trust.
  • Subsequently AE Brighton entered a contract to sell two of the properties.

Ginnane J dismissed an application by AE Brighton for the caveats to be removed, but required the caveator to commence proceedings promptly to support its claim, on the following grounds –

  1. Where a trustee wrongfully used trust money to provide part of the cost of acquiring an asset, the beneficiary was entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It was irrelevant whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset.  This principle was not reliant on proof of fraud, merely on breach of trust. [32]-[33]
  2. Based on this principle there was a prima facie case that the caveator had an estate or interest in the properties as a beneficiary under a constructive trust. This arose from money (ie the purchase money under the share sale agreement) obtained by Esposito Holdings as a result of misleading or deceptive conduct, from which the caveator suffered loss, held on trust by Esposito Holdings for the caveator, being paid in breach of trust by Esposito Holdings to AE Brighton which used it to purchase the properties.  While the evidence in the arbitration did not bind AE Brighton, because it was not a party to the arbitration, it was relevant in determining this prima facie case. [28], [36], [37], [38], [40], [41]
  3. AE Brighton had more than a mere equity, which was not an equitable estate and so not caveatable. [30]-[31]
  4. Although the court took into account that AE Brighton had entered into two contracts of sale, the caveats predated the contracts and AE Brighton had made no submission about how, taking into account the interests of the mortgagees and other caveators, the caveator’s security interest in the properties could be protected if the caveats were removed. Accordingly the balance of convenience favoured maintenance of the caveats on terms requiring the caveator to commence its proposed proceeding promptly. [42]-[43]

An application for leave to appeal against this decision has been lodged, the respondent’s application for security for costs being dismissed: AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 43.

In Super Jacobs & Anor v Esera Faalogo & Ors [2019] VSC 778 (3 December 2019) Daly AsJ the facts were –

  • The defendants were registered proprietors of a residential property. They were migrants, of limited means, not highly educated or familiar with legal or financial matters.  In 2016 they gave a general power of attorney to a mortgage broker who they believed was arranging finance for them to be secured against their property.
  • In 2017 the mortgage broker, the defendants’ claimed fraudulently, used the power to execute a contract of sale of the land to the plaintiffs who became registered proprietors in June 2018. The sale was not by auction or private treaty or advertised and had other unusual features.
  • The defendants received no funds from sale, subsequently discovered this transfer, and later in 2018 caveated on the ground of: “Registered proprietor(s) being entitled to possession of the certificate of title for the land and to prevent improper dealings”. This was one of the grounds of claim in the drop-down menu in the Registrar of Titles’ electronic lodgment service.
  • The plaintiffs applied for removal of the caveat and for an order for possession.

Daly AsJ removed the caveat, holding –

  1. Even if (which they denied) the plaintiffs obtained the property by fraud or improper dealing the caveators’ claim to have the transfer set aside on the grounds of a fraud by, or which could be sheeted home to, the registered proprietors was not an interest or estate in land. They did not hold an equitable interest in the property until the claim was made good in a court.  Until then their equitable right to assail the transfer for fraud was a ‘mere equity’, being a personal right of action.  On the same principle, if a mortgagee sold land in breach of its duties to the mortgagor the mortgagor had only an equity to set aside the pending transfer of land and could not caveat. [18]-[20], [28]-[32]
  2. Accepting for present purposes that the mortgage broker owed the defendants a fiduciary duty, and that as such, if (as they denied) the plaintiffs were knowingly concerned in the broker’s breach of trust, or were a knowing recipient of trust property (being the land), then the plaintiffs may be liable to the defendants pursuant to the principles in Barnes v Addy (1874) LR 9 Ch. App. 244 with the remedy of a remedial constructive trust. However, this did not convert the defendants’ potential claim into an equitable interest as opposed to a personal claim against the plaintiffs.  This was to be contrasted with an equitable interest arising from proprietary estoppel or a common intention constructive trust: in such a case the equitable interest arose from when the promise was relied upon or the common intention was given effect. [34]-[36]
  3. It was accordingly unnecessary to consider whether the caveat ought to be removed because the grounds of claim did not refer to an interest in land known to the law, or whether the caveat should be amended. [37]
  4. If the defendants had had an interest in the land the balance of convenience would have been in their favour. [17]

Comment.  Both cases considered the decision of the Full Court in Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd [1994] 1 VR 672 that where, under the Torrens system, a mortgagee sells in breach of its duties to the mortgagor, the mortgagor has an equity to set aside the pending transfer of land, but until the equity is made good by bringing a successful claim the mortgagor has no equitable interest in the land and therefore no right to caveat.  The first case distinguished it.  The second applied it.

The principle that the interest claimed in the caveat must be in existence at the time of its lodgment – it was not enough that the caveator had commenced proceedings which may result in such an interest being vested in him or her – was also asserted in Boensch v Pascoe [2019] HCA 49 which was the subject of Blog 29.

Philip H. Barton

Owen Dixon Chambers West

20 April 2020

 

29. A rare High Court foray into caveats – a claim for compensation under the equivalent of the TLA s. 118 – in what circumstances a trustee in bankruptcy has a caveatable interest – whether the interest claimed was correctly stated in the caveat – why maintenance of a caveat does not require an undertaking as to damages.

Boensch v Pascoe [2019] HCA 49 (13 December 2019) concerned the interaction between bankruptcy law and NSW caveats law, materially identical to Victorian law.  The following provisions of the Bankruptcy Act 1966 were relevant:

Upon a person becoming bankrupt, s 58(1) vests in the trustee in bankruptcy property then belonging to the bankrupt that is divisible among the bankrupt’s creditors together with any rights or powers in relation to that property that would have been exercisable by the person had the person not become a bankrupt.  Excluded by s. 116(2)(a) from the divisible property is property held in trust by the bankrupt for another person.  However where the person who becomes bankrupt is a trustee of property who has incurred liabilities in the performance of the trust, such entitlement as the person has in equity to be indemnified out of the property held on trust gives rise to an equitable interest in the property held on trust taking that property outside the exclusion in s 116(2)(a) (on the basis that the exclusion is limited to property held by the bankrupt solely in trust for another person).

Notwithstanding the foregoing, where the property held on trust by the bankrupt out of which the bankrupt had an entitlement in equity to be indemnified comprised legal title to land registered under the Real Property Act 1900 (NSW) (“the NSW Act”) (ie the equivalent of the Transfer of Land Act 1958), what was vested in the trustee in bankruptcy until the trustee could obtain legal title by registration was only the equitable estate (s. 58(2)).

The NSW Act provided:

any person who, “by devolution of law or otherwise, claims to be entitled to a legal or equitable estate or interest in land” under the provisions of the Act “may lodge with the Registrar-General a caveat prohibiting the recording of any dealing affecting the estate or interest to which the person claims to be entitled” (s. 74F(1));

a caveat must be in the approved form and specify “the prescribed particulars of the legal or equitable estate or interest … to which the caveator claims to be entitled” (s. 74F(5));

failures strictly to comply with the formal requirements for caveats are to be disregarded by a court in determining the validity of a caveat (s. 74L);

upon application by the registered proprietor the Registrar-General was required to serve a notice on the caveator that it would lapse unless within 21 days from service the caveator obtained and lodged a Supreme Court order extending the caveat (s. 74J(1));

any person who is or claims to be entitled to an estate or interest in the land described in a caveat may apply to the Supreme Court for an order that the caveat be withdrawn by the caveator (s. 74MA(1));

any person who, “without reasonable cause” lodges or after request refuses to withdraw a caveat is liable to pay compensation to any person who sustains pecuniary loss attributable to the lodging of the caveat, or the refusal or failure to withdraw it (s. 74P(1)).

The facts were –

  • Mr and Mrs Boensch were registered proprietors of a property.  He claimed that in 1999 they had reached a matrimonial property settlement under which she agreed for consideration to transfer her interest in the property to him.  He also claimed that in 1999 they had executed a Memorandum of Trust which included that she would cause her share of ownership to be transferred to him to hold the whole of land in trust, in substance for their children, and would arrange for a professionally drafted trust document.
  • In October 2003 he was served with a bankruptcy notice.
  • He claimed that in March 2004 they had executed a deed of trust confirming the settlement upon him as trustee in the 1999 Memorandum of Trust, constituting “the Boensch trust”and creating their children as First Group Beneficiaries.
  • On 23 August 2005 a sequestration order was made against him.  The trustee in bankruptcy was legally advised that there were strong prospects of defeating the trust claim.  Documents produced by the bankrupt did not lead the trustee to a contrary view.  On 25 August 2005 the trustee lodged a caveat claiming a “Legal Interest pursuant to the Bankruptcy Act 1966”.
  • Documents and evidence subsequently produced by the bankrupt were for a long time unconvincing.   However in December 2007 a court held that the Memorandum of Trust was not a sham and that it manifested a sufficient intention to constitute a trust.   Appeals failed.
  • The caveat lapsed on 15 September 2009.
  • The bankrupt took proceedings claiming compensation under s. 74P(1).  The primary judge concluded that, because the bankrupt had not proven that the trustee in bankruptcy lacked a caveatable interest it could not be said that the trustee had lodged or maintained the caveat without “reasonable cause”, but that even if the trustee had not had a caveatable interest he nevertheless had an honest belief based on reasonable grounds that he had a caveatable interest and thus reasonable cause to lodge and maintain the caveat within the meaning of s. 74P(1).
  • An appeal by the bankrupt failed but he obtained special leave to appeal to the High Court.  The appeal was unanimously dismissed.  There were two judgments: by Bell, Nettle, Gordon and Edelman JJ.; by Kiefel CJ, Gageler and Keane JJ.  Unless otherwise stated references below are to the judgment of the plurality.  The following propositions emerge from the judgments –
  1. Provided the bankrupt had a valid beneficial interest in the trust property, the trust property vested in the trustee in bankruptcy subject to the equities to which it was subject in the hands of the bankrupt.  For these purposes, a valid beneficial interest meant a vested or (subject to applicable laws as to remoteness of vesting) contingent right or power to obtain some personal benefit from the trust property. [15]
  2. Notwithstanding s. 58(1), a legal estate or interest in land subject to the Real Property Act could not pass to the bankrupt’s trustee in bankruptcy unless and until the trustee applied and subsequently became registered as proprietor of the land.  After this the trustee still held the estate or interest subject to the equities to which it was subject in the hands of the bankrupt. [94]
  3. The onus was on Mr Boensch to establish that he had lacked any valid beneficial interest in the property.  However, the evidence established that he had a beneficial interest in the property – to the extent of his right to retain the property as security for satisfaction of his right of indemnity as trustee of the Boensch trust.  By reason of that beneficial interest, an estate in the property vested forthwith in equity in the trustee in bankruptcy pursuant to s. 58 of the Bankruptcy Act 1966, subject to a subtrust on the terms of the Boensch Trust but permitting the trustee to exercise the right of indemnity.  On that basis, the trustee in bankruptcy was entitled to be registered as proprietor and that was a sufficient basis to sustain his caveat. [102], [116] (Similarly Kiefel CJ, Gageler and Keane JJ at [2]).
  4. There was a division of opinion on whether the interest claimed in the caveat, ie “Legal Interest pursuant to the Bankruptcy Act 1966”, was adequate.  On the one hand, expressing themselves very cautiously, the plurality stated that ([107]) “Generally speaking” it was to be doubted that this claimed interest was adequate to describe an equitable estate vested in a trustee in bankruptcy pursuant to s. 58(2) by reason of the bankrupt’s right of indemnity.  While noting that NSW statutory provisions did not require the caveat to specify whether the interest claimed was legal or equitable, their Honours gave reasons why this wording was inadequate, stating that ([107]) it “may be accepted that a court would not ordinarily make an order under s. 74K(2) of the NSW Act extending the operation of a caveat which employed that description”; and stating in a footnote that it was unnecessary to determine whether the court would have power to order amendment of the caveat in those circumstances referring to Percy & Michele Pty Ltd v Gangemi [2010] VSC 530 at [92]- [102] per Macaulay J.On the other hand Kiefel CJ, Gageler and Keane JJ held that the equitable estate vested in the bankrupt was adequately described in the caveat [11].
  5. The trustee in bankruptcy also had good reason to believe, as he did, that the Boensch Trust was not validly constituted.  However, the possibility that the trust might have been set aside under the Bankruptcy Act would not have been sufficient to sustain the caveat.  The interest asserted in the caveat must be in existence at the time of its lodgment.  The assertion by a caveator, who at the time of the lodgment did not have an estate or interest in the land, that he had commenced proceedings which may result in such an interest being vested in him did not suffice. [103] – [104]
  6. The test for liability under s. 74P(1) was established in Beca Developments Pty Ltd v Idameneo (No 92) Pty Ltd (1990) 21 NSWLR 459 at which time the statutory words were “wrongfully without reasonable cause”.  This test was that the claimant for compensation must establish that the caveator had neither a caveatable interest nor an honest belief based on reasonable grounds that the caveator had a caveatable interest (and thus “without reasonable cause”), and that the caveator acted deliberately, knowing that he or she had no interest in the land (and thus “wrongfully”).  Notwithstanding the repeal of “wrongfully” this remained the correct test. [110], [111] (Similarly Kiefel CJ, Gageler and Keane JJ at [12]).
  7. The plurality noted that the Beca Developments test had been substantially followed by intermediate courts in other States including in Edmonds v Donovan [2005] VSCA 27;  (2005) 12 VR 513 at 548 per Phillips JA (Winneke P and Charles JA agreeing at 516 [2], [3]).  The High Court however left open whether, if that test is not satisfied, a person may still be liable under s. 74P(1) by reason of acting with an ulterior motive or where the only interest supporting a caveat is de minimis in terms of legal content or economic value. [114]
  8. Accordingly provided the caveat was lodged on the basis of an honest belief on reasonable grounds that the bankrupt had an extant beneficial interest in the property (including a beneficial interest by way of right of indemnity) the trustee in bankruptcy had reasonable cause to do so.  In fact there was a caveatable interest here.  Further the trustee honestly believed on reasonable grounds that the property vested in him either because the trust was void or because of the bankrupt’s right of indemnity [105], [108], [116] (Similarly Kiefel CJ, Gageler and Keane JJ at [12]).
  9. Even if, as the plurality had held, there was a mere technical deficiency in the statement of the interest claimed this did not of itself demonstrate the absence of a “reasonable cause” to lodge and not withdraw the caveat, at least where the caveat did not overstate the interest sought to be protected. [108]
  10. The plurality noted that, although a caveat was “a statutory injunction to keep the property in statu quo until [the caveator’s] title shall have been fully investigated”, unlike an application for interlocutory injunction it did have to be supported by an undertaking as to damages.  Their Honours justified this on the ground that the holder of an unregistered interest in land under the Torrens system is more vulnerable to inconsistent dealings. [113].

Comment: The equivalent Victorian provision to s. 74P(1) is the TLA s. 118 which provides –

“Any person lodging with the Registrar without reasonable cause any caveat under this Act shall be liable to make to any person who sustains damage thereby such compensation as a court deems just and orders”.

Accordingly the two provisions are materially the same and the High Court’s decision applies in Victoria.  The test in Victoria has however been the same as in NSW, or virtually so, as illustrated in Blogs 9 and 24.

The case is also instructive on –

  1. whether the interest claimed in the caveat was correct.  The comment in paragraph 4 above that the NSW statutory provisions did not require the caveat to specify whether the interest claimed was legal or equitable applies equally in Victoria – the TLA s. 89 simply requires that caveator be a person “claiming any estate or interest in land”;
  2. the interest claimed in the caveat must be in existence at the time of its lodgment – it is not enough that the caveator has commenced proceedings which may result in such an interest being vested in him – paragraph 5 above;
  3. why an undertaking as to damages is not normally required – paragraph 10 above.