Maria Bechara v Theodoros Haratsaris

Judgment 1REIN J: The plaintiff, Ms Maria Bechara ("Ms Bechara"), is a solicitor who as the principal of Bechara & Company, acted for Mr Theodoros Haratsaris ("Mr Haratsaris") from 1999 to 2005 in proceedings brought by Mr Haratsaris against a Mr Vorillas in the District Court and the Court of Appeal, in respect of injuries suffered by Mr Haratsaris in a motor accident. 2During the period that Ms Bechara acted for Mr Haratsaris, there had been negotiations between Ms Bechara and solicitors acting on behalf of Mr Vorillas' insurer, NRMA Insurance Ltd, and even an offer of $280K (inclusive of costs) had been made by NRMA to settle the proceedings. In 2005, Ms Bechara decided to cease practising as a solicitor and informed Mr Haratsaris of this decision in April 2005. Mr Haratsaris appointed new solicitors, Messrs Pryor Tzannes & Wallis ("PTW") to act for him in connection with the proceedings and, shortly after, a further offer of $242K (inclusive of costs) was made by NRMA through its solicitors to PTW. Mr Haratsaris accepted the offer by a deed entered into on 17 May 2005. 3The net funds $172, 685.34 payable from the monies paid by NRMA, pursuant to the settlement, were paid to the account of Mrs Haratsaris on 1 August 2005. 4On 27 April 2005, Ms Bechara sent an itemised bill of costs ("the bill of costs") to Mr Haratsaris in respect of the work which she had preformed for Mr Haratsaris and enclosing a draft irrevocable authority for payment of her costs and a draft undertaking which she sought from PTW in connection with the matter. On 2 May 2005 she also sent a letter to PTW informing them of the fact that she had sent a bill to Mr Haratsaris and that she was seeking payment of it (Exhibit A1, p 360). PTW replied by letter of 27 May 2005 stating that they were seeking instructions from Mr Haratsaris (Exhibit A1, p 364). There were follow up letters from Ms Bechara to PTW but no authority or undertaking was ever provided by Mr Haratsaris or PTW, and although PTW were paid their costs out of the settlement monies Ms Bechara has never been paid. Ms Bechara was not informed of the deed of 17 May, or that the settlement monies had been received in August, and did not become aware of that fact until 22 September 2005 (Exhibit A2, p 403). 5Shortly after the settlement monies were received, on 29 August 2005, Mr Haratsaris transferred to his wife ("Mrs Haratsaris") his interest in a property at Christies Beach, Adelaide ("the Adelaide property") describing the transfer as a result of a gift to Mrs Haratsaris made with "love and affection and no monetary consideration whatsoever" which transfer was registered on 30 August 2005 in the Lands Titles Registration Office of South Australia. 6The defendants had earlier borrowed $100K, in 2003, in connection with the purchase of the Adelaide Property providing a mortgage to the Commonwealth Bank of Australia ("CBA") to secure the loan, and on 23 August 2005 the defendants paid $116K to CBA to discharge that mortgage. 7On 30 August 2005 Mrs Haratsaris executed a memorandum of mortgage over the Adelaide property in favour of RAMS to secure a loan of $143K made to her. 8On 22 February 2006 Mrs Haratsaris applied for a subdivision of the Adelaide property which was approved. 9On 19 March 2008 Mrs Haratsaris sold one of the two lots of the subdivided land to a third party who paid $240, 500 to Mrs Haratsaris. Ms Bechara claims that Mrs Haratsaris is a constructive trustee of the proceeds of sale. Mrs Haratsaris remains the owner of the other subdivided lot. 10Ms Bechara claims that the transfer by Mr Haratsaris of his interest in the Adelaide Property and the payment of the $172K into Mrs Haratsaris' account had the same purpose, namely to preclude her from recovering her fees. Ms Bechara asserts that the transfer was a transfer to defraud her as a creditor and hence that it should be struck down by s 37A of the Conveyancing Act 1919 (NSW) which is the following terms: (1) Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced. (2) This section does not affect the law of bankruptcy for the time being in force. (3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors. Ms Bechara, alternatively, relies on an equivalent provision - s 86 of Law of Property Act 1936 (SA) which is in the following terms: (1) Every conveyance of property made with intent to defraud creditors shall be voidable at the instance of the party prejudiced thereby. (2) This section shall not extend to any estate or interest in property conveyed for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the conveyance, notice of the intent to defraud creditors. It was agreed that nothing turns on the distinction between the two legislative provisions, so I shall focus on s 37A since it is also relied on in relation to another transaction. 11Ms Bechara did not take any action in respect of the unpaid fees for a long time. However, on 1 May 2009 Ms Bechara commenced proceedings in the New South Wales District Court against Mr Haratsaris in respect of the bill of costs. 12On 2 July 2009 Mr Haratsaris filed his defence in the District Court. 13On 21 October 2010 judgment was entered in the District Court against Mr Haratsaris in the amount of $118, 870.33 plus an amount for interest of $55, 882.08 amounting to a total of $174, 752.41 ("the judgment debt"): see Exhibit A, p 629. Although Mr Haratsaris had filed a defence he did not take an active role in defending those proceedings thereafter and the matter was heard ex parte by Murrell DCJ, with her Honour noting that she was satisfied Mr Haratsaris had notice of the hearing. 14Within weeks of Mr Haratsaris having filed his defence in the District Court proceedings a property acquired by Mr Haratsaris in 2008 was transferred by him to Mrs Haratsaris as trustee of the Haratsaris Family Trust ("the Trust"). The stated consideration payable by Mrs Haratsaris was $550K: see Exhibit A2, p 537. 15The property in question, which I shall describe as "the Belmore Property", was one which had been transferred to Mr Haratsaris by his mother in early 2008 for a consideration of $1. Mr Haratsaris shortly after the transfer subsequently obtained a loan for $205,668.58 from First Mortgage Home Loans Pty Ltd ("First Mortgage") which was secured by the Belmore Property. 16On 22 July 2009 Mr Haratsaris arranged to discharge the mortgage to First Mortgage by repayment of the loan monies. 17On or about 27 August 2009 Mr Haratsaris transferred his interest to Mrs Haratsaris for the purported consideration of $550K and the transfer was registered on that date. Mrs Haratsaris applied for and obtained a loan in the amount of $300K from ANZ and that amount, or $250K of it, was used to repay the first Mortgage debt by Mr Haratsaris. By letter dated 13 July 2009 Ms June Hoskin, a registered conveyancer, on behalf of Mrs Haratsaris, advised the bank that Mrs Haratsaris would not be contributing any further funds to the purchase other than the loan proceeds "as she already has an interest in the property as spouse of the vendor": see Exhibit A2, p 538. 18Ms Bechara claims that the Belmore Property transfer, like the Adelaide Property conveyance, was designed to defeat her position as a creditor and should also be set aside by virtue of s 37A of the Conveyancing Act 1919 (NSW). 19It is clear that as at August 2005 Mr Haratsaris' only significant asset was his interest in the Adelaide Property and his entitlement to the balance of the settlement proceeds from his personal injury claim. By transferring his interest in the Adelaide Property to his wife and by directing that all of his personal injury settlement monies be paid to his wife, he left himself with no assets. Mr Haratsaris was then, and is now, in receipt of a disability pension although he has, according to his evidence, been conducting business as a developer: see T87.3-5 and T147.20, see also T114 and Mrs Haratsaris' evidence at T40.1, T44.32, T46.10 and T50.7 and see his affidavit verifying his defence in the District Court proceedings at Exhibit A2, p 520 and his affidavit in these proceedings, Exhibit A1, p 129, [81]-[84] and Mrs Haratsaris' affidavit, Exhibit A1, p 115, [36]-[38]. 20If Mr Haratsaris was aware that Ms Bechara claimed he owed her money for her fees, a matter to which I shall return, he may well have believed that Ms Bechara had decided not to pursue him for those fees, since from the second half of 2005 to mid 2008 he had received no communication from her. 21For a transfer of land to be voidable under s37A there are these elements which need to be established: (1)Alienation or transfer of property by a debtor, (2)The alienation or transfer was carried out with intent to defraud creditors and (3)The person seeking to set aside the transfer has been prejudiced. 22There was no dispute by the defendants that (1) has been met. There was agreement that Marcolongo v Chen (2011) 242 CLR 546, (2011) 274 ALR 634; (2011) 85 ALJR 380; [2011] HCA 3 provides the appropriate guidance in relation to (2) and (3). 23The plurality in Marcolongo (French CJ, Gummow, Crennan and Bell JJ) examined the history of s 37A of the Act, and analogous legislative provisions, and held that the statute should be given a liberal construction and that "defraud" should be read as "delay, hinder or [otherwise] defraud": see [19], [32] and [56]. It was not necessary to show that the debtor wanted creditors to suffer a loss or that the debtor had a purpose of causing loss, rather, "it was necessary to show the existence of an intention to hinder, delay or defeat creditors and in that sense to show that accordingly the debtor had acted dishonestly" (emphasis added): see [32]. 24In Marcolongo Mrs Marcolongo was a next door neighbour who had a claim against Lym in respect of the building works carried out on Lym's property, which at the time of the sale by Lym to Mr Chen, had not yet been the subject of adjudication in the District Court. Mrs Marcolongo did subsequently obtain judgment for $388K plus costs against Lym. 25In Marcolongo, Mr Chen had encouraged or procured Ms Yang to sell the property to him in haste and at a relatively low price ($15M), telling her that there were outstanding claims against his company Lym International Pty Ltd ("Lym"), and that if she did not do that Lym would suffer a big loss and have its assets frozen. 26In Marcolongo French CJ, Gummow, Crennan and Bell JJ observed at [56]-[57]: [56] ... But the provision in special condition 33(b) for application of the balance of the proceeds to debts owed by Lym and related entities of Lym, and the evidence as to the lack of arrangements for Mr Chen to pay that balance, shows the deterioration to the position of Mrs Marcolongo that inevitably ensued. It is no answer, as it was no answer in Re Fasey; Ex parte Trustees, that there had been no delay and hindrance occasioned by the transaction because eventually she might have had some recovery for any judgment she recovered and costs. [57] The second point is that s 37A requires a finding, which Hamilton J made, of intent to achieve the proscribed prejudice. The section does not postulate a mixture of motives from which there must be extracted what is identified as a predominant intent to defraud. Further, as Stephen J indicated in his discussion in Barton v Deputy Federal Commissioner of Taxation, a provision such as the Elizabethan Statute does not require for its operation that the proscribed intent to defraud be the sole intent... and at [322] approved of a what was said by Russell LJ in Lloyds Bank v Marcan [1973] 1 WLR 1387 at 1390-1391: I am not sure what is meant by a perfectly innocent defeat, hindrance or delay. It must be remembered that in every case under this section the debtor has done something which in law he has power and is entitled to do; otherwise it would never reach the section. If he disposes of an asset which would be available to his creditors with the intention of prejudicing them by putting it (or its worth) beyond their reach, he is in the ordinary case acting in a fashion not honest in the context of the relationship of debtor and creditor. And in cases of voluntary disposition that intention may be inferred. Also relevant is [25]: [25] The point sought to be made in the text of Halsbury attached to footnote (c) may be expressed by saying that it would be the duty of the judge to direct a jury that they might infer an intention by the settlor to defeat or delay creditors, even in the absence of direct evidence of that intention, where this outcome was the necessary consequence of a voluntary settlement. In this way, it was easier to infer a dishonest intention if the conveyance were voluntary than if it were made for consideration. Evidence that the conveyance was voluntary does not replace the requirement of proof of intent by a distinct category where constructive fraud, with notions of constructive knowledge or notice as understood in equity, would suffice for the application of s 37A. Rather, the evidence is that species which has sufficient weight to entitle the fact finder to decide an issue (here the necessary intent) in favour of the moving party, although the fact finder is not obliged to do so and other evidence given may be decisive to the contrary. 27The parties are agreed that the sole issues in this case are whether the transfers were made by Mr Haratsaris with the requisite intent and whether Mrs Haratsaris can rely on the exception in s 37A(3) in relation to the Belmore property. It was common ground that included in "creditors" are contingent or prospective creditors: see Kang v Kwan [2002] NSWSC 1187; (2002) 11 BPR 20,623. It was accepted by Mrs Haratsaris that she could not rely on s 37A(3) or s 86(2) of the South Australian legislation because she had not provided valuable consideration for the transfer of the Belmore property. 28Mr and Mrs Haratsaris deny that they had an intention to defeat Ms Bechara as a creditor and I have, pursuant to a timetable put in place at the end of oral submissions, received detailed submissions on the question of the defendants' credibility. I will refer to what each of the defendants say to explain their actions but before doing so I think it is appropriate to observe that, prima facie, the combined effect of: (1)The transfer of Mr Haratsaris' settlement money to the sole account of his wife. (2)The transfer of the Adelaide Property interest from Mr Haratsaris to Mrs Haratsaris without valuable consideration. (3)The transfer of the Belmore Property to the Trust in August 2009, that property having being received by Mr Haratsaris in 2008 from Mr Haratsaris' mother. (4)The timing of these transfers (i.e. in the case of the Adelaide Property within a few weeks of the payment of the settlement monies and in the case of the Belmore Property within weeks of Mr Haratsaris having filed his Defence). (5)The fact that the Trust never did pay Mr Haratsaris the full amount of the stated consideration of $550K. bespeak, with nothing more, a very calculated attempt to deprive Ms Bechara of any assets from which she could recover a judgment for costs, should she obtain one, which as August 2005 she had made clear she would seek and, again, as at 1 July 2009 she had clearly indicated she wished to do. 29Mr Kelly submitted on behalf of Ms Bechara that the Court can infer that a person intended the natural consequence of his or her actions. The natural consequence of both transfers was that they, at different times, left Mr Haratsaris with no assets. 30It was submitted by Mr McCulloch that the allegations made by Ms Bechara involve an allegation of, essentially, a conspiracy to commit fraud "which must be established in accordance with the Briginshaw standard" a reference to Briginshaw v Briginshaw (1938) 60 CLR 336 and see particularly pp 360364 per Dixon J. 31I accept that an allegation that a debtor has taken steps to "delay hinder or otherwise defraud" (per Marcolongo) is an allegation of dishonesty and its seriousness must be borne in mind in determining whether Ms Bechara has established, on the balance of probabilities, the requisite intent under s 37A(1): see Rejfek v McElroy (1965) 112 CLR 517, 521-522 per Barwick CJ, Kitto Taylor, Menzies and Windeyer JJ. However, Ms Bechara does not have to establish a conspiracy to commit fraud. Rather what she has to establish (and she has the onus) is that Mr Haratsaris transferred his property with the intent to defraud one or more of his creditors. 32In this context I should deal with the question of the onus of proof in respect of s 37A(3). The defendants' closing submissions ("DCS") at [78] assert that Ms Bechara bears the onus of proof that Mrs Haratsaris was not, at the time of the alienation, a purchaser in good faith without notice of the intent to defraud creditors and cites Huynh v Helleh Holdings Pty Ltd [2001] NSWSC 1162, [28] per Hamilton J. Huynh does provide authority for that proposition: see [18] and [28]. A different view, however, has been taken in B v U [2012] NSWSC 1416, a case relied on by Ms Bechara. As Pembroke J pointed out in B v U, whilst there are cases which have adopted the approach urged by the defendants, such as Huynh and cases mentioned at [18] of Huynh, the later decision of the Court of Appeal in Wentworth v Rogers [2004] NSWCA 430 expressed a different view noting that cases such as PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 were concerned with different legislative provisions: see [64] - [65]. Hodgson JA, with whom Santow JA and Hislop J concurred, said that whilst the onus of establishing the requisite intent in the alienor is on the plaintiff, the onus under s 37A(3) is "on the person asserting its protection": see [66]. It follows that the onus lies on Mrs Haratsaris to establish that she is entitled to the protection of s 37A(3). 33Mr Haratsaris' defence in these proceedings and his affidavit had a number of elements: (1)In his defence, in answer to paragraph 16 of Ms Bechara's statement of claim that he had received the solicitor client bill on or about 29 April 2005, he denied that allegation: see Exhibit A1, p 35, [16]. That defence was verified by affidavit: see Exhibit A1, p 38. (2)In his affidavit of 6 December 2012, Mr Haratsaris said he did not recall receiving the bill of costs "either in the mail or by Registered Post"(Exhibit A1, p 126, [57]). (3)He claimed that in late 2004 he had told his accountant that he and his wife wanted to start their own company importing building materials and massage tables and that he needed funds. He says that in 2004 his accountant, Mr Rick Bayer from LBH Accountants, told him that he would have difficulty raising finance and that if he could not obtain finance he could transfer his share to Denise. He says that he tried to obtain a loan from CBA but was unsuccessful: see Exhibit A1, p 128, [77]-[79]. He says: 77. At the time of transferring my interest in the Adelaide property to my wife, there was no reason or intention to defraud anyone. 78. I was not aware at the time that I had any creditors other than CBA, as mortgagee of the Adelaide property prior to the transfer. 79. I was also considering instructing my solicitors to sue the Plaintiff for handling my personal injury claim negligently. He also said that "Aussie Money" was his wife's business and that with the transfer of the Adelaide property to her she was greatly assisted in her ability to raise capital. He said his involvement in the business was limited to "being on the phone, making orders and organising the deliveries" see Exhibit A2, p 129, [82]. (4)The Trust was set up because "we wanted to ensure our assets would be protected for Denise and the children, should anything go wrong in the business": see para 84 of his affidavit. Denise was appointed trustee of the Trust and the beneficiaries were their children: see Mrs Haratsaris' affidavit, Exhibit A1 p 116, [45] (5)His mother had transferred the Belmore Property to him because she had been diagnosed with breast cancer (see Exhibit A1, p 129, [89]-[90]). He obtained advice from Ms Vicki Tzortzis of James Lawyers, and this occurred on 16 April 2008. He intended to transfer the property to the Trust, as his mother wanted the property to go to Mr Haratsaris' children, but he did not undertake this straight away. He obtained a loan and granted a mortgage. The mortgage of approximately $250K was repaid by Mrs Haratsaris out of the funds she received from the ANZ Bank in July 2009. The transfer to the Trust was in line with the original and innocent establishment of the Trust well before the Belmore property was transferred. (6)He says that he did not tell his wife about the District Court proceedings until he received a bankruptcy notice based on the District Court judgment. (7)He says that he did not know that a hearing date for the District Court claim had been allocated and he did not know that judgment been entered against him until he was served with the bankruptcy note. 34Mrs Haratsaris position in her Defence and affidavits had these elements: (1)She did not know that Ms Bechara had served a bill of costs on her husband and far as she was concerned whatever was owing would have been taken care of by the new solicitors: see T41.50, see her affidavit at Exhibit A1, p 111, [8] and p 117, [59]. (2)She did not know that Mr Haratsaris was a debtor to Ms Bechara when he transferred the Adelaide interest. (3)Mr Haratsaris did not tell her that he had been sued by Ms Bechara in the District Court so that when the Belmore Property was transferred she did not know that Ms Bechara was a creditor. (4)Her affidavit evidence about the establishment of the Trust was that its purpose was as "part of a long term plan to ensure that should anything go wrong in the Aussie Money business, or any of the other businesses in which we were involved, that the trust would hold assets for the benefit of our children" see her affidavit, Exhibit A1, p116, [45] and see T37.1-12