Official Trustee in Bankruptcy v Klewer

PARTIES : Plaintiff - Official Trustee in Bankruptcy Defendant - Lucy Patricia Klewer

COUNSEL : Plaintiff - Mr S Golledge, counsel Defendant - Mrs Klewer, unrepresented

SOLICITORS : Plaintiff - Harris Freidman Hyde Page Defendant - unrepresented

• 12 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

11674/08 OFFICIAL TRUSTEE IN BANKRUPTCY v LUCY PATRICIA KLEWER

JUDGMENT 1 HER HONOUR: The plaintiff, the Official Trustee in Bankruptcy ('Official Trustee'), proceeds on two motions. The first seeks orders pursuant to Rules 14.28 and 13.1 of the Uniform Civil Procedure Rules 2005, that the defence be struck out and that summary judgment for possession of a property at Korora in New South Wales which is the subject of the proceedings be given, together with leave to issue a writ of possession. The second motion seeks orders pursuant to Rule 14.28 of the Rules, striking out the cross claim filed by the defendant, Mrs Lucy Patricia Klewer. 2 Mrs Klewer's cross claim is brought in relation to an 'accidental' fire at the property which occurred in 2007, after the Official Trustee became the registered proprietor of the property, but while Mrs Klewer remained in occupation. Mrs Klewer claims that this fire resulted in her suffering personal injury and various identified loss, through the Official Trustee's failure to maintain the property after the fire. 3 On 15 October 2009, the Official Trustee's motions came before Kirby J, when Mrs Klewer participated in the proceedings by telephone hook-up. His Honour took the view that the matter was not one suitable for participation by Mrs Klewer at the hearing of the motions in that fashion. He ordered that the hearing be adjourned to 1 December and that if Mrs Klewer believed that she was unable to attend through medical incapacity, by 24 November she had to fax to the Official Trustee's solicitor and to the Court, an affidavit from a doctor annexing a medical report indicating the reason for her inability to come to Sydney. No such affidavit was provided and on 24 November, Registrar Bradford confirmed the hearing date. 4 There was a further affidavit filed on 26 November in which Mrs Klewer stated that she was not able to travel to Sydney and again requested a telephone hook-up, for the hearing. Some medical reports relating to both her and her son were annexed. One was from Dr John Wenham dated 4 November, who reported that Mrs Klewer suffered from a number of conditions and that 'It appears from reading her notes that either condition results in a degree of incapacity, which renders her unable to continue court appearances'. He suggested that she avoid high stress situations and obtain independent legal advice. Another was from Dr Lo Tam of 24 November, agreeing with Dr Wenman's recommendations. 5 At the hearing there was no objection to Mrs Klewer participating by telephone. Mrs Klewer then made an adjournment application, on the basis of further proceedings which she had commenced in the Federal Magistrate's Court and in order that she be referred for pro bono legal advice, given her medical condition. That application was refused. Mrs Klewer then made two further applications. The first, for an adjournment because she was too tired to continue and the second, that I disqualify myself from further hearing the motions, given my refusal of her adjournment applications. Both applications were refused. Mrs Klewer refused the opportunity to take a break before submissions were made for the Official Trustee. This was estimated to require about 20 minutes to put. Instead, she terminated her participation in the hearing, a course which she had also earlier taken in the Federal Court proceedings (see Klewer v Official Trustee in Bankruptcy (No 2) [2008] FC 1788 at [17].) The hearing then proceeded without her further participation and judgment was reserved. 6 Later that day Mrs Klewer sought the opportunity to make written submissions. The Official Trustee did not oppose that course. I took the view that justice demanded that Mrs Klewer be given that opportunity, with the Official Trustee also being given an opportunity to make a response in writing. 7 Mrs Klewer later filed an affidavit which she had sworn, together with an affidavit sworn by her son. By Mrs Klewer's affidavit, she not only sought to make submissions, but also to rely on extensive evidentiary material. Receipt of that material was opposed, in the absence of leave being sought and granted and the absence of any explanation for the course adopted. In the event that it was accepted, however, it was submitted that neither the evidence, nor the submissions detracted from the force of the plaintiff's claim to summary judgment. In the circumstances, I took the view that Mrs Klewer should be permitted to rely on that material. 8 By that material, Mrs Klewer explained that various sums had originally been used towards the purchase price of the property and that other sums were now available to be used. These sums totalled $311,000, when the purchase price of the property was $250,000. This, it was claimed, made the property non divisible to the trustee. The balance of the mortgage was now said to be $205,000 and a further $167,000 was available to be paid. Mrs Klewer explained that this information was not advanced in order to re-agitate what had already been determined in Federal Court proceedings, but, she claimed, these sums more than satisfied the requirements of s 116 of the Bankruptcy Act 1966 (Cth). 9 As to the cross claim it was submitted that $60,000 was owed to Mrs Klewer in relation to the devaluation of the property which also had to be taken into account, in any calculations as to what was due to her, after a sale. She claimed that the Official Trustee had a legal obligation to maintain the property after the fire and that it had not paid any money in relation to the mortgage nor the land rates, since it took title. Such payments had been made by her. 10 As for Robert Klewer, he deposed, amongst other things that he lived in the property with his mother, who he relied on for management of his finances and the consequences of a brain injury. He understood that the property was his, having been included in a trust in his favour in a will which could not be located and that he had been awarded $27,000 in a personal injury matter, which was available to pay off the mortgage. 11 The Official Trustee submitted that this evidence fell into two categories. Either it was material available to Mrs Klewer at the time of the earlier proceedings in the Federal Magistrates Court, and for the most part was dealt with in the judgment given on the s 116 issue then litigated. Alternatively, it was evidence of an intention to make payments towards the improvement of the property, or the discharge of the mortgage debt currently outstanding on the property. Mrs Klewer was not entitled to reagitate issues already determined in the earlier proceedings and otherwise, the material relied on was irrelevant.

The defence 12 The Official Trustee became the registered proprietor of the property on 20 July 2007. Despite this, Mrs Klewer has refused to vacate the premises. In 2007, Mrs Klewer commenced proceedings in the Federal Magistrates Court seeking orders that the property 'be declared non-divisible to the trustee'. Her application failed. (See Klewer & Anor v Official Trustee in Bankruptcy [2008] FMCA 274.) These proceedings were commenced by the Official Trustee in 2008. 13 Mrs Klewer appealed to the Full Federal Court. (See Klewer (No 2)). That appeal also failed and an application for special leave was made to the High Court. On 5 August 2009, that application was refused, the High Court indicating that no reason to doubt the correctness of the Federal Court decision was seen. (See Klewer & Anor v Official Trustee in Bankruptcy [2009] HCASL 156.) 14 From Mrs Klewer's submissions, it was clear that there was no issue that she became a bankrupt in September 2005, when she was the registered proprietor of the property. It was in July 2007 that the Official Trustee became the registered proprietor, following that bankruptcy. That sequence of events accorded with the provisions of s 58 of the Bankruptcy Act. 15 Mrs Klewer still resides in the property with her son. She does not pay rent, but claims to pay land tax, even though she is no longer the owner of the property. She has refused to vacate the property, despite requests made of her. The Official Trustee seeks vacant possession so that the property may be sold. 16 Mrs Klewer's defence names her son Robert as the second defendant, but he is not a party to these proceedings. The defence also claims that the property, being Mrs Klewer's residential home 'cannot be divisible to the Plaintiff'; that Mrs Klewer proposes to challenge the majority of the proofs of debt allowed by the Official Trustee and that she will file a claim for damages. 17 It was the Official Trustee's case that Mrs Klewer sought to defend the proceedings on a basis already dealt with in the proceedings in the Federal Magistrates Court and the Federal Court, by which she was bound. Mrs Klewer also seeks to deal with those same matters in new proceedings which she currently has on foot before the Federal Magistrates Court. Her application in those proceedings is also that the property 'be declared non-divisible to the respondent'. Mrs Klewer has sought orders of the Federal Magistrates Court that these proceedings be stood over and that the Official Trustee refrain from continuing with them, pending the Federal Magistrate Court's hearing of the current application. Those orders were refused on 27 October and Mrs Klewer was ordered to file any further affidavits on which she wished to rely in those proceedings by 16 November. 18 Mrs Klewer has not complied with those orders, taking the view, she explained in correspondence of 25 November, that it was not important for her to do so. Instead, she intends at the hearing on 22 December, to ask the Magistrate whether he accepts that if funds which she had available were paid, that the property would then become non-divisible to the Official Trustee, in which event she would make such payments and return to the Court later, with proof, so that the hearing could continue. 19 Mrs Klewer argued that she was not prevented from using newly available protected funds to reduce the mortgage 'to save the family home from the trustee'. Federal Magistrate Raphael had considered the possibility that such funds might become available, but had concluded that they could only be considered if they eventuated. Now some $67,000, the proceeds of a personal injury claim had become available. Mrs Klewer's son Robert deposed that he had also been awarded damages in personal injury proceedings which were available to be used. Mrs Klewer claimed that if the application succeeded, the Official Trustee would retain all of the protected monies and that if the claim was allowed 'the defendant and her son will proceed to take their own lives in the said property'. This was a repetition of a similar threat which Mrs Klewer had earlier made, after she ceased her participation in the hearing. 20 There are obvious difficulties with the course Mrs Klewer has embarked on, not the least of them the last mentioned threats, which can have no bearing on the Court's consideration of what here lies between the parties. 21 Mrs Klewer's approach appears to result from an apparent misapprehension of the judgments already given by the Federal Magistrate's Court and the Federal Court. It was initially held by Federal Magistrate Raphael in Klewer & Anor v Official Trustee in Bankruptcy [2008] FMCA 274 (10 March 2008):

16. It will be seen that the scheme of s.116 is to exclude certain moneys from being divisible to creditors. Mrs Klewer claims that she has an interest in a regulated superannuation fund under a payment split under Part VIIIB of the Family Law Act (s.116(2)(d)(iva) or alternatively s.116(2)(d)(vii)). The first point to be made is that the money which was used by Mr Klewer to repay the mortgage on the Boambee Gardens property was not money subject to a payment split, because at the time the money was paid, payment splits were not part of the law of Australia. But in any event, it is clear that s.116(2)(d) relates to the original payments and not to the asset which the payment is used to purchase, save as under sub-ss.116(3) or (4). These subsections are the ones by which an indirectly acquired asset can be held to be non-divisible. The difficulty which Mrs Klewer has in utilising sub-s.116(3) is that she must satisfy the court that the whole or substantially the whole of the money paid for a purchase is protected money, so that sub-para.116(2)(n) shall apply. "Protected money" is defined as exempt money. That in turn is described as an amount to which sub-s.(1) does not extend because of sub-paras.(2)(d)(ii) or (iv). Sub-para (2)(d)(ii) is the proceeds of a life assurance policy, which is not relevant in this case, and sub-para.(2)(d)(iv) is a payment to the bankrupt from a superannuation fund received on or after the date of bankruptcy. The money used to pay off the mortgage of the Boambee Gardens property was neither of those.

17. The money used to buy the Korora property was raised on a mortgage first from the Housing Association and then from the CBA, although either $44,200.00 or $50,000.00 of that money came from money that would not be divisible by virtue of s.116(2)(g) and is therefore capable of being exempt money under s.116(2D)(b). This would, prima facie, and subject to proof, give Mrs Klewer a right to make a claim pursuant to s.116(4). This finding would apply to the workers compensation proceeds and the other settlement moneys to which I have referred earlier in these reasons, other than the settlement money paid before the property damage claim.

18. When the Boambee Gardens property was sold, Mrs Klewer says most of the money went into paying the mortgage or making improvements in the Korora property. But the proceeds of sale of the Boambee Gardens property is not exempt money. For the avoidance of doubt, I would make it clear that my finding in relation to the s.116(2)(g) moneys is that if Mrs Klewer can satisfy the trustee that those moneys were used either in the original purchase of the property or in paying back some of the mortgage loan (in which case they would become exempt loan moneys) or in affecting improvements of the property, then it would appear she has the right to make a claim under s.116(4) but because of the amounts involved I am unable to find that they constitute substantially the whole of the moneys paid for the purchase so that s.116(3) would not apply. 22 Bennett J expressly approved those conclusions in Klewer (No 2) at [65], having observed at [64]:

64 It is s 116(4) that applies where "outlay" in relation to property, defined in s 116(2D) of the Act, is claimed. "Outlay" includes money paid for the purchase or acquisition of property and money paid in respect of extensions, alterations or improvements since purchase or acquisition. Where protected money is so applied, as would seem to be Ms Klewer's case, the claim is, under s 116(4), to part of the proceeds of sale of the Korora property upon realisation by the trustee. 23 As the Official Trustee submitted, Mrs Klewer advances no basis upon which the further money which she may have paid off the mortgage since these judgments were given, or the further sums which she now has available to pay, can be treated any differently under s 116 of the Bankruptcy Act, upon which she relies. The section does not give her a right to possession of the property. That is what is here in issue between the parties. There is no question that the Official Trustee is the registered proprietor of the property. Mrs Klewer has not advanced any basis upon which it might be concluded that she has a right to possession of the property which she no longer owns, or that the property is no longer a divisible asset vested in the Official Trustee. 24 It is also apparent that the relief which she seeks in the new proceedings which she has brought in the Federal Magistrates Court and the defence which she seeks to advance in these proceedings, are subject to res judicata, or issue estoppel, given the earlier judgments given by those courts. 25 A defendant is, of course, not to be denied a contested merits hearing unless the absence of a defence is clearly demonstrated. The test which the Official Trustee must meet is that discussed in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129. I am satisfied that this is such a case. There are no serious conflicts on the facts. The legal issues on which Mrs Klewer now relies were dealt with in the earlier proceedings which she brought in the Federal Magistrates Court and the Federal Court. Her application for special leave in the High Court failed. The hearing of these proceedings was deferred, pending that consideration. In those circumstances, it must follow that the onus which now falls on the Official Trustee to show that there is no possibility of Mrs Klewer's defence succeeding has been satisfied. What she seeks to agitate in the new proceedings which she has taken in the Federal Magistrate's Court and what she has here advanced in relation to s 116 of the Bankruptcy Act, plainly raises no new issues upon which this Court's consideration of the claim for possession could depend. 26 Mrs Klewer's endeavours to prevent the Official Trustee from obtaining possession of the property may be understandable in a human sense, but this Court is bound to adhere to the requirements imposed upon it by s 56 of the Civil Procedure Act 2005, which provides that 'The overriding purpose of this Act and of rules of court, in their application to civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in the proceedings'. In this case, that purpose will not be achieved if the orders sought by the Official Trustee are refused. 27 I am satisfied that it has been shown that Mrs Klewer has no defence to the Official Trustee's claim. The reference in the defence to the bringing of proceedings for damages and the bringing of a challenge to the majority of the proofs of debt allowed by the Official Trustee, can result in no different conclusion. I will deal with Mrs Klewer's cross claim separately, but it suffices to observe that neither such a claim, nor any dissatisfaction with the way in which proofs of debt were earlier dealt with in the administration of the bankruptcy, are relevant to the question of the Official Trustee's right to possession of property of which it is the registered proprietor. 28 It follows that the orders sought must be made, including as to costs, which should follow the event in the usual way.

The cross claim 29 By her cross claim Mrs Klewer seeks orders in relation to the repair and replacement costs of damage to the kitchen and smoke damage to other parts of the property, which were caused by an accidental fire which occurred in December 2007. She also claims unspecified damages for loss of use of the kitchen; loss of value of the property, identified as some $65,000 and damages for pain and suffering resulting from burns which Mrs Klewer sustained to her hand, while putting out the fire. 30 The power to strike out pleadings which disclose no reasonable cause of action should only be exercised in plain and obvious cases and must be exercised consistently with the requirements of the Civil Procedure Act. The onus which falls on the Official Trustee in this respect is also that discussed in General Steel. In considering this application, Mrs Klewer's claims must be taken at their highest, namely on the basis of an assumption that her claims as to what occurred will be established at a hearing. 31 Also to be considered is that the cross claim does not identify the basis upon which Mrs Klewer's claims are advanced. In large part, they are difficult to see. It is not in issue that the Official Trustee was the owner of the property at the time of the fire. It has never become the occupier, never having obtained control of the property or the possession which it seeks in these proceedings. Mrs Klewer has always remained in occupation, while contesting the Official Trustee's right to possession on the basis of a view of the construction of s116 of the Bankruptcy Act, which failed, as I have explained, but which Mrs Klewer persists in advancing. 32 It is not claimed that the fire had anything to do with the Official Trustee, or any act or omission on its part. The complaints which are advanced concern the injuries sustained by Mrs Klewer in putting the fire out and the Official Trustee's alleged failures to take steps as the proprietor of the property, to deal with the consequences of the fire, with the result being the loss of use of the kitchen and a resulting diminution in the value of the property. 33 It is not alleged that it was a breach of any duty to Mrs Klewer which fell upon the Official Trustee as the proprietor of the property, which gave rise to the fire. If any of Mrs Klewer's claims are advanced in negligence, what duty of care it is claimed was owed to Mrs Klewer by the Official Trustee is not apparent. That it is foreseeable that someone might be injured, if acting to put out a fire, is not of itself a basis upon which it may be concluded that a duty of care was owed by the Official Trustee to Mrs Klewer. 34 Mrs Klewer has remained in occupation of the property despite the Official Trustee's objection and attempts to obtain possession. It is not apparent how Mrs Klewer could be awarded damages in respect of any damage to this property which resulted in her loss of use of the kitchen. 35 The claim that by its failure to deal with the consequences of the fire, there has been a diminution in the value of the property, does not fall into quite the same category, (see for example Mannigel v Aitken (1983) 77 FLR 406 at 409). How that claim is advanced is not, however, apparent on the pleadings as they stand. 36 Mrs Klewer has not suggested that any difficulty with the pleadings might be cured by an available amendment. It may be that if Mrs Klewer has a claim in relation to the value of the property, it ought to be advanced in the bankruptcy, rather than in these proceedings. Nevertheless, I take the view that before the conclusion is reached that her claim in this respect is beyond saving, that she should be given a further short opportunity to amend her pleadings to put them on a proper footing, if one is available. No reasonable causes of action are apparent on the face of the cross claim, in the case of the other claims advanced and, in that respect, the cross claim must be struck out.

Orders 37 For the reasons given, I order that: 1. The defence be struck out. 2. Judgment for possession of the property be given. 3. Leave to issue a writ of possession be given. 4. Mrs Klewer pay the costs of the strike out motion, as agreed or assessed. 5. Those parts of the cross claim which seek damages for personal injury and loss of the use of the kitchen be struck out. 6. Mrs Klewer be given leave to amend the cross claim in so far as damages for diminution of the value of the property is concerned. The amended cross claim should be filed and served on or before 20 January 2010. 7. Costs of the motion in relation to the cross claim are reserved. **********

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