Is it possible to save family home from the Trustee in Bankruptcy?

Can the Trustee in Bankruptcy claim an interest in the family home because the bankrupt is living there, even if the bankrupt is not registered on the title as an owner?

The short answer is yes: if the Trustee can prove a common intention constructive trust.

But Trustees do not always succeed: In Silvia (Trustee) v Williams [2018] FCAFC 194 (14 November 2018) the Federal Court of Australia – Full Court (Perram, Barker and Derrington JJ, jointly) held, on appeal, that the Trial Judge was correct to dismiss the Trustee’s claim that Mr Williams (as sole owner) held 50% of his interest in the family home on trust for Mrs Williams’ bankrupt estate.

This is an analysis of the decision.

The Facts: Why the family home was purchased in Mr William’s sole name

On 24 January 2012, Mr & Mrs Williams settled the sale of their home in Blake Street, Dover Heights, which had been jointly owned. The sale price was $3.35 million. The net proceeds were $1.56 million.

Mrs Williams had extensively renovated the home before it was sold, but the work was defective. Shortly after the settlement of the sale, a claim was made by the purchasers for repairs. In subsequent legal proceedings, Mrs Williams was ordered to pay the purchasers more than $1 million in damages (Pisano v Dandris [2014] NSWSC 1070). Not long afterwards, Mrs Williams presented a debtor’s petition and was made bankrupt.

Mr Williams was also sued by the purchasers, but on appeal, he was found to be not liable (Williams v Pisano [2015] NSWCA 177).

On 4 May 2012, Mr Williams exchanged contracts in his name alone for the purchase of the property in Military Road, Dover Heights (not far from Bondi Beach), the subject of the current proceedings. This was long before Mrs Williams’ bankruptcy on 7 October 2014.

The purchase price was $2.09 million, which was funded by a deposit paid of $209,000 and an equity contribution of $500,000 (both paid by Mr Williams), and a bank loan for the balance.

The Military Road property was purchased as their matrimonial home. They live there with their daughter.

The Law: The common intention constructive trust

A court of equity will intervene to declare the existence of a proprietary interest in a family home on the part of a spouse or de facto partner … when … it would be unconscionable on the part of the person against whom the claim is brought to refuse to recognise the existence of the equitable interest: Baumgartner v Baumgartner [1987] HCA 59. [quoted at paragraph 13]

One common example is where a spouse or partner makes a financial contribution towards the cost of acquiring, improving or maintaining a property held in the other’s name. In such cases, it is accepted that the party asserting the trust must prove, first, that the spouses held a common intention that they would own the property together; and secondly, that the party asserting the trust acted upon that common intention by making contributions [which] may include not only the costs of acquisition, but also the costs of any improvements or costs relating to maintenance. [paragraph 14]

The reasons why the Trustee’s claim failed

The Trustee did not fully articulate the common intention trust case until in his oral final submissions. The trust was not pleaded, and the Trustee did not seek leave to amend the pleadings. The Court concluded that:

[Mr Williams] was genuinely prejudiced and the common intention constructive trust claim should not have been entertained. [paragraph 54]

This is sufficient to dismiss the appeal. For the reasons which follow, however, even though the trust case should not have been entertained, the trial judge was correct in concluding that the claim should fail. [paragraph 55]

The Court reviewed the deposit paid of $209,000. The deposit was drawn by cheque from one of Mr Williams’ accounts. The day after the cheque cleared, Mrs Williams transferred $209,000 from one of her accounts into that account. On its face that transfer of $209,000 appeared to be an indirect contribution referrable to the deposit.

However, the Trustee failed to prove the first requirement that the contribution was made under a ‘common intention’ that Mr & Mrs Williams would own the property together because:

• The Trustee made no real attempt … to trace any of the proceeds of sale of the Blake Street property into the money used … to acquire the Military Road property;
• Mrs Williams had not been examined on what she intended by that payment, and the evidence did not establish the purpose of that payment (was it a gift, a loan, an equity investment, an adjustment?);
• Mr Williams gave evidence that the decision to purchase in his name alone was for tax reasons, because if the possibility they could reside overseas for work eventuated, then he could rent out the home and take advantage of negative gearing in relation to the rent received.

For these reasons, the Court rejected the Trustee’s argument that the payment led to an ‘inexorable’ inference that there was a ‘common intention’ that Mrs Williams would have a beneficial interest in the Military Road property.

Had a ‘common intention’ been proved, the Court would have concluded that payment was sufficient detriment / contribution for the purposes of establishing a trust.

Analysis

• The Trustee bears the onus of proof of establishing the existence of a common intention constructive trust. The Trustee must provide evidence of a contribution and the purpose for which it was made.
  
  In this case, the Trustee simply asserted there was a trust in oral submissions, without providing proof. The Trustee failed to even plead the existence of a trust, let alone adduce evidence to prove it
   
• Mr & Mrs Williams took the sensible precaution of purchasing their new home in the name of Mr Williams alone because he was less exposed to the threatened litigation than Mrs Williams.
  
  Not that he could admit that was the reason. His explanation that the house was purchased in his name alone for tax purposes, in the event it was rented out, was a good reason and helped negate the ‘common intention’.
   
• Most conveyancing transactions in which a new family home is purchased to replace an old family home, are ‘back to back’. That is, the settlement of the sale take place simultaneously with the settlement of the purchase, and the proceeds of sale are applied to the purchase price directly.
   
  This transaction was different because of the time gap between the sale and the purchase. The purchase contract for the Military Road home was not entered into until four months after the settlement of the sale of the Blake Street home.
  
  The Trustee admitted that during this period “some of the sale proceeds may have been intermingled with the other household funds”. The Trustee failed to provide forensic evidence to ‘trace’ the sale proceeds to the deposit (or other money) paid for the Military Road home purchase.

And so the Williams’ family home was saved from the Trustee in Bankruptcy.

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