Re Joe De Fazio Ex Parte: the Official Trustee In Bankruptcy and Fourth Gozbarb Pty Ltd [1988] FCA 33 (22 February 1988)

FEDERAL COURT OF AUSTRALIA

Re: JOE DE FAZIO
Ex parte: THE OFFICIAL TRUSTEE IN BANKRUPTCY and FOURTH GOZBARB PTY. LTD.
No. 197 of 1986
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
EXERCISING FEDERAL JURISDICTION IN BANKRUPTCY
Northrop J.(1)

CATCHWORDS

Bankruptcy - purchase of land in name of company controlled by the bankrupt - capacity in which bankrupt entered into contract of sale - whether the purchase of the land constituted a settlement of property by the bankrupt to the company - whether the settlement was made for valuable consideration - nature of valuable consideration.

Whether payment of moneys by the bankrupt to the company by way of part payment of purchase price of land constituted a settlement of property - whether such money was money of the bankrupt - onus of proof.

Bankruptcy Act 1966 ss.5,115,120

HEARING

MELBOURNE
22:2:1988

Counsel for Applicant: Mr. G.T. Bigmore

Solicitor for Applicant: Mr. G.T. Bigmore

Counsel for Respondent: Mr. L. Watts

Solicitors for Respondent: Messrs. Kiddle Briggs & Willox

ORDER

The application be dismissed with costs to be taxed/ to be taxed.

(This order is to be settled and filed in accordance with rule 124 of the Bankruptcy Rules.)

DECISION

On 24 March 1986, pursuant to the Bankruptcy Act 1966, a sequestration order was made against the estate of Joe De Fazio, also known as Joseph Paul De Fazio, ("the bankrupt"). The order was based on an act of bankruptcy which was committed on 15 March 1985 and, pursuant to s.115 of the Act, the bankruptcy of the bankrupt was deemed to have commenced on 15 March 1985. Within a period of two years before 15 March 1985, the debtor was involved in a number of transactions involving the purchase of a dwelling house situate and known as 29 Wimba Avenue, Kew, ("the land"). As a result of those transactions, on 21 December 1983, a company, Fourth Gozbarb Pty. Ltd., ("the Company"), became registered as the sole proprietor of the land. By application dated 22 January 1987, the Official Trustee in Bankruptcy, as trustee of the property of the bankrupt, ("the Official Trustee"), is seeking orders, in substance, that the bankrupt was the beneficial owner of the land and alternatively, that the transactions involving the purchase of the land constituted a settlement of property by the bankrupt under s.120 of the Act and was void under paragraph 120(1)(a) of the Act. The relevant parts of that paragraph are set out:-

"120(1) A settlement of property, ... not being -
(a) a settlement ... made in favour of a
purchaser ... in good faith and for
valuable consideration ...

is, if the settlor becomes a bankrupt and the
settlement came into operation after, or within 2
years before, the commencement of the bankruptcy,
void as against the trustee in the bankruptcy."

2. There are a number of unsatisfactory features about this case, some of which will be referred to in detail later in these reasons. For present purposes, it is sufficient to say that the case as initially presented on behalf of the Official Trustee did not include a detailed analysis of the documents contained in the file of the solicitor acting on behalf of the bankrupt and the Company in relation to the purchase of the land. The file became an exhibit at the hearing of the application and it was only towards the concluding part of the hearing that the true significance of the contents of the file became apparent. In a case where the truthfulness of the bankrupt and witnesses favourable to his interests is very much in issue in relation to events that occurred more than four years before the hearing, the contents of documents prepared at the time the transactions were being conducted assume a compelling role.

3. The case as initially presented by the Official Trustee was deceptively simple. At all material times before 21 December 1983, being the date the Company became registered as the proprietor of the land, the land was registered in the names of a Mr. and Mrs. Waters. By a contract of sale made in May 1983, the Waters agreed to sell the land to a Richard Dover for the sum of $192,000. By a contract of sale constituted by a sale note dated 6 September 1983, Dover agreed to sell the land to the bankrupt "& Nominees" for the sum of $190,000. Pursuant to the terms of the sale note, a deposit in the sum of $19,000 was paid by the bankrupt. Dover was unable to complete his purchase. By an agreement in writing dated 27 October 1983 and made between the Waters, Dover and the bankrupt, the parties agreed to resolve the problems that had arisen between them in accordance with the terms contained in the agreement. For present purposes, it is sufficient to say that the agreement contained terms to the effect that the Waters would enter into a contract of sale to sell the land to the bankrupt for $190,000, the deposit of $19,000 already paid by the bankrupt to Dover would be treated as the deposit under the new contract of sale and that the completion date would be 5 December 1983. Pursuant to the terms of the agreement, a contract of sale dated 27 October 1983 was entered into between the Waters as vendors and the bankrupt "and/or Nominee" as purchaser for $190,000. The deposit of $19,000 was described as "has already been paid" and the residue was due on 5 December 1983. Clause 4 of the contract was as follows:-

"4. If the property is expressed as sold to a
named Purchaser `and/or nominee' (or words of
like effect) then the named Purchaser may
nominate a substitute or additional
Purchaser(s) but in any event the named
Purchaser shall remain personally liable for
the due performance of all his obligations
under this contract until the substituted
Purchaser(s) if any has legally taken his
place and become bound to fulfil the
Purchaser's obligations under this contract
whereupon the named Purchaser shall guarantee
the due performance of those obligations.
These arrangements shall be completed to the
reasonable satisfaction of the Vendor or his
solicitor at the expense of both the Purchaser
and the nominee(s)."

Settlement of the contract of sale occurred on 5 December 1983 when the balance of the purchase price was paid and a transfer of the land from the Waters to the Company was signed by the Waters. Pursuant to that transfer, the Company became registered as the proprietor of the land on 21 December 1983.

4. On these facts, there is much to be said for the view that there had been a settlement of property by the bankrupt within s.120 of the Act. In that section a settlement of property includes any disposition of property; see sub-section 120(8). In the present case the Official Trustee did not suggest that the settlement was not made in "good faith." Thus the issue raised by the Official Trustee was whether the settlement had been made for valuable consideration within the meaning of paragraph 120(1)(a) of the Act.

5. Before considering this aspect further, reference should be made to some further facts. Late in 1982, the bankrupt and his mother, Maria, became directors of the Company. It is true to say that at all relevant times, the bankrupt controlled the Company. The bankrupt claims that at all relevant times the land was to be used for the benefit of a family trust and that the Company was to be the trustee of that trust. The family trust, called the De Fazio Family Trust No. 2, was created by a deed of settlement dated 16 September 1983. The settlor is Joseph Guiliano, the trustee is the Company, the primary beneficiaries are stated to be the bankrupt and his children, while additional members of the class of general beneficiaries are Maria and the spouse or widow of the bankrupt. Stamp duty was paid on the settlement on 4 November 1983. Counsel for the Company contended that at all relevant times with respect to the transactions leading to the transfer of the land, the bankrupt was acting as agent for the Company or as a trustee for the De Fazio Family Trust No. 2 and that at no time was he acting on his own behalf. The bankrupt gave evidence to that effect.

6. In these circumstances, the contents of the file of the solicitors then acting on behalf of the bankrupt is of importance. The solicitor handling the matter is overseas and has been overseas for a number of years. It was impracticable to obtain evidence from him. The contents of the file support the evidence of the bankrupt. The file commences with the sale note, Dover to the bankrupt, and the letter from the agent acting for Dover to the bankrupt. The next document is a note making reference to the setting up of a trust. Almost immediately thereafter are further notes relating to the Company as the trustee of the De Fazio Family Trust No. 2 and the position relating to nominating a substituted purchaser for the land. It is not necessary to refer in detail to the contents of the file. It is noted that by letter dated 21 September 1983, the solicitor is writing to the bankrupt confirming that the land is to be purchased by the Company. The arrangement was that the A.N.Z. Bank, Lalor, was to finance the purchase by advancing money secured by way of first mortgage on the land. For that purpose, the Bank was concerned to sight the documents relating to the Company and the deed of trust. Copies of the necessary documents and the proposed transfer to the Company were forwarded to the Bank under cover of a letter dated 30 September 1983. The file contains references to the agreement between the Waters, Dover and the bankrupt that was executed on 27 October 1983. It is strange that at that time the new documentation did not make reference to the Company as being the purchaser but, even if it had, one could expect the Official Trustee to put similar arguments based upon a settlement arising from the change of purchaser under the contract from Dover and the contract from the Waters.

7. The file contains a copy of a letter dated 17 November 1983 from the solicitors for the bankrupt and the Company to the solicitors for the Waters enclosing completed Notices of Nomination and Acceptance of Nomination together with transfer preparatory to settlement. The notices appear to be in conformity with the terms of condition 4 of the contract from the Waters to the bankrupt. Those notices are not in evidence before the Court. Unsigned duplicates are in the file. I am prepared to infer that the notices were executed and forwarded to the solicitors for the Waters. This inference is drawn from the fact of the transfer which was signed to transfer the title from the Waters to the Company. The Notice of Nomination is dated November 1983 and is said to be signed by the bankrupt. It refers to the contract of sale dated 27 October 1983. It gives notice that the bankrupt nominates the Company as the purchaser of the land and authorises the deposit of $19,000 paid by him under the contract to be applied as a deposit paid by the Company and declares that no consideration has passed or will pass between the Company and himself in respect of the nomination. The Notice of Acceptance of Nomination is dated November 1983 and is said to be sealed by the Company. It states that the Company consents to be nominated as the purchaser under the contract of sale dated 27 October 1983.

8. It is obvious that the Waters acted upon the Notices of Nomination and Acceptance of Nomination. It is not really disputed that the Company provided at least $100,000 of the balance of the purchase moneys which were paid to the Waters at settlement. That was obtained by the Company from the A.N.Z. Bank at Lalor by way of a loan secured by mortgage on the land.

9. On these facts, I am prepared to find that there was a settlement of property made by the bankrupt to the Company within two years before the commencement of the bankrupt's bankruptcy under s.120 of the Act. That settlement was made in good faith. Further, I am satisfied that the settlement was made in favour of a purchaser, the Company, for valuable consideration and thus comes within exclusive provisions of paragraph 120(1)(a) of the Act with the result that the settlement is not void as against the Official Trustee.

10. The nature of consideration sufficient to satisfy the requirements of paragraph 120(1)(a) were discussed in Official Trustee v. Arcadiou (1985) 8 FCR 4 by Woodward and Northrop JJ. at pp 11-12. In that passage the Court applied the opinion expressed by Lockhart J. in Barton v. Official Receiver (1984) 4 FCR 380. Since Arcadiou, the High Court has approved the opinion expressed by Lockhart J.; see Barton v. Official Receiver [1986] HCA 44; (1986) 161 CLR 75. In the present case there is no doubt that in the ordinary commercial sense, the Company gave consideration for the nomination by the bankrupt pursuant to condition 4 of the contract of sale dated 27 October 1983. That consideration moved from the Company. It undertook the obligations imposed on the purchaser by that contract. It executed that consideration, at least in part.

11. In any event, on the whole of the evidence, I am satisfied that when the bankrupt entered into the contract of sale dated 6 September 1983, when he entered into the tripartite agreement dated 27 October 1983, and when he entered into the contract of sale dated 27 October 1983, he did so in the capacity of a trustee of a family trust. The family trust was formalised in the deed of settlement dated 16 September 1983 which formally created the De Fazio Family Trust No. 2. In these circumstances, when the bankrupt disposed of the land to the Company he did so in his capacity as trustee of the family trust. In these circumstances, for reasons similar to those applied by me in Re Wills; Ex parte Wills, 4 November 1987, unreported, there was no settlement of property by the bankrupt in favour of the Company within the meaning of s.120 of the Act.

12. For these reasons, the orders sought in the application as originally formed are refused.

13. At a late stage of the hearing, it became apparent that the orders sought in the application were not supported by the evidence. The evidence was in a confused form and it is almost impossible to make findings of fact with any confidence. At a late stage, the solicitor for the Official Trustee was granted leave to add additional orders to the orders sought by the application as follows:-

"2A. Alternatively, an order declaring void as
against the applicant (the Official Trustee)
(as a settlement within the meaning of s.120
of the Bankruptcy Act 1966) the payment in and
about September and December 1983 of sums
totalling $91,515.93 by the bankrupt to the
respondent (the Company).

3A. An order that the respondent (the Company) pay
to the applicant (the Official Trustee) the
sum of $91,515.93.

3B. An order declaring that the land is charged in
favour of the applicant (the Official Trustee)
with payment of the said sum of $91,515.93;
but such charge is subject to the rights of
all persons apart from the applicant and the
respondent (the Company)."

14. The sum of $91,515.93 is calculated as follows. The contract price of the land was $190,000. At settlement, after allowances for adjustments, the total purchase price to be paid was $191,515.93. This was made up by $100,000 advanced by the A.N.Z. Bank at Lalor, $19,000 deposit paid by a cheque drawn by the bankrupt and the balance being a cheque in the sum of $72,515.93 drawn by the bankrupt.

15. The additional orders sought are based on evidence adduced at the hearing with respect to business and bank dealings conducted by the bankrupt, members of his family and business associates leading up to December 1983. About the middle of the year 1981 the bankrupt together with Peter Granato and Gino Giulino purchased a business known as Capitani Furniture Pty. Ltd. ("Capitani") which carried on the business of selling and manufacturing lounge room furniture. In about April 1983 the bankrupt and Granato bought out Giulino and thereafter carried on the Capitani business. In 1983, business was good and Capitani prospered. The financial records of Capitani are not before the Court. Capitani is in liquidation and the whereabouts of its financial records are not known. It is a fair comment, however, to say that it appears that the bankrupt and Granato carried on the business as though Capitani was not a corporation. They seemed to treat payments of account to Capitani as payment to them in their personal capacity. Capitani banked with the Richmond South Branch of Westpac Banking Corporation, but not all cheques and cash payable to Capitani were paid into that bank. Finance to conduct Capitani was obtained from Westpac and security for advances made were given by the parents of the bankrupt and of Granato. In order to protect the interests of his parents, discussions took place concerning the creation of the family trust. These discussions led to the creation of the De Fazio Family Trust No. 2 and the purchase of the land. It was necessary for the bankrupt to obtain cash for the purpose of purchasing the land. I have formed the opinion that he was not an efficient businessman. He did not understand the difference between a corporation and the persons controlling that corporation. He entered into many unusual business dealings with his parents and with business associates using moneys supplied by them and transferring those moneys for other uses not only for his benefit but for the benefit of his parents and his business associates. There are no written records of those transactions. Oral evidence was given with respect to them but that evidence was confusing and imperfect and I am unable to rely upon any of it. Nevertheless it is necessary to make comments on aspects of the evidence.

16. In the present case, the burden of proof assumes an important role. Under s.120 of the Act, the Official Trustee has the burden of proving the facts upon which an order may be made. For present purposes, the contentions made on behalf of the Official Trustee were that moneys constitute property within the meaning of s.120 of the Act; see the wide definition of "property" contained in sub-section 5(1) of the Act, that the payment of moneys by way of part payment of purchase moneys with respect to the purchase of the land constituted a settlement of property within s.120 of the Act since that payment constituted a disposition of property, that that settlement is void as against the Official Trustee under paragraph 120(1)(a) of the Act since the bankrupt became a bankrupt and the commencement of that bankruptcy commenced within two years after the date of the settlement and that as a result the Official Trustee, under s.120 of the Act, is entitled to recover the amount of the moneys so paid from the Company and that right is supported by a charge over the land to satisfy the payment of that amount. In support of those contentions, reliance was based on the equitable principles of resulting and constructive trusts, namely that where land is purchased by two or more persons but the land is transferred to one of them only, that person holds the land in trust for the persons who provided the purchase moneys; see for example, Calverley v. Green [1984] HCA 81; (1984) 59 ALJR 111 and Muschinski v. Dodds [1985] HCA 78; (1985) 60 ALJR 52. Reliance was placed also on the principle that the settlement constituted a gift by the bankrupt to the Company and the Official Trustee was entitled to recover the amount of that gift from the Company. In all events, it was contended that the Official Trustee could trace the money and recover it from the Company. In this regard, reference was made to Official Receiver v. Klau; Ex parte Stephenson Nominees Pty. Ltd. (1987) 74 ALR 67.

17. There are many difficulties in accepting those contentions, not the least of which is the finding already made that the Company gave valuable consideration for the settlement of property constituted by the nomination of it by the bankrupt pursuant to condition 4 of the contract of sale dated 27 October 1983. In the result, I do not need to decide on the contentions made since, in my opinion, the Official Trustee has failed to prove that the sum of $91,515.93 was in fact moneys of the bankrupt when paid by him. Proof of the payment of that money from a bank account in the name of the bankrupt was sufficient to shift the evidentiary burden onto the Company, but as a result of the evidence led on behalf of the Company, unsatisfactory as it was, I am not satisfied that the sum of $91,515.93 or any specific part of it was money of the bankrupt to support the contentions made.

18. I turn to consider the evidence. It must be remembered that the purpose of the transactions was to set up a family trust. For this purpose, the bankrupt did not go to Westpac but approached the ANZ Bank at Lalor. This was a new step, the bankrupt having had no previous dealings with that branch. He understood he would be able to obtain finance from that branch. Copies of the bank statements of the bankrupt and the Company with that branch are in evidence. A number of the other documents used in connection with those accounts are in evidence. The manager of the branch at that time gave evidence. His recollection was hazy but I make no adverse comment about that. What is clear is that the accounts were to be used for the purchase by the Company of the land to be held by the Company as trustee for the De Fazio Family Trust. The bankrupt opened his account on 6 September 1983, the date of the sale note from Dover to the bankrupt, with a deposit of $19,056, consisting of $5,500 cash and $13,556 cheques. The cheques were cheques payable to Capitani and related to accounts for the supply of furniture. The bankrupt was used to handling large sums of cash, sometimes his money, sometimes money belonging to the people. Capitani and the bankrupt owed money to the bankrupt's parents and it was said that the deposit of $19,056 was to repay in part the moneys owing. The moneys were to be used for the purchase of the land. The deposit of $19,000 was paid by a counter cheque drawn by the bankrupt on 9 September 1983 payable to the agents of Dover.

19. The Company opened its account with the A.N.Z. Bank, Lalor, on 29 November 1983, but it is clear that the bank had advanced the $100,000 to enable the Company to settle the purchase of the land on 5 December 1983. The financing arrangements were complicated and need not be considered further.

20. Further deposits were made to the bankrupt's bank account on 22 November 1983 and 5 December 1983 in the sums of approximately $40,500 and $53,400 respectively. I am unable to say where those amounts came from but, on the whole of the evidence, I am not satisfied that they were moneys owned by the bankrupt. There is a suggestion that part of them were in fact advanced by the bank in an indirect way for the benefit of the Company. By debit note dated 6 December 1983, the bankrupt withdrew $72,515.93 from his account for "Part settlement for Fourth Gozbarb P/L." That sum, together with the $100,000 lent by the bank directly to the Company, constituted the balance of purchase price for the land.

21. After the deduction of various fees including an amount of $8,357.47 miscellaneous fee charged by the bank, a credit of some $13,000 remained in the account. On 15 December 1983 the bankrupt signed a cheque in the sum of $10,000 payable to Vincent and Mary Pileggi. This was said to be one of the semi-family, semi-business transactions entered into by the bankrupt whereby moneys were handed around between family, friends and business connections. Thereafter, apart from two contra entries in the sum of $10,000 made in July 1984, the bankrupt's bank account remained static.

22. Having regard to the whole of the evidence and having regard to the general burden of proof and the shifting or evidentiary onus of proof, I am not satisfied that the Official Trustee has proved, on the balance of probabilities, that the bankrupt used his money to pay the sum of $91,515.93 towards the purchase of the land. At the same time, I am not satisfied that it was not the money of the bankrupt and I am unable to find who in fact had the beneficial interest in that money. In these circumstances, the amended orders sought by the Official Trustee should not be made.

23. Accordingly, the application is dismissed with costs to be taxed.