Plaintiff v First Defendant

2 The caveats[1] which apply to those properties state the grounds of claim as an implied, resulting or constructive trust. AE Brighton's argument was primarily based on a constructive trust. Reference was made to an equitable charge by counsel for UDP but that is not an interest claimed in the caveats.

3 UDP relies upon an arbitral award which, in declaration 6, said in effect that on and from the completion date of a share sale agreement on 31 January 2014 the claimant, Esposito Holdings Pty Ltd, held the purchase price on constructive trust for UDP.

4 That arbitration related to disputes arising under a share sale agreement by which the seller, Esposito Holdings, agreed to sell and the buyer, UDP, agreed to purchase all of the issued shares in 5 Star Foods Pty Ltd. At the time of completion, Mr Antonio Esposito was the sole shareholder and director of Esposito Holdings.

5 AE Brighton was not a party to the arbitration agreement, nor could it have been, as it was not a party to the share sale agreement. One of AE Brighton's arguments in support of its application was that it was not bound by the finding of constructive trust made by the arbitrator.

6 Mr Esposito was the sole shareholder in AE Brighton until 7 July 2019 when, shortly before his bankruptcy, he transferred his shareholding in AE Brighton to Ms Violetta Esposito. Ms Esposito has made the affidavit on behalf of AE Brighton supporting its application for the removal of the caveats.

7 There is evidence that, at the time when Mr Esposito was owner and sole director of both Esposito Holdings and AE Brighton, part of the purchase price received from UDP was paid to Esposito Holdings and was used by it, perhaps through another company to which I will refer, to purchase the four properties over which the caveats are lodged.

8 The plaintiff, AE Brighton, made the following submissions. First, that it was not a party to the arbitration and that the arbitral award could not be used to bind the properties. Secondly, that the terms of the arbitral award which related to a constructive trust were expressly limited to the claimant, Esposito Holdings. Thirdly, that the arbitral award could not in any event bind the property at 2 Kinane Street because the constructive trust declared in the arbitral award was said to have arisen on 31 January 2014 and AE Brighton had become registered proprietor of that property on 2 December 2013. Fourthly, that the proceedings which UDP foreshadowed against AE Brighton would be an abuse of process as it was not a party to the arbitral award and that, in any event, UDP should have made its claim in the arbitration proceedings. Fifthly, that UDP's claim at its highest amounted to a mere equity and was not an equitable estate or interest in respect of which a caveat could be lodged. Finally, that the balance of convenience was against the maintenance of the caveats.

9 Ms Esposito's affidavit contains statements to the same effect as those submissions. She stated that there was no basis for a constructive trust as UDP did not make any financial contributions to the purchase of the properties. AE Brighton did not intend to give UDP any interest in the properties and did not make any promises or representations in respect of them.

10 Ms Esposito also stated that AE Brighton is contracted to sell the two Brighton properties for approximately $15m and that settlement would be frustrated unless the caveats were removed. She also observed that AE Brighton was not a party to the arbitral award and that the award did not declare that it was subject to a constructive trust.

11 The final arbitral award, in paragraph 2, stated that by reason of facts set out in paragraph 1, the claimant, being Esposito Holdings, engaged in misleading and deceptive conduct in contravention of s 18 of sch 2 of the Competition and Consumer Act 2010 of the Commonwealth, and in paragraph 3 declared that the second respondent by counter-claim, who was Mr Esposito, was involved in the claimant's contravention within the meaning of s 2(1) and for the purposes of s 236 of sch 2 of the Competition and Consumer Act.

12 As previously mentioned, paragraph 6 of the award declared that, on and from completion, Esposito Holdings held the purchase price on a constructive trust for UDP. The award also declared that UDP suffered loss and damage by reason of matters set out in paragraphs 1, 2 and 3 in the amount of $54,144,847.

13 On 5 October 2018, Croft J gave UDP, to which by that stage receivers and managers had been appointed, leave to enforce the award and ordered that 'The Award is given effect as a judgment of the Court'.

14 UDP has foreshadowed that it proposes to commence proceedings to support a constructive trust over the properties and alleged that on and from 31 January 2014 the purchase price was held on constructive trust for it. It has provided a draft statement of claim for a proposed proceeding which pleads some of the findings of the arbitrator. It proposes to plead that at all material times Mr Esposito was sole director and controlling mind of United Dairy Power Pty Ltd, 5 Star Foods Pty Ltd, Esposito Holdings and AE Brighton.

15 It then proposes to plead that, on dates unknown to it, Mr Esposito procured Esposito Holdings to give approximately $22.4 million to AE Brighton and to him and that he procured AE Brighton to use the money to buy the four properties. It proposes to allege that that action was in breach of trust, that AE Brighton received the money as a volunteer and with actual knowledge of the facts and knowing it was the proceeds of Esposito Holdings' breach of trust, and to seek remedies for that breach.

16 Apart from the arbitral award, to which I will return, UDP also relied on evidence given by Mr Esposito at an examination conducted under the Corporations Act 2001 (Cth), the transcript of which is in evidence. His answers were given with the introductory claim 'privilege' which relates to protection against self-incrimination.

17 I will next refer to passages in that transcript, commencing at p 34.

18 Mr Esposito was asked whether he had set up another business and he said, 'Correct'. When asked what that business was called he said, 'National Dairy Holdings' and that he was the shareholder and director and that the company secretary was his partner, Ms Esposito.

19 He was asked how much that new business owed Esposito Holdings and he said, 'Approximately $7m'.

20 He was asked, 'What became of the money that your new business received from Esposito Holdings? What did it do with it?' He answered, 'Bought properties'. He was asked, 'Which properties?' He said, 'I think there's a property in Ballarat, Daylesford and Brighton'. For the purposes of this application I take the reference to 'Ballarat' to be to Bunkers Hill, the reference to 'Daylesford' to be to Werona, and the reference to 'Brighton' to be to the two properties adjacent to each other.

21 He was then asked, 'Mr Esposito, we are talking about where the $7 million, give or take, that went to your new company has been invested and you were about to give me some addresses for properties that have been purchased. Could you do so, please?' The answer was, '2 Kinane Street in Brighton, 92 the Esplanade in Brighton. I'm actually not sure if that's 92 or 98, but it's one of those two.' Question, 'We might just stop and do them one at a time. So there's 2 Kinane Street, Brighton, which is owned a the company called AE Brighton Holdings Pty Ltd'. Answer 'Mm-hm'. Question 'That's a $12 company[2] of which you are the beneficial owner and that's your primary residence; is that correct?' Answer, 'Correct'.

22 He was asked, 'Then I think you were going to 92 The Esplanade, Brighton. That is also owned by AE Brighton Holdings Pty Ltd and I think you said that was purchased with the sale proceeds from here; is that correct?' Answer, 'Correct'. Question, 'Has Violetta made any contribution to the UDP business?' Answer, 'No'. 'Has she made any financial contribution to your new business?' Answer, 'No'. 'Is there also a property at 639 and 649 Williams Road, Werona?' Answer, 'Yes'. And then another question, 'Then The Esplanade, 92 The Esplanade property as I understand it is an adjoining property?' The transcript says, '(Witness nods)' Question, 'Yes?' Answer, 'Yes'.

23 In my opinion, Mr Esposito's answers provide prima facie evidence that the purchase price for the AE Brighton four properties was provided, with one possible qualification, from the money obtained from UDP under the share sale agreement. The money may first have been paid to National Dairy Products, but was then paid to AE Brighton, which purchased the properties. The qualification is the timing issue, to which I will return.

24 Mr Esposito has not made an affidavit concerning any of the answers that he gave in that transcript.

25 As mentioned, there was a timing issue in respect of the purchase of 2 Kinane Street. The arbitral award declared that the constructive trust arose on and from the completion which occurred on 31 January 2014; whereas the purchase of the Kinane Street property seems to have been settled or the title transferred to AE Brighton on 2 December 2013. AE Brighton's argument is therefore that the constructive trust could not apply to that property. But I consider that by Mr Esposito's answers quoted above there is, at least, prima facie evidence that the money obtained from the share sale agreement was used to purchase 2 Kinane Street.

26 How that may have occurred is not shown from the transcript but, in my opinion, Mr Esposito's evidence suggests that part of the money from the share sale agreement found its way, perhaps at a later time, to assist in the purchase of 2 Kinane Street. As quoted above, Mr Esposito mentioned 2 Kinane Street as a property in Brighton which had been purchased, having previously said that properties, including in Brighton, had been purchased with money obtained from Esposito Holdings. Whether the share sale agreement money was used to assist in the purchase of the Kinane Street property through repayment of an earlier loan or otherwise does not appear. As I have said, there is no affidavit from Mr Esposito about any of the answers that he gave.

27 Establishing a prima facie case in respect of the flow of money does not, of course, establish the estate or interest in land by way of trust on which UDP relies in support of its caveats.

28 UDP bears the onus of proving that there is a prima facie case that justifies the maintenance of the caveats.[3] That must be a prima facie case by reference to evidence or inferences from evidence that UDP has an estate or interest in each of the four properties. If such a prima facie case is established, then the balance of convenience must be considered and also what is appropriate to protect the caveator's interest in the properties. In making determinations about these issues, the Court does not make a final judgment of facts or as to legal or equitable claims.

29 I will deal next with additional arguments raised by AE Brighton and then return to the question of whether a prima facie case of a constructive trust has been established.

30 AE Brighton contended that any claims of UDP amounted to a mere equity, which was not an equitable estate and therefore did not support a caveat. It relied on the judgment of Brooking J in the decision of Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd.[4] In that case, the Court decided that when a mortgagee of Torrens system land sold it in breach of its duties to the mortgagor, the mortgagor had an equity to have the sale set aside. Until the equity was made good the mortgagor had, however, no equitable interest in the land and therefore no right to lodge a caveat.

31 However, if, in this case, UDP establishes a prima facie case that it is a beneficiary of a constructive trust over the four properties, then, in my opinion, the case falls not into the mere equity category but into another category of an 'equity' to which Brooking J referred. That category was 'an equitable interest in property, that is, some right of ownership enforced by equity but not by the common law'.[5] That describes the rights of a beneficiary under a constructive trust.

32 The question then is whether the evidence before the Court establishes a prima facie case that UDP is a beneficiary under a constructive trust. UDP based its argument on a principle stated in Foskett v McKeown,[6] which, in turn, was referred to by Hargrave J in Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd,[7] and is as follows:

Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset. [8]

33 That principle does not, as I read it, depend on showing fraud; it depends on proving breach of trust or, expressed for present purposes, a prima facie breach of trust. UDP has primarily relied for its proof on the findings of the arbitrator and the evidence of Mr Esposito, to which I have referred.

34 My attention was drawn by email on Friday, and again this morning, to a judgment of Garde J delivered last Wednesday, the day after I heard this application. That judgment was UDP Holdings Pty Ltd v Ironshore Corporate Capital Limited,[9] in which UDP made a claim under a buyer warranty and indemnity insurance policy in respect of losses it suffered by entering into the share sale agreement. An issue arose about whether the insurer was estopped by the arbitrator's findings. Garde J stated:

The arbitrator accepted that but for the breach of cl 7.6(b), the purchase would not have proceeded with the result that UDP suffered a loss of opportunity to avoid the transaction. This was the basis of the award made by the arbitrator.

UDP made a general submission that the underwriters are estopped from denying or disputing the facts underlying the arbitral award including the assessment of loss. It contended that it was entitled to an award in this proceeding on the basis that no transaction would have occurred had UDP known that the Seller's warranties were untrue.[10]

While the evidence in the arbitration has greatly expedited the proof of the claim in this proceeding, and considerably reduced the area of dispute, there is no estoppel as claimed by UDP or abuse of process in the determination of UDP's claim on the policy in accordance with law.[11]

His Honour therefore required UDP to prove that its losses were covered by the policy.

36 I have taken that judgment into account in deciding this application. But I consider that, while the evidence in the arbitration may not bind AE Brighton, it can be relevant in determining whether a prima facie case of a constructive trust arises. UDP has the evidence, or at least some of that evidence, potentially available to it. Of course, AE Brighton will be able to test that evidence and make submissions in any proceeding that UDP commences, whereas it was not a party to the arbitration proceeding and did not have an opportunity to challenge the evidence led in the arbitration.

37 On UDP's case, the constructive trust arises from money obtained as a result of misleading or deceptive conduct, from which it suffered loss, being used by AE Brighton to purchase the four properties.

38 The findings of the arbitrator and the evidence that UDP used to obtain the award, when read with Mr Esposito's evidence, leads to the conclusion that UDP has a prima facie case that Esposito Holdings held the purchase money on trust for UDP. There is a prima facie case that Esposito Holdings breached its trust obligations to UDP by paying that money to AE Brighton, which used it to purchase the four properties. I take into account in reaching that prima facie view the fact that Esposito Holdings and AE Brighton have common ownership and Mr Esposito's evidence upon his examination.

The evidence in the arbitration that I have set out above, and the findings and conclusions in the arbitral award were not challenged by either UDP or the underwriters. They are effectively common ground for the purposes of this proceeding. They are sustained by over 7,000 pages of evidence in the court book. The Court was also assisted by the evidence of three forensic accounting experts and the receiver and manager of UDP. The evidence overwhelmingly establishes that the Seller and its officers intentionally and knowingly overcharged Lion over a period of years. They knew that the financial accounts and records of the Company and the Group were misleading and deceptive at the relevant dates. I have no hesitation in accepting the arbitrator's findings and conclusions.[12]

40 It would be incorrect to proceed on the basis that AE Brighton, despite the common ownership at relevant times, is bound by His Honour's conclusions. But, in my opinion, the fact that the evidence 'overwhelmingly establish[ed]' UDP's claim against the insurer, when taken with the other matters to which I have referred, including Mr Esposito's evidence upon examination, provides a prima facie case that UDP can establish a constructive trust under which it is a beneficiary and therefore has an estate or interest in the properties. As I have said, there is prima facie evidence that money obtained in breach of that trust was used to purchase the four properties.

41 The Court must also take into account that a caveat can only be wide enough to protect the interest of the caveator and their security interest. As UDP's caveats claim an interest as a beneficiary under a constructive trust, I consider that they satisfy this requirement.

42 Turning then to the balance of convenience, I take into account that AE Brighton has entered into contracts for the sale of the two Brighton properties. However, I note that the caveats were lodged before those contracts were entered into. I was, before disposing of the summons, willing to hear any submissions about how UDP's security interest in the properties could be protected if the caveats were removed, taking into account the interests of the mortgagees and other caveators. Without such an arrangement, the balance of convenience favoured the maintenance of the caveats on terms that required UDP to commence its proposed action promptly.

43 After hearing further submissions, in which no proposal was made for removal of the caveats on terms that protected UDP's interests, I propose to make orders dismissing AE Brighton's summons and requiring UDP to commence its proceeding promptly.

[1] One Caveat was lodged over five titles.

[2] This may have been attended to describe a '$2 company'.

[3] Piroshenko v Grojsman (2010) 27 VR 489.

[4] [1994] VicRp 47; (1994) 1 VR 672, 675-6 (Southwell and Teague JJ agreeing).

[6] [2000] UKHL 29; [2001] 1 AC 102.

[7] (2017) 52 VR 664.

[8] Ibid 763, citing Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102, 131 (Lord Millett).

[9] [2019] VSC 645.

[10] Ibid [82]-[83] (citations omitted).