1372/2004 VITO PENNIMPEDE V GERARD PENNIMPEDE & 2 ORS
JUDGMENT
1 HIS HONOUR: This complicated litigation relates to the beneficial ownership of a factory in Cringila (or Unanderra) on land in Folio 3/SP 47101. The parties are all related and I will respectfully use their forenames for ease of reference. Vito and Pasquale were the principals of a steel fabrication business carried on by Rainbow Constructions Pty Limited. They were the only directors and shareholders. Rainbow Constructions bought Lot 10, Five Islands Road Cringila in about March 1992 for $500,000 and obtained an advance of about $400,000 from Household Financial Services Pty Ltd. Rainbow Constructions carried on business earlier in other premises. Lot 10 was a lot in a Strata Plan. Rainbow Constructions subdivided Lot 10 into two lots and sold the land in Folio 3/SP47101 to all four of the parties to these proceedings in 1993. To enable that purchase, Gerard and Rita lent about $100,000 to Rainbow Constructions, Vito and Pasquale; and they borrowed $100,000 from Westpac Bank to enable them to do so.
2 On 26 April 1993 Rainbow Constructions as vendor entered into a contract to sell the land to the present parties, and in accordance with the contract they took title 50% to Gerard and Rita, 25% to Vito and 25% to Pasquale when the contract was completed on 11 June 1993. The price expressed in the contract and transfer was $280,000. This price was supported by a valuation which was obtained about that time. Vito and Pasquale's cases are to the effect that the beneficial interests which arose on completion of the sale were not the same as the interests that appeared on the register. All four joined in borrowing $202,000 from National Australia Bank, secured to NAB by a mortgage on completion of the sale on 11 June 1993. All four were mortgagors, and all four incurred liability to NAB. However Vito and Pasquale were the ones who benefited from this borrowing, because they applied almost all of it to pay debts of their company. After later dealings Gerard and Rita (who are husband and wife) are now registered proprietors of a three-quarters share as tenants in common with Pasquale as the registered proprietor of a one-quarter share.
3 Rainbow Constructions sold the back lot in the subdivision to Mr Scavarelli on 29 October 1992. It does not clearly appear when this was settled, but this probably happened about 11 June 1993 so the proceeds of sale or most of them could be paid to Household Finance, producing a large reduction in the mortgage debt. Mr Scavarelli needed a road, and he was given a guarantee, by a Deed executed on 11 June 1993 in which Vito, Pasquale, Gerard and Rita were guarantors, relating to works on the road. Gerard and Rita never owned the back lot and did not sell anything to Mr Scavarelli.
4 Vito and Pasquale claim that debts were owing to Gerard and Rita then under these arrangements, that the debts were repaid by many transactions over many years, that there is no longer any secured debt, and that Gerard and Rita should transfer the 50% share to Vito and Pasquale in equal shares. Gerard and Rita's case is to the completely different effect that the true arrangements were that they purchased a half share in the property, forewent $140,000 of debt and in this way paid $140,000 as purchase money, and they are the beneficial owners of the 50% interest. They deny that there was any arrangement to hold their interest only as security. Vito was a registered proprietor from 1993 until he transferred his 25% share to Gerard and Rita in 1996. Vito claims that the 25% share which he transferred in 1996 is held on trust for him. Vito and Pasquale each claim that he is entitled to be beneficial co-owner of a 50% share, and that the 50% share acquired by Gerard and Rita when the property was acquired in 1993 is held on trust for Vito and Pasquale in equal shares.
5 If the true arrangement was as Vito and Pasquale allege there would be other issues to consider as there is no memorandum in writing of the security arrangement, and Gerard and Rita have pleaded complicated assertions of estoppel and other defences. There is a large mass of affidavits and oral evidence about whether or not there was such an agreement, and what were its terms, and Vito and Pasquale bear the onus of proof.
6 The proceedings were commenced by Vito's Summons on 6 February 2004. The Amended Statement of Claim claimed a declaration that Gerard and Rita hold title to the land on trust for Vito as to a 50% share, alternatively a 25% share. It also claims (claim 3) an account of rents and profits received or made by Gerard and Rita in their use trusteeship and possession of the land, and (4) that an account be taken of profits made by Gerard and Rita with respect to the lease. There are ancillary claims, including a claim for equitable damages or compensation.
7 The Amended Statement of Claim (para 2) alleges that Gerard and Rita advanced funds to Rainbow Constructions for the purpose of the company meeting its day to day operation requirements in about 1992, continued to do so from time to time and advanced $40,000 in total. The Amended Statement of Claim also alleges (para 5) that Gerard and Rita agreed to lend to Rainbow Constructions, Vito and Pasquale approximately $100,000 as the remainder of the purchase price after an advance of about $400,000 from Household Financial Services. Particulars of para 5 allege terms of an oral agreement for the advance of $100,000. This is referred to as the first agreement. Gerard and Rita would obtain a loan of about $100,000 from Westpac Bank and provide that sum to Rainbow Constructions to complete the purchase. Vito claims that there was then an agreement that Rainbow Constructions, Vito and Pasquale would repay all principal moneys on that loan, and also on a loan of $40,000 which Gerard and Rita had made to Rainbow Constructions, after 12 months, with all costs and expenses, and that Rainbow Constructions, Vito and Pasquale would indemnify Gerard and Rita against any costs associated with interest on the loan to them from Westpac Bank. When the 12 months expired, Rainbow Constructions, Vito and Pasquale were unable to meet these obligations and Vito alleges that there was a varying agreement, shortly to the effect that the term of the loan would be extended, Vito and Pasquale would continue to pay all costs and expenses and bank interest and that Gerard and Rita would be named as registered title holders as security, and would transfer that security to Vito on repayment of the loans and reasonable demand.
8 It is then alleged (paras 7 and 8) that in March 1993 Rainbow Constructions, Vito and Pasquale were unable to discharge these obligations and to repay the loans and a further agreement was made to the effect that the term would be extended and that Rita and Gerard would be named as registered title holders to provide security, and would transfer their security upon repayment of the loans and on reasonable demand. It is alleged (para 10) that in advance of preparation of the contract for sale Vito and Pasquale arranged for valuers to value the land which was valued at $280,000.
9 It is then alleged (para 11A) that no moneys were in fact paid for transfer of the land by Rainbow Constructions; that while the contract for sale and the transfer recited consideration of $280,000 no moneys were in fact paid for the transfer, and no moneys were paid by Gerard and Rita. It is then alleged (paras 11B, 11C and 11D) that Gerard and Rita held title to the land as security for repayment of moneys and were obliged to retransfer the land on repayment in full of the moneys secured; and that the moneys had been repaid in full, so that Rita and Gerard hold their 50% title on a constructive trust for Vito and Pasquale.
10 It is then alleged (para 13) that between about 1993 to 1996 Vito and Pasquale utilised loans advanced by National Australia Bank and secured on the land by a mortgage which showed Gerard and Rita as joint mortgagors. It is alleged (para 13A) that from August 1994 to April 1995 Vito and Pasquale acquired components, used and modified them and constructed a factory on the land at total costs of over $200,000; with the knowledge and approval of Gerard and Rita. These costs comprised payment of $70,000 and forbearance of drawing salary and provision of labour and material to a total of $230,000.
11 It is then alleged (paras 14-20) that Vito, Pasquale, Gerard and Rita leased the land to Balderstone Hornibrook Asset Management Pty Ltd for five years from 1 July 1996 and
17. It was orally agreed between the Plaintiff and the Defendants that the lessee would direct all rental payments to the First and Second Defendants on behalf of the Plaintiff and the Third Defendant and that the First and Second Defendants would be paid and would receive such rent as repayment of the moneys owing to them under the first loan and under the second loan .
12 It is then alleged that Gerard and Rita received or retained all rent payments without giving an account to Vito, retained payments in excess of $140,000 and refused to pay rent to Vito.
13 A further claim referred to as the Second Agreement (paras 21-25) is to the effect that (para 21) Gerard and Rita agreed with Vito to accept a transfer of Vito's 25% share on terms that they would hold the title on behalf of Vito. Vito's 25% share was transferred without consideration, and Gerard and Rita hold the title on a constructive trust for Vito. It is alleged (para 24) that Vito has repaid the sum of $80,000 to Gerard and Rita and (para 25) that they have refused to comply with demands for reconveyance.
14 In their Defence Gerard and Rita deal with many matters some of which are matters of detail which need not be summarised. They allege that the amounts advanced in about 1992 exceeded $40,000, in addition to the $100,000 advance. They deny there was an agreement that they would be named as registered title holders in order to provide them with security for $140,000. They allege that it was agreed among Rainbow Constructions, Vito, Pasquale, Gerard and Rita that the debt then owed by Rainbow Constructions would be discharged and that the discharge would be treated as payment of Gerard and Rita's share of the purchase price. This was an oral agreement made by Vito, Pasquale, and by Gerard on behalf of himself and Rita. They claim that this agreement was acted on, that they incurred a number of detriments in respect of it, and that Vito and Pasquale are estopped from alleging that they did not pay any consideration, or that they are not the beneficial owners of one half share. The detrimental actions which they allege include undertaking obligations under the contract, paying stamp duty, incurring the liabilities of proprietors of land, borrowing money from National Australia Bank and mortgaging the land, not requiring repayment of the earlier loans of $140,000 or of interest on them and giving a guarantee to Mr Scavarelli.
15 Gerard and Rita also plead the absence of any note or memorandum in writing relating to the various agreements alleged.
16 Paragraph 9 of the Defence deals with a number of advances by National Australia Bank secured by a mortgage which all four parties granted to National Australia Bank at or about the time of the transfer of title. $202,000 was advanced on the transfer of title to the land on 11 June 1993. $4,594.12 of this was repaid to Gerard to repay Vito and Pasquale's share of the stamp duty on the contract of sale, which had been paid by Gerard and Rita.
17 Gerard and Rita allege that the remaining $197,405.88 was applied at the request of Vito and Pasquale to discharge liabilities of Rainbow Constructions and that this satisfied Vito and Pasquale's share of the purchase price. What Gerard and Rita allege about the application of $197, 405.88 to pay creditors of Rainbow Constructions is completely clear and undisputable. Out of the NAB advance of $202,000, $116,915.05 was applied on settlement to repaying Household Finance and obtaining a release of that company's mortgage; directly in the interest of Rainbow Constructions. Apart from the payment of $4,594.12 to Gerard relating to Stamp Duty the other payments were to creditors of Rainbow Constructions. A further NAB advance of $8,000 at about the same time was paid by Vito and Pasquale for the benefit of Rainbow Constructions. A later NAB advance of $40,000 was used to acquire the workshop building which was later erected on the premises. A further advance of $90,000 was used to discharge expenses relating to erection and fit out of the workshop building. A further NAB advance of $60,000 was used to acquire a mobile crane for Rainbow Constructions; and Rainbow Constructions subsequently repaid that advance.
18 Gerard and Rita then allege (para 9.8) that the NAB borrowings and interest expenses were incurred to the use of all four in equal shares. They then allege (para 9.10) that the loan then owed to NAB was discharged on 8 October 1996, discharging Vito from liability in respect of the borrowings and advance.
19 In effect the positions that Gerard and Rita take are that they were the purchasers as beneficial owners of a half share in the land, and paid for their $140,000 share of the purchase price of $280,000 by forgoing $140,000 of debt then owed to them by Vito and Pasquale and Rainbow Constructions; that there was no arrangement for them to take their half share in the land as security only; that $210,000 of the advances from NAB were paid out at the direction or for the benefit of Vito and Pasquale; so that Vito and Pasquale were the borrowers of that $210,000 in substance and Gerard and Rita are entitled to indemnity for those advances. The other advances by NAB were for the benefit of all four owners of the land and Gerard and Rita should bear half of the other advances.
20 Upon Vito's claim relating to the 25% share transferred on 24 September 1996 Gerard and Rita allege that Vito agreed by deed to transfer his share and was discharged by that deed from further obligations, including obligations to NAB, and that on about 8 October 1996 a discharge was obtained from NAB. They then allege (para 13) that Vito is estopped by that deed and by the transfer from denying their beneficial ownership; and they also allege estoppel in pais and a number of detriments relating to their reliance on the 1996 transaction. They also plead the absence of any note or memorandum in writing signed by them.
21 Gerard and Rita allege (paras 14 to 19) that they have made numerous informal offers to transfer the 25% share back on discharge of the liability to NAB and repayment of advances they made for Vito, that these offers were not accepted, that no agreement emerged from them and that Vito did not act on them within a reasonable time and they were withdrawn in 1999 or 2000. They then allege (paras 20 to 27) circumstances in which they claim that they ought to be allowed credit for advances and moneys paid to or for the benefit of Vito.
22 In paragraphs 29 to 31 they allege laches and acquiescence of Vito and allege a number of elements of prejudice. They also rely by analogy on the Limitation Act 1969 against the claims for accounts, equitable damages and compensation.
23 In their Second Cross-claim, filed on 14 December 2007, Gerard and Rita ask the Court to order sale of the property under s 66G of the Conveyancing Act 1919 which will bring about division of the proceeds among the persons interested in the property. Their Cross-claim requires the Court to ascertain what interests in the property exist, and to make orders dealing with caveats.
24 Pasquale is the third defendant. By his Second Amended Statement Of Cross-Claim filed on 21 November 2008 Pasquale claims a declaration that Gerard and Rita hold title on trust for him as to a 25% share, an account of profits made by them in their trusteeship, an account of profits in respect of the lease of the land, equitable damages and compensation and consequential orders. His allegations are similar to Vito's Amended Statement of Claim. According to those allegations in dealings in 1992 and 1993 Gerard and Rita advanced funds to Rainbow Constructions for the purpose of meeting its day-to-day operational requirements, to a total of $40,000, and in March 1992 advanced approximately $100,000 for the purchase of the property as a loan to Rainbow Constructions, Pasquale and Vito. Pasquale alleges (para 7) that in March 1993 Rainbow Constructions, Pasquale and Vito were unable to discharge these loans and (para 8) there was an agreement to extend the term of the loans on terms which included that in order to provide security for the loans (totalling $140,000) Gerard and Rita would be named as registered title holders; that their ownership interest always was and remained a mortgage; that the equity of redemption was not barred and has been satisfied. Pasquale alleges (para 8) that Gerard and Rita agreed that they would transfer title to Pasquale on repayment of the loans and on reasonable demand. Pasquale alleges that Gerard and Rita arranged for the valuer to carry out the valuation. He alleges (para 11) that the transfer to Gerard and Rita was a consequence of the oral agreement about going on title as security. He alleges that it was known and acknowledged that Pasquale and Vito were bad security risks so far as any bank was concerned and accordingly it was agreed that Gerard and Rita would become registered proprietors so that borrowing funds from the bank was made easy. Pasquale relies on several alternative bases for entitlement to Gerard and Rita's registered interest in the land, under the law of mortgages, and as a resulting trust being a common intention trust.
25 Pasquale makes allegations similar to those made by Vito relating to improving the property and leasing it out, and to entitlements under the lease. He alleges that Gerard and Rita have received all rental payments without giving any account and have collected in excess of $140,000.
26 Gerard and Rita's Defence to this Cross-claim generally follow their Defence to Vito's claim.
27 This is very unfortunate litigation among brothers relating to family affairs and none of the family members seemed objective when giving evidence. Their involvement in conflict was obviously intense and deeply personal and has continued over many years. There have been instances of savage threats and even personal violence. I do not have much confidence in the evidence of the brothers. Observations in Watson v Foxman & Ors (1995) 49 NSWLR 315 at 318-319 by McLelland CJ in Eq on problems of proof of oral representations apply well to this case. What his Honour said about proof of misleading conduct consisting of spoken words applies also where it is claimed that oral agreements or arrangements deal with property of significant value in a way different to what appears on the title register or in any written record made at the time.
28 McLelland CJ in Eq said:
Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.
Each element of the cause of action must be proved to the reasonable satisfaction of the Court, which means that the Court 'must feel an actual persuasion of its occurrence or existence'. Such satisfaction is 'not … attained or established independently of the nature and consequence of the fact or facts to be proved' including the 'seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding': Helton v Allen (1940) 63 CLR 691 at 712.
29 Considerations of these kinds pose serious difficulties of proof for a party relying upon spoken words as a foundation of a cause of action in the absence of some reliable contemporaneous record or other satisfactory corroboration. In this case there is no contemporaneous document which supports the claim that the true arrangement was only a loan on mortgage, not a purchase, and there is no satisfactory corroboration. McLelland CJ in Eq's observations apply with only slight changes to the present case. A great deal of what I was told related to conversations which were alleged to have occurred well over 10 years before I heard the evidence. Most of what I was told about the conversations seemed to me to be little more than impressions, accompanied by plausible details which were very unlikely to be based and were not based on actual memory. These impressions came to me through a filter (perhaps an osmotic barrier) of years of conflict, argument and strong feeling.
30 There are a number of objective circumstances which appear important for decision on the facts. The arrangement was not recorded in writing in any way, whether by a mortgage document, a covering agreement or any note however informal. A solicitor acted for all the purchasers, but there is no indication that he was in any way involved in the security arrangement and as I later find he was not told of it. If a solicitor who acted for all parties had known of such an arrangement it is likely that some record of the arrangement would have emerged, probably in the form of a second mortgage, registered or unregistered, or if not, in some other written acknowledgement. It would have been obvious to a solicitor that the interests of Vito and Pasquale needed to be protected by a written acknowledgement signed by Gerard and Rita, at the very least.
31 No explanation was given to me in evidence for the absence of involvement of the solicitor in recording the arrangements, and no explanation was given to me for the absence of any written record of the arrangements at all. In an arrangement among brothers a high degree of informality is less surprising and less improbable than in other circumstances, but valuable land and significant amounts of money were involved. The transaction should, if the affairs of Rainbow Constructions had been conducted regularly, have been recorded in its accounts and its directors' Minutes; but it is unlikely that the company's records were kept in a regular way by its directors Vito and Pasquale, and the company went into liquidation in March 1997.
32 The transaction does not accord with any ordinary businesslike arrangement for security of land under the Torrens system. It seems strange that a security interest should only extend to a 50% share; if the security were enforced, it could only be enforced against a 50% share, restricting sale or other remedies markedly because the other two co-owners would remain. Security interests usually extend to the whole of the property under security, even if they are second mortgages.
33 Gerard and Rita paid all the stamp duty on the contract of purchase. They were repaid $4,594.12 out of the $202,000 advanced by NAB, and I find that this related to stamp duty. It is an anomaly for their case that they got more than half the stamp duty back but a far greater anomaly for Vito's case that they had to bear any of the stamp duty at all; if they were interested only as mortgagees the ordinary and reasonable outcome would be that all the stamp duty would be borne by the mortgagors. No further payment was made and Vito and Pasquale did not ever attempt to pay any more and did not acknowledge liability to do so. Bearing almost half the stamp duty suggests that Rita and Gerard shared in the beneficial ownership.
34 In my judgment it is overall improbable that Gerard and Rita acted only as benefactors for Vito and Pasquale, providing their efforts, their credit and money, mortgaging their property to Westpac and signing mortgages to NAB, bearing financial risks, without being entitled to any ultimate advantage. The overall probabilities favour their positions.