Parsons and Parsons v McBain [2001] FCA 376 | Case summary

THE COURT 1 These appeals involve competing claims to two properties in Smithton, Tasmania. The appellant, Bronwyn Parsons, is the proprietor of 80 King Street and the appellant, Cathryn Parsons, is the proprietor of 2 Leesville Road. The respondent is the trustee of the bankrupt estates of Bronwyn's husband, Peter Parsons and his brother, Cathryn's husband, Geoffrey Parsons. In those capacities, he claims the two properties. Bronwyn Parsons had taken a transfer of her land from her husband, as had Cathryn Parsons from her husband. The trial judge declared each transfer to be void and ordered the land to be transferred to the trustee. Bronwyn Parsons and Cathryn Parsons appeal those orders. 2 Peter Parsons acquired 80 King Street in 1977. When Peter and Bronwyn marries ten years later, the property became their matrimonial home and they agreed that it would be owned by them equally. Thereafter Bronwyn Parsons made contributions towards the loan that Peter Parsons had taken to purchase the property, and she also made payments of principal and to keep down the interest. The trial judge found that "a common intention constructive trust" in favour of Bronwyn Parsons came into existence, presumably as to one moiety. The facts may have justified a finding of an express trust by declaration notwithstanding the courts' reluctance to hold that such a trust exists, as to which, see: In re Schebsman; Ex parte The Official receiver v Cargo Superintendents (London) Ltd and Schebsman [1944] Ch 83 at 104. 3 Geoffrey Parsons purchased 2 Leesville Road as a vacant block in 1977. Around the same time he also purchased a house at 22 Simpson Avenue, Smithton. Geoffrey Parsons and Cathryn were married in 1979. They agreed that Simpson Avenue would be their matrimonial home to be "equally owned" by them. Before they moved into the property, they decided to build a house at 2 Leesville Road where they would live. Cathryn Parsons' father built the house and both Cathryn and Geoffrey Parsons contributed towards its cost. The trial judge found that 2 Leesville Road was subject to "a common intention constructive trust" in favour of Cathryn Parsons, presumably also as to one moiety. 4 Peter Parsons, his brother Geoffrey Parsons, and their parents, Frederick and Flo Parsons, were partners in a transport business. For some years the business had been trading unprofitably and by 1992 it was probably insolvent. It certainly needed funds to keep it afloat. In June 1992 Peter Parsons, with the consent of Bronwyn Parsons, mortgaged 80 King Street to secure a loan of $36,000 which he then advanced to the partnership. Simultaneously, Geoffrey Parsons mortgaged 2 Leesville Road to secure a loan of $58,000 which he contributed to the partnership. Frederick and Flo Parsons also contributed money to the business. The loans were used to pay existing creditors, including money that was due on truck leases and the bank overdraft. 5 Although large sums were invested in the business, it could not pay its way and in due course Peter Parsons and Geoffrey Parsons became bankrupt. Before their bankruptcy, 80 King Street was transferred to Bronwyn Parsons and 2 Leesville Road was transferred to Cathryn Parsons. The trial judge found that these transfers "were made for the purpose of putting the respective houses out of the reach of Peter and Geoffrey's creditors". 6 The trustee brought separate proceedings against Bronwyn Parsons and Cathryn Parsons to recover the two properties. He claimed that the transfer of each was void against him under s 120 or s 121 of the Bankruptcy Act 1966 (Cth). Section 120(1) provides: "A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee and the transferor's bankruptcy if: (a) the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and (b) the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property." Section 121(1) provides: "A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor's bankruptcy if: (a) the property would probably have become part of the transferor's estate or would probably have been available to creditors if the property had not been transferred; and (b) the transferor's main purpose in making the transfer was: (i) to prevent the transferred property from becoming divisible among the transferor's creditors; or (ii) to hinder or delay the process of making the property available for division among the transferor's creditors." 7 The two proceedings were heard together. Both appellants relied on the same arguments to resist the trustee's claim. First, each said that she had an equitable interest as to one moiety in the transferred property and that a transfer of the legal title to that interest was outside s 120 and s 121. Second, each said that she had "an equity of exoneration" in respect of the 1992 mortgage, which equity entitled her to cast the burden of the debt upon her husband's interest, and since the amount of the loan secured by the mortgage exceeded the value of her husband's interest, his interest had been extinguished. Other defences had been raised, but by the end of the trial they were not pressed. 8 The trial judge held that the existence of a "common intention constructive trust" was not an answer to the trustee's claim, following Re Osborn; Ex parte Trustee of the Property of Osborn (A bankrupt) v Osborn (1989) 25 FCR 547. The facts of Re Osborn were similar to those under consideration. Within two years of the sequestration order, the bankrupt had transferred to himself and to one Alison Osborn, a joint interest in the property in which they lived. The trustee brought proceedings under s 120 to recover the outstanding interest. Ms Osborn claimed that she was the equitable owner of that interest under a constructive trust and that interest defeated the claim. When considering this defence, Pincus J discussed the nature of a constructive trust. He referred to a passage in Muschinski v Dodds (1985) 160 CLR 583 at 615, where Deane J said that a constructive trust: "… has not outgrown its formative stages as an equitable remedy and should still be seen as constituting an in personam remedy attaching to property which may be moulded and adjusted to give effect to the application and interplay of equitable principles in the circumstances of the particular case. In particular, where competing common law and equitable claims are or may be involved, a declaration of constructive trust by way of remedy can properly be so framed that the consequences of its imposition are operative only from the date of judgment or formal court order or from some other specified date." Relying on this passage, Pincus J held "that the property was not, and should not be declared to have been, subject to a constructive trust in favour of [Ms Osborn] at a date prior to the transfer": 25 FCR at 554. Accordingly, he found in favour of the trustee in bankruptcy. 9 There is a divergence of views as to when a constructive trust such as that under consideration arises. Some courts have taken the position that this type of trust is not a title to, or lien on, property, but a mere remedy to which equity resorts in granting relief against fraud, and it does not exist so as to affect property held by a wrongdoer until it is declared by a court of equity as a means of affording relief: International Refugee Organization v Maryland Drydock Co, 179 F2d 284, 287 (4th Cir, 1950). This view is based on the proposition that in every case where a constructive trust may arise, the beneficiary has an option to claim a beneficial interest in the trust property or sue for a personal remedy, and it is only when the beneficiary successfully obtains a declaration that there is a constructive trust, that he will have elected to forego his non-proprietary claim: see generally Bogert, Trusts and Trustees (Revised 2nd ed, 1978) s 471. 10 This approach has been roundly criticised by many commentators including the great equity lawyer Austin Scott. In his treatise on the Law of Trusts (4th ed, 1989) at s 462.4, Professor Scott wrote: "It has been suggested that the constructive trust does not arise until the defrauded person brings a suit in equity and the court decrees specific restitution. The notion seems to be that a constructive trust is created by the court and that it therefore does not arise until the court creates it by its decree. The notion is in part fostered by the terminology employed. It is sometimes said that when there are sufficient grounds for imposing a constructive trust, the court 'constructs' a trust. The expression is, of course, absurd. The word 'constructive' is derived from the verb 'construe', not from the verb 'construct'. It is true that both verbs are derived from the same Latin word, but they have quite different meanings in English. No one would think of saying that where there is constructive fraud or malice or notice, the court constructs fraud or malice or notice. When it is said that there is constructive fraud or malice or notice, what is meant is that, although there is no actual fraud or malice or notice, the same consequences, or many of them, follow. The court construes the circumstances in the sense that it explains or interprets them; it does not construct them. So in the case of a constructive trust, the court finds from the circumstances that some of the consequences that would follow from the creation of an express trust should also follow." 11 The law in England is to this effect. For example, in In re Sharpe (A Bankrupt); Ex parte Trustee of the Bankrupt's Property v The Bankrupt [1980] 1 WLR 219, a judgment handed down four months before the decision in Re Osborn, Browne-Wilkinson J considered whether an irrevocable licence that arose under a "common intention constructive trust" was binding on a trustee in bankruptcy. The trustee had argued that the trust was not a substantive right but an equitable remedy and that it would be inequitable to grant the remedy after bankruptcy. Browne-Wilkinson J rejected this argument. He said (at 225): "I cannot accept that argument in that form. Even if it be right to say that the courts can impose a constructive trust as a remedy in certain cases - which to my mind is a novel concept in English law - in order to provide a remedy the court must first find a right which has been infringed. So far as land is concerned an oral agreement to create any interest in it must be evidenced in writing: see section 40 of the Law of Property Act 1925. Therefore if these irrevocable licences create an interest in land, the rights cannot rest simply on an oral contract. The introduction of an interest under a constructive trust is an essential ingredient if the plaintiff has any right at all. Therefore in cases such as this, it cannot be that the interest in property arises for the first time when the court declares it to exist. The right must have arisen at the time of the transaction in order for the plaintiff to have any right the breach of which can be remedied." 12 The law in Australia is the same. In Giumelli v Giumelli (1999) 196 CLR 101 the respondent, who was in partnership with his parents, had been promised by them that he would become the owner of part of their property, known as Dwellingup. In reliance upon that promise, the respondent remained in the partnership and worked to improve the Dwellingup property. The High Court found that the parents held the land upon a constructive trust. As to the nature of the trust, Gleeson CJ, McHugh, Gummow and Callinan JJ, in their joint judgment, said (at 112) that: "A constructive trust of this nature is a remedial response to the claim to equitable intervention made out by the plaintiff. It obliges the holder of the legal title to surrender the property in question, thereby bringing about a determination of the rights and titles of the parties. The term 'constructive trust' is used in various senses when identifying a remedy provided by a court of equity. The trust institution usually involves both the holding of property by the trustee and a personal liability to account in a suit for breach of trust for the discharge of the trustee's duties. However, some constructive trusts create or recognise no proprietary interest. Rather there is the imposition of a personal liability to account in the same manner as that of an express trustee. An example of a constructive trust in this sense is the imposition of personal liability upon one 'who dishonestly procures or assists in a breach of trust or fiduciary obligation' by a trustee or other fiduciary. In the present case, the constructive trust is proprietary in nature. It attaches to the Dwellingup property. Such a trust does not necessarily impose upon the holder of the legal title the various administrative duties and fiduciary obligations which attend the settlement of property to be held by a trustee upon an express trust for successive interests. Rather, the order made by the Full Court is akin to orders for conveyance made by Lord Westbury LC in Dillwyn v Llewelyn (1862) 4 De G F & J 517 at 523 [ER 1285 at 1287] and, more recently, by McPherson J in Riches v Hogben [1985] 2 Qd R 292 at 302. In these cases, the equity which founded the relief obtained was found in an assumption as to the future acquisition of ownership of property which had been induced by representations upon which there had been detrimental reliance by the plaintiff. This is a well recognised variety of estoppel as understood in equity and may found relief which requires the taking of active steps by the defendant." 13 Thus, the notion that a "common intention constructive trust" first comes into existence when so declared by the court must be rejected. In virtue of the fact that such a view informed the decision in Re Osborn, the case should not be followed. In any event, it is clear that Deane J was not of opinion that a "common intention constructive trust" is brought into existence by court order. In Muschinski,at 614, he said: "Equity acts consistently and in accordance with principle. The old maxim that equity regards as done that which ought to be done is as applicable to enforce equitable obligations as it is to create them and, notwithstanding that the constructive trust is remedial in both origin and nature, there does not need to have been a curial declaration or order before equity will recognize the prior existence of a constructive trust … Where an equity court would retrospectively impose a constructive trust by way of equitable remedy, its availability as such a remedy provides the basis for, and governs the content of, its existence inter partes independently of any formal order declaring or enforcing it. In this more limited sense, the constructive trust is also properly seen as both 'remedy' and 'institution'. Indeed, for the student of equity, there can be no true dichotomy between the two notions." (emphasis added) 14 It was submitted by the trustee, however, that an observation by the Full Court in Secretary, Department of Social Security v Agnew (2000) 96 FCR 357 was inconsistent with the views just expressed. The Full Court said (at 365) that: "… the court has a discretion to modify the prima facie date on which the [constructive] trust takes effect. We would adopt the view of A J Oakley that 'in the absence of any judicial order to the contrary, a constructive trust will take effect from the moment at which the conduct which has given rise to its imposition occurs': Oakley, Constructive Trusts (3rd ed, 1997), p 5. See also Pawlowski, pp 12, 130-132. Compare Re Sabri; Ex parte Brien v Australia & New Zealand Banking Group Ltd (1996) 21 Fam LR 213 at 223-229." 15 We do not agree. We do not take the word "discretion" in the passage cited to mean that what is involved, in determining when a constructive trust is deemed to exist, is a weighing process where various factors found to be relevant are taken into account, an assessment made of the weight to be given to each of those factors, and then a weighing of the factors so assessed and a determination made as a result of that process. A decision of that kind may be described as discretionary but as the cases show, that is not what is involved in determining the date on which a constructive trust is to take effect. 16 We think it clear from the context (including the cases to which the Court had express reference) that the Full Court was doing no more than acknowledging that, in an appropriate case, an equitable interest arising under a constructive trust may be defeated by, or must defer to, competing claims. The equitable interest will not be defeated merely because the legal title has passed to a trustee in bankruptcy, for he stands in the shoes of the bankrupt: Aguilar v Aguilar (1820) 5 Madd 414; 56 ER 953. But the interest may be defeated by, or may be made to defer to, later claims "by conduct, by representations, by misstatements of a character which would operate and enure to forfeit and to take away the pre-existing equitable title": Shropshire Union Railways and Canal Company v The Queen (1875) LR 7 HL 496, at 506 per Lord Cairns. What must be shown to take away a pre-existing equitable title is "something tangible and distinct having grave and strong effect to accomplish the purpose": Abigail v Lapin [1934] AC 491 at 504. 17 What is the position here? There is nothing in the conduct of either Mrs Bronwyn Parsons or Mrs Cathryn Parsons, as regards her acquisition of her interest in the matrimonial home, or the manner in which she dealt with that interest, which could lead a court to deny her full beneficial entitlement to her. That is, Mrs Bronwyn Parsons and Mrs Cathryn Parsons have done nothing that would cause a court to prefer the interests of unsecured creditors of the bankrupt estates of Mr Peter Parsons and Mr Geoffrey Parsons over their own equitable interests. That being so, neither s 120 nor s 121 can have application to the transfer by the bankrupt to his wife, of the legal interest in property in which the wife holds the beneficial interest. 18 This disposes of the trustee's claim to one half of each property. We can now consider each appellant's claim to ownership of the remaining half based upon the right of exoneration. The equity of exoneration is summarised in Fisher & Lightwood's Law of Mortgage (Aust. Ed., 1995) at par 30.7: "It is a well established principle that a person who has mortgaged his property to secure the debt of another stands only in the position of a surety and is entitled to be exonerated by the principal debtor. In this position is a wife who has mortgaged her property to secure money raised for the benefit of her husband. There is a similar equity in favour of a husband. Where the property of the wife, or property over which she has a power of appointment, is mortgaged, and the money is paid to her and her husband, or to him alone, it is considered prima facie that it was borrowed for his benefit, and his property is first applied, as for payment of his own debt, unless the presumption is rebutted by proof on the part of the husband, that the whole or some part of the money did not come to his hands. If the debt was not originally incurred for the benefit of the husband, this equity of exoneration does not arise by reason of his giving a covenant as additional security. The result will be the same, where the husband has paid off the mortgage, and has taken an assignment of it in trust for himself." The authorities go back three centuries: Huntington v Huntington (1702) 2 Vern 438; 23 ER 881; Taite v Austin (1714) 1 P Wms 284; 24 ER 382; Parteriche v Powlet (1742) 2 Atk 383; 26 ER 632; Clinton v Hooper (1791) 3 Bro CC 201; 29 ER 490. 19 It was once thought that this doctrine was limited to husband and wife. This appeared to be the view of Ashburner in his Principles of Equity (2nd ed, 1933) at p 170. In Halsbury's Laws of England (4th ed, 1979), exoneration is discussed only under the title concerned with husband and wife (Vol 22, pars 1071-1076). However the authorities show that the doctrine is not so limited, and will apply in other cases. That is what occurred in Gee v Liddell [1913] 2 Ch 62 and Caldwell v Ridge Wholesale Acceptance Corporation (Australia) Limited (1993) 6 BPR 13,539. 20 The equity of exoneration is an incident of the relationship between surety and principal debtor. It usually arises where a person has mortgaged his property to secure the debt of another, whether or not that other has covenanted to pay the debt. However, it will also arise in a case where, although not an actual suretyship, the relationship is treated as one of suretyship. This is Lord Selbourne's third class of suretyship mentioned in Duncan, Fox, & Co v North and South Wales Bank (1880) 6 App Cas 1, 10. For the doctrine to apply in this class, the following facts will usually exist. First, a person must charge his property. Where the person is the beneficial owner of the property it will be sufficient if the charge is by his trustee. Second, the charge must be for the purpose of raising money to pay the debts of another person or to otherwise benefit that other person. Third, the money so borrowed must be applied for that purpose. See generally Re Berry (a bankrupt) [1978] 2 NZLR 373. 21 An equity of exoneration operates in the nature of "a charge upon the estate of the principal debtor by way of indemnity for the purpose of enforcing against that estate the right which [the beneficiary] has, as between [the beneficiary] and the principal debtor, to have that estate resorted to first for the payment of the debt": Gee v Liddell [1913] 2 Ch D 62 at 72. Thus, where co-owners mortgage their property so that money can be borrowed for the benefit of one mortgagor, the other has an interest in the property of the co-mortgagor whose property is to be regarded as primarily liable to pay the debt. 22 The trial judge denied to each appellant the right of exoneration because she had received "a tangible benefit" from the 1992 mortgage. The benefit, which might more accurately be described as an expected benefit, was that, by putting money into the partnership business, the business might survive and, as put by counsel for the trustee, that would bring "home money to put food on the table and clothe the children". 23 If a surety receives a benefit from the loan, the equity of exoneration may be defeated. So, if the borrowed funds are applied to discharge the surety's debts, the surety could not claim exoneration, at least in respect of the benefit received. But the benefit must be from the loan itself. The question suggested by the Lord Chancellor of Ireland is: "Who got the money?": see In re Kiely (1857) Ir Ch Rep 394, 405. In Paget v Paget [1898] 1 Ch 470 both the husband and the wife "got the money" and this prevented the wife claiming exoneration. 24 The "tangible benefit" referred to by the trial judge will not defeat the equity. It is too remote. In any event, the exoneration to which a surety is entitled could hardly be defeated by a benefit which is incapable of valuation, and even if it were so capable, the value is unlikely to bear any relationship to the amount received by the principal debtor. 25 Although each appellant is entitled to exoneration, that does not give her ownership of her husband's property, but merely a charge over it. It will therefore be necessary for each appellant to transfer a one half interest in the property to the trustee. He will then hold it subject to each appellant's charge. In any event, each appellant has the right to be subrogated to the mortgage over her husband's interest in accordance with cases such as Banque Financičre de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221. 26 Finally, it should be noted that upon becoming the registered proprietor of the matrimonial home, each appellant mortgaged the property to raise money. The trial judge ordered each appellant to indemnify the trustee in respect of all liability incurred pursuant to that mortgage. It has not been suggested that this order was wrongly made. 27 In the result, the appeals should be allowed in part. In each appeal, the declaration and orders 2 and 4 of the trial judge should be set aside, and in lieu thereof there should be orders requiring each appellant to transfer her respective property to herself and to the trustee as tenants in common in equal shares (if there was a joint tenancy, it was severed by the bankruptcy: Morgan v Marquis (1853) 9 Ex 145 at 147-148, 156 ER 62 at 63; Re Holland; Ex parte Official Trustee in Bankruptcy (1985) 5 FCR 165). Each appellant should have her costs of the appeal and of the proceedings at first instance. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Full Court.

Parsons and Parsons v McBain

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