Category: Mere Equity not Caveatable

Blog 62. Caveators lost in blizzard, but obtain injunction.

Reindel & Ors v Confreight Pty Ltd & Ors (No 2) [2022] VSC 442, Daly AsJ (8 August 2022).

This case arises from the same development as that the subject of Blog 61.   It concerns imposition of caveats based on Barnes v Addy claims, no caveatable interest being found to exist. In the 1874 English case of Barnes v Addy (1874) LR 9 Ch. App. 244 at 251 – 252 Lord Selborne LC stated –

“Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility.  That responsibility may no doubt be extended in equity to others who are not properly trustees, if … But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers … unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees”.

Subsequent cases have worked out the scope of these principles, known as the “first and second limbs of Barnes v Addy”, ie knowing receipt of trust property or dishonest assistance in a breach of trust (being an accessorial liability).

The facts were –

  • In around 2015 Messrs Reindel, Murone and Monson decided to carry out a multi – unit residential development in Windsor. A company (WDC) was incorporated to perform the development.  It was trustee of a unit trust in which Confreight Pty Ltd (Confreight) and Supply Chain Logistics (SCL) controlled respectively by Murone and Monson together held 35%, and an entity associated with Reindel held 65%, of the units.  In 2020 the development was completed and WDC was wound up with negligible return to Confreight and SCL.
  • Five residential units in the development valued at approximately $2 m. in total had been transferred by WDC, one to Reindel and four to a company controlled by him (Blizzard Winds).  On 3 February 2021 the liquidator wrote to the unit holders in the trust seeking information including on this transfer.  On 15 February 2021 the liquidator made his statutory report including stating that there were claims totalling over $2 m. by unsecured creditors.
  • In the first half of 2021 Confreight and SCL caveated over the five Windsor units and over a Toorak property of which Reindel’s wife Ms Runhardt had been registered proprietor since 2015. Relevantly the interest in land claimed was as beneficiary of an “implied, resulting or constructive trust”.
  • In July 2021 Reindel and associated parties commenced a proceeding under the Transfer of Land Act s. 90(3) to remove the caveats. The caveators opposed this and, if their opposition failed, applied to restrain the registered proprietors from dealing with the land pending the determination of their proceeding referred to below.
  • In August 2021 Confreight and SCL commenced a proceeding (the investors’ proceeding) alleging inter alia that: Reindel had caused WDC to transfer much cash and the Windsor units to himself and his associated entities for little or no consideration; by reason of his alleged breaches of fiduciary duty and of trust they were inter alia entitled to orders that property of the unit trust be transferred to WDC (in its capacity as trustee), and/or equitable compensation for the value of property transferred from WDC in breach of trust or for less than market value, and certain other relief.
  • The defendants to the investors’ proceeding in substance denied the allegations against them, alleging that transfers were in reduction of debts duly owing.
  • The plaintiffs in the investors’ proceeding also alleged that Reindel had used WDC’s funds for mortgage payments on and renovations to the Toorak property. Reindel admitted these payments into his and Runhardt’s joint account, and that payments were applied to paying the mortgage, but denied misappropriation.  The plaintiffs also alleged that Runhardt participated in Reindel’s breach of fiduciary duty and breach of trust by receiving trust property with knowledge of his breaches.  Runhardt basically denied all allegations concerning her.
  • On 14 September 2021 WDC’s liquidator applied to intervene in the caveat proceeding, supported by an affidavit exhibiting his letter of 3 February and his report. He subsequently did not pursue this application.
  • The caveat and injunction proceedings were heard in October 2021 with judgment reserved. Although no orders were made in the caveat or the investors’ proceeding that the evidence in one proceeding would stand as evidence in the other Daly AsJ would (footnote [92]) if necessary have ordered this now as for then (traditionally “nunc pro tunc”). Her Honour stated ([25]) that the findings and issues raised by the liquidator’s report and letter and WDC’s accounting records were a generally reliable guide to the affairs of WDC and the unit trust, although it was unnecessary for present purposes to determine whether the concerns raised therein had been established.  Her Honour noted ([64]) that the liquidator’s affidavit, his letter, his report and the accounting records revealed evidence of the transfers of Windsor units being for no consideration or at an undervalue, although it was premature to conclusively determine whether in breach of trust or otherwise invalid (also [34]).
  • In January 2022 the liquidator sought, inter alia, court approval to enter an agreement to assign certain unspecified causes of action to a Mr Baker – it was unclear but her Honour inferred that there was a substantial overlap between these causes of action and those in the investors’ proceeding ([31]). The liquidator also applied to be appointed as a receiver of the unit trust, deposing that he believed that this was necessitated by cl. 12.5 of the trust deed which provided that on its liquidation WDC ceased to be trustee of the trust.
  • Clause 37 of the trust deed provided:

“the rights of the trustee to indemnity for losses … and to recoupment for expenditure incurred shall … be limited to the monies and property comprising the Trust Fund … but this clause shall not be construed as in any way limiting the liability of any trustee (or of any director of a company which is a trustee hereof) to the unit holders for any breach of trust involving the dishonesty or wilful act or omission of that trustee or director.”

Daly AsJ removed the caveats but granted an interlocutory injunction restraining Reindel and Blizzard Winds from dealing with their residential units –

  1. The possibility of the caveators having a prima facie case of an interest in the land was undermined if they lacked standing to bring their claims in the investors’ proceeding, or this was in doubt. Generally the proper party to bring a claim to recover trust property was the trustee but this was subject to “special circumstances”, eg collusion between the third party wrongdoer and the trustee, insolvency of the trustee, or where the trustee was unwilling or unable to take action to recover trust property. There were real doubts whether the caveators had standing to, in effect, recover WDC’s property.  Alternatively, any claim for damages and/or equitable compensation would have to be calculated by reference to their shares in the unit trust.  [40]-[41], [46], [47]
  2. Confreight and SCL could also in their capacity as shareholders of WDC apply under s. 237 of the Corporations Act 2001 (Cth) to bring a derivative action to bring the claims in the investors’ proceeding on behalf of WDC. This application had not been made, although they had made an informal application for leave to continue the investors’ proceeding standing in the shoes of WDC in its capacity as trustee. [48]
  3. On the issue of standing, the position was somewhat fluid and far from clear cut. There was some doubt whether on its liquidation WDC remained as trustee of the unit trust or whether the liquidator was ready, willing, and able to pursue any claim by WDC against third parties for the benefit of the beneficiaries (and creditors) of the trust, but it appeared that liquidator had not reached a final position.  Clause 37 of the trust deed preserved the beneficiaries’ entitlement to pursue claims against the trustee and the directors, at least on their own behalf. And although the plaintiffs arguably needed curial leave to proceed with their claims in the investors’ proceeding to recover trust property, it was in the context of the current case neither necessary nor appropriate to determine the possible fate of this application for leave.  It was accordingly difficult for present purposes finally to resolve the question of standing and this undermined the caveats, given that the entitlement to lodge a caveat must exist at the time of lodgement. [55], [56], [57], [62], [63]
  4. The caveators must demonstrate a prima facie case, ie a probability of being found to have the asserted legal or equitable rights or interest in the land. The ‘prima facie case’ test was preferable to the ‘serious question to be tried’ test of such rights or interest. [69]-[70]
  5. The caveats over the Toorak property were unsustainable. Runhardt was alleged at most to have accessorial liability for Reindel’s (and WDC’s) alleged breach of trust.  In Barnes v Addy cases a constructive trust was only imposed over the property concerned on a curial determination to this effect.  Until then there was no proprietary interest, even where it was claimed that trust property could be “traced” to a particular (other) property.  Further, any “notice” Runhardt had of Reindel’s alleged breach of trust postdated her becoming registered proprietor of the Toorak property. [80]-[82], [91(c)], [138]
  6. Even if breach of trust or of fiduciary duty was established against Reindel or WDC, the liability of Blizzard Winds was (notwithstanding that Reindel was its sole director) only accessorial. Further, even if the transfers to Blizzard Winds were arguably tainted by fraud which could be sheeted home to it so it lost the protection of indefeasibility of title, and a court ultimately determined to impose a constructive trust over the units, the entitlement of a former registered proprietor to set aside a transfer for fraud was an in personam claim giving rise to a mere equity, not an equitable and so caveatable interest.  Accordingly the caveats over its property would also be removed. [83]-[87], [91], [94], [96], [138]
  7. The claim concerning the transfer to Reindel was also only an in personam claim incapable of supporting a caveat. [87], [91(a)], [94], [96], [138]
  8. However, Reindel and Blizzard Winds would be restrained from dealing with the units transferred to them. Runhardt would not be restrained from dealing with the Toorak property. [117]-[121], [133], [137], [138]

       Philip H. Barton

          Owen Dixon Chambers West

        Monday, November 7, 2022

40. B acquires monies from A by mistake or in breach of trust, which B passes on to a third party, who uses them to purchase land of which third party becomes registered proprietor – Monies held on constructive trust for A – Not mere equity – Caveat by A based on constructive trust upheld – AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 235. No purchaser’s lien and so no caveatable interest because purchaser in breach of contract of sale – Ironbridge Holdings Pty Ltd v O’Grady [2020] VSC 344.

AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 235 (11 September 2020) was an unsuccessful application for leave to appeal from the case of that name covered in Blog 32, in which Ginnane J dismissed an application under the Transfer of Land Act s. 90(3) for caveats to be removed.  The facts are now restated from that Blog and supplemented –

  • 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 that its sole shareholder 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 2017 UDP caveated over the properties on the grounds of an implied, resulting or constructive trust.
  • In 2018 the Supreme Court gave UDP leave to enforce the Award and ordered that it be given effect as a judgment of the Court (‘Award recognition judgment’).
  • In 2019 AE Brighton entered contracts to sell two of the properties.

After the decision of Ginnane J in October 2019 UDP took an assignment of a mortgage registered on the properties, took possession, as mortgagee in possession rescinded the contracts of sale, and sold the properties with settlement due on 4 September 2020.  Its solicitor swore that the net proceeds of sale would be paid into court pending resolution of a proceeding.

The Court of Appeal (Kyrou, Kaye and Sifris JJA) held or stated –

  1. The law related to applications under s. 90(3) in conventional terms (eg see Blog 1). [25]-[26]
  2. A successful challenge to the exercise of judicial discretion by Ginnane J required establishment of an error of the kind identified in House v The King (1936) 55 CLR 499 at 505. [27]
  3. Only a legal or equitable interest in land could sustain a caveat and accordingly, as stated by the High Court in Boensch v Pascoe [2019] HCA 49 (Blog 29), a mere statutory right to take steps to avoid a transaction did not suffice – the interest asserted must be in existence when the caveat was lodged. A mere equity, defined in various ways including ‘a right, usually of a procedural character, which is ancillary to some right of property, and which limits it or qualifies it in some way’, was not a proprietary interest. [28]-[29]
  4. The constructive trust of the type upon which UDP relied was an institutional trust arising from the retention of funds known to have been paid by mistake. More particularly –

(a)        This trust arose at the time when the person who received the funds acquired knowledge of the mistake, if the moneys paid could still be identified at that time.  The recipient’s conscience was then bound and it would be against conscience for the recipient to use the funds as his or her own. [30]

(b)      “Knowledge” meant the payee having actual knowledge, or wilfully shutting his or her eyes to the obvious, or wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make, or having knowledge of circumstances which would indicate the facts to an honest or reasonable person. [31]

  1. A third party may be liable to account as a constructive trustee where it received trust property with notice that it was being dealt with in a manner involving a breach of trust. In accordance with the equitable principle of tracing, the beneficial owner of misappropriated property could recover it or its traceable proceeds from someone holding the asset, subject only to the defence of bona fide purchaser for value without notice.  Where a trustee wrongfully used trust money to provide part of the cost of acquiring an asset, the beneficiary was entitled at his or her option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his or her personal claim against the trustee for the amount of the misapplied money. [32]-[33]
  2. This case had two features usually absent from cases where a caveator claimed an interest under a constructive trust –

(a)     There was a declaration, recognised by the Award recognition judgment which itself had the effect of declaring as a matter of law, that Esposito Holdings held the purchase price paid by UDP on constructive trust for UDP from 31 January 2014;

(b)    Secondly, the sole director of the corporate registered proprietor of the properties (Mr Esposito) had given sworn evidence at a public examination that funds subject to the constructive trust were used to purchase the properties.  He was aware of all the facts giving rise to the constructive trust.  As he was its sole director his knowledge was attributable to Esposito Holdings.  It was its knowledge of those facts, which operated on its conscience, that could give rise to an institutional constructive trust without the need for a court order and which enabled the arbitrator to declare the existence of a constructive trust from 31 January 2014.  Importantly, as Mr Esposito was also the sole director of the plaintiff, his knowledge was attributable to the plaintiff.

The combination of those two features established a prima facie case that the beneficiary of the constructive trust had an equitable interest in the properties, in accordance with the principles of tracing. [55], [56], [58].

  1. The Evidence Act 2008 s. 91 provided that evidence of the decision, or of a finding of fact, in an Australian or overseas proceeding was inadmissible to prove the existence of a fact that was in issue in that proceeding. However, s. 91 did not preclude Ginnane J from relying on the Final Award and the evidence adduced in the arbitration, as they were not being used to prove the existence of any fact but were being considered in assessing whether there was sufficient evidence to enable UDP to establish a prima facie case of the existence of a caveatable interest. [45], [59]-[60]

In Ironbridge Holdings Pty Ltd v O’Grady [2020] VSC 344 (11 June 2020), Ginnane J, the facts and relevant holdings were –

  • In 2006 the plaintiff entered a contract of sale to purchase land from vendors of which the defendant was the survivor.  The settlement date was no later than 7 years but was extended.
  • A deposit and certain instalments of purchase money were paid, but the final instalment was not.  Part of the land was transferred.  The vendor rescinded the contract.
  • The purchaser caveated on the basis of an alleged equitable (purchaser’s) lien over the untransferred land to secure repayment of instalments of purchase money and interest.
  • The purchaser succeeded in a claim for restitution.  However the purchaser was held not to have a caveatable interest.  His Honour observed that where title was not conveyed the purchaser’s lien secured the repayment of monies paid by the purchaser, to whom it gave a right to sell the property and take a share of the proceeds of sale in an amount equal to the debt.  But there must be a debt which the lien could secure.  Here there was no lien because the purchaser was in default of its obligations under the contract: the purchaser was only entitled to the lien where the contract went off through no fault of its own. [307], [309], [310], [312]-[314]

Philip H. Barton

Owen Dixon Chambers West

21 September 2020

 

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