Di Pietro & Ors v Official Trustee in Bankruptcy [1995] FCA 712

CATCHWORDS

BANKRUPTCY - Trusts - bankrupt the registered proprietor of land - whether bankrupt's children hold a beneficial interest in the land - terms of settlement in proceedings for dissolution of marriage - bankrupt thereby acknowledged that "she will hold [the matrimonial home] or such other residence as she may later acquire on trust for the two...children of the marriage" - whether parties intended that after acquired premises would be held on trust only to the extent that they were purchased with the proceeds of sale of the matrimonial home.

STATUTE OF FRAUDS - declaration of trust respecting land must be signed by the beneficial owner, not his or her solicitor - where land is transferred to a person absolutely, but the transferee undertakes to hold it on trust for another person, the beneficiary may prove the trust by parol evidence.

Bankruptcy Act 1966 (Cth), ss 58(1), 116(2)(a)

Conveyancing Act 1919 (NSW), s 23C (1)(b).

Tierney v Wood (1854) 19 Beav 330; 52 ER 377.

Ryder v Taylor (1935) 36 SR(NSW) 31.

Rochefoucauld v Boustead [1897] 1 Ch 196.

Secretary, Department of Social Security v James (1990) 95 ALR 615.

Last v Rosenfeld [1972] 2 NSWLR 923.

Bloch v Bloch (1981) 55 ALJR 701.

Walker v Corboy (1990) 19 NSWLR 382.

Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491.

Kauter v Hilton (1953) 90 CLR 86

DI PIETRO & ORS v OFFICIAL TRUSTEE IN BANKRUPTCY

NG 908 of 1994

Jenkinson, Tamberlin, Sackville JJ.

Sydney

7 September, 1995

IN THE FEDERAL COURT OF AUSTRALIA)

NEW SOUTH WALES DISTRICT REGISTRY) No. NG 908 of 1994

GENERAL DIVISION )

ON APPEAL from a single judge of the Federal Court of Australia

BETWEEN:

ELIO DI PIETRO

First Appellant

AND:

KIM BONNIE DONALDSON

Second Appellant

AND:

KEITH CONNOR DONALDSON

Third Appellant

AND:

OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE BANKRUPT ESTATE OF PATRICIA WILLIAMS

Respondent

CORAM: JENKINSON, TAMBERLIN, SACKVILLE JJ.

PLACE: SYDNEY

DATE: 7 SEPTEMBER, 1995

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The appeal be dismissed, with costs.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA)

NEW SOUTH WALES DISTRICT REGISTRY) No. NG 908 of 1994

GENERAL DIVISION )

ON APPEAL from a single judge of the Federal Court of Australia

BETWEEN:

ELIO DI PIETRO

First Appellant

AND:

KIM BONNIE DONALDSON

Second Appellant

AND:

KEITH CONNOR DONALDSON

Third Appellant

AND:

OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE BANKRUPT ESTATE OF PATRICIA WILLIAMS

Respondent

CORAM: JENKINSON, TAMBERLIN, SACKVILLE JJ.

PLACE: SYDNEY

DATE: 7 SEPTEMBER, 1995

REASONS FOR JUDGMENT

SACKVILLE J:

I gratefully adopt the statement of facts in the judgment of Jenkinson J. I proceed directly to the issues argued on the appeal.

Conveyancing Act 1919 (NSW) s.23C(1)(b)

Mr McInnes QC, who appeared for the appellants, argued that the declaration of trust, which was acknowledged in the Terms of

Settlement dated 13 September 1971, was enforceable because it was evidenced in writing as required by s.23C(1)(b) of the Conveyancing Act 1919 (NSW). Section 23C, insofar as relevant, reads as follows:

"23C.(1) Subject to the provisions of this Act with respect to the creation of interests in land by parol:

...

(b) a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by his will;

...

(2) This section does not affect the creation or operation of resulting, implied, or constructive trusts."

Mr McInnes argued that the acknowledgment in the Terms of Settlement constituted a writing which "manifested and proved" the declaration of trust by the bankrupt, relating to the Kendall Street property and any subsequent residence acquired by her. He also contended that the writing had been "signed by some person who is able to declare such trust". That person was the solicitor who represented the bankrupt in the divorce proceedings, which were ultimately resolved by the orders made by the Supreme Court of New South Wales on 13 September 1971.

It is clear enough from the evidence that the Terms of Settlement were signed by Mr Edward France, of the firm Edward France and Nyman, who represented the bankrupt in the divorce proceedings. I would infer that Mr France was authorised by the bankrupt to sign the Terms of Settlement on her behalf. It is also clear that the writing required by s.23C(1)(b) need not be made at the time the trust is declared, but may be made subsequently: Rochefoucauld v Boustead [1897] 1 Ch. 196 (CA), at 206; Secretary, Department of Social Security v James (1990) 95 ALR 615 (FCA/Lee J.), at 622; Meagher and Gummow, Jacobs' Law of Trusts in Australia (5th ed, 1986), at 104.

The difficulty facing Mr McInnes' submissions is that the authorities establish that a signature by an agent is not enough to satisfy the requirement in s.23C(1)(b) that the writing must be signed "by some person who is able to declare such trust". It has been regarded as established since Tierney v Wood (1854) 19 Beav 330; 52 ER 377, that the writing must be signed by the beneficial owner of the land and not by his or her agent: Ryder v Taylor (1935) 36 SR(NSW) 31 (NSW SCt) at 51, per Nicholas J.; Jacobs' Law of Trusts, at 103-104. Mr McInnes acknowledged that his argument was inconsistent with the passages in Jacobs' Law of Trusts summarising the authorities. In my opinion those passages correctly state the law. Other cases referred to by Mr McInnes, such as Secretary, Department of Social Security v James; McRae v Coulton (1986) 7 NSWLR 644 (NSWCA) and Hagan v Waterhouse (1991) 34 NSWLR 308 (NSW SCt), do not bear on this issue. No reason was given for departing from the established construction of s.23C(1)(b) and I see no reason to do so. This point fails.

Proof of the Trust

In the alternative, Mr McInnes relied on the principle that equity will not allow provisions derived from the Statute of Frauds 1677, such as s.23C(1)(b), to be used in order to commit a fraud: Rochefoucauld v Boustead, at 207. He submitted that it would be unconscionable for the bankrupt, or the trustee in bankruptcy standing in her shoes, to claim beneficial entitlement to property that she acquired by undertaking to observe the terms of a trust. On this basis he submitted that, if s.23C(1)(b) of the Conveyancing Act 1919 prevented direct enforcement of the trust, the bankrupt was subject to a constructive trust on the same terms as the acknowledgment recorded in the Terms of Settlement. Such a trust was excluded from the operation of s.23C(1)(b) by s.23C(2).

The authorities support the principle that, where land is transferred to a person absolutely, but the transferee undertakes to hold it on trust for another person, the beneficiary may prove the existence of the trust by parol evidence and obtain remedies requiring the trustee to give effect to the trust: Rochefoucauld v Boustead, at 206; Last v Rosenfeld [1972] 2 NSWLR 923. The better view is that such a trust is not enforced as a constructive trust, but as an express trust. The beneficiary is entitled to prove the express trust because to do otherwise would be to allow the statute to be used as an instrument of fraud: Jacobs' Law of Trusts, at 105; Bloch v Bloch (1981) 55 ALJR 701, at 706, per Brennan J. Compare, however, H.A.J. Ford and W.A. Lee, Principles of the Law of Trusts (1990), at 208-211.

In my view, the second and third appellants (to whom I shall refer as "the children") were entitled to rely upon parol evidence to establish that the bankrupt acquired the Kendall Street property on trust for them. In substance, the only evidence of the trust was the acknowledgment made on behalf of the bankrupt in the Terms of Settlement signed by her solicitor and the noting of the contents of that document in the orders made by the Supreme Court. There was no other evidence adduced before the trial judge as to the terms of the agreement whereby the bankrupt undertook to hold the Kendall Street property on trust. Nonetheless, that evidence was admissible, despite s.23C(1)(b) of the Conveyancing Act 1919, at least when coupled with evidence from which it could be inferred that the solicitors had authority to sign the document on behalf of the bankrupt. Moreover, the evidence was sufficient to establish that a trust was created in favour of the children and to entitle them to enforce their beneficial interest in any trust property.

The Terms of the Trust

The relief sought by the children does not relate to the Kendall Street property, which was disposed of by the bankrupt in 1176. The children seek, inter alia, a declaration that the bankrupt's interest in the property at Redgum Avenue, Cronulla, is held by her in trust for them as tenants in common in equal shares. As his Honour pointed out, the bankrupt's legal title to a half share of the Redgum Avenue property, of which she became registered proprietor in June 1981, had vested in the Official Trustee on 12 November 1991, the date the sequestration
order was made by the Federal Court. In substance, the children seek orders enforcing the trust acknowledged in the Terms of Settlement against the Official Trustee, as the registered proprietor of a half share of the Redgum property. This raises the question of whether the trust acknowledged in the Terms of Settlement created or resulted in the children obtaining a beneficial interest in the Redgum Avenue property.

To answer this question, it is necessary to consider the terms of the trust acknowledged on behalf of the bankrupt in the Terms of Settlement. In the absence of other evidence of the terms of the trust, the language used in the acknowledgment must be construed. His Honour dealt only briefly with this question on the assumption, contrary to his view, that the bankrupt's declaration of trust was evidenced by a writing signed as required by s.23C(1)(b) of the Conveyancing Act 1919. His Honour did not consider whether the principles stated in Rochefoucauld v Boustead could be relied upon by the children, since no such argument was put to him.

His Honour rejected the suggestion that the declaration of trust by the bankrupt, as a matter of construction of the acknowledgment in the Terms of Settlement, created in the children a beneficial interest in any residence subsequently acquired by the bankrupt, irrespective of the source of funds for the acquisition. Such a construction was "not open". His Honour took the view that the declaration of trust recorded in the Terms of Settlement could operate only in accordance with what he
described as the "tracing principle". In other words, if enforceable, the trust entitled the children to a beneficial interest in a residence, other than the Kendall Street property, only if and to the extent that the proceeds of sale of the Kendall Street property could be traced to the subsequently acquired residence.

In this Court, Mr McInnes argued (although not in his written submissions) that his Honour's construction of the acknowledgment in the Terms of Settlement was incorrect. Mr McInnes contended that the document recorded a declaration of trust by the bankrupt that she would hold the Kendall Street property, or any other residence she might later acquire, on trust for the two children of the marriage, regardless of any principle of tracing. As his argument rested on the language of the Terms of Settlement, the document should be set out in full:

"TERMS OF SETTLEMENT AND MINUTES

OF PROPOSED ORDERS

The Suit will proceed to an undefended hearing on the ground of Separation contained in the Respondent's Answer and subject to the sanctioning of the Deed of Settlement bearing even date herewith orders made by consent that:

1. Custody of the two children of the marriage Keith Connor Donaldson and Kim Bonnie Donaldson be granted to the Petitioner and that there be no order for access to the Respondent.

2. That each party pay their own costs of and incidental to these proceedings.

IT IS NOTED that the petitioner seeks no order for the maintenance for the abovementioned children and relies on her capacity to work to support herself and the children of the marriage and undertakes to the respondent and to the court that she will not
thereafter make any application for maintenance for the support of either of the two said children and further acknowledge that she will hold this property or such other residence as she may later acquire on trust for the two said children of the marriage.

Dated this 13th day of September 1971.

[Signed] [Signed]

Solicitor for the PetitionerSolicitor for the Respondent"

It is fair to say that the acknowledgment recorded in the Terms of Settlement, if considered in isolation from the remainder of the document and from the circumstances in which it came to be prepared, is capable of being read in the way suggested by Mr McInnes. Yet that reading produces somewhat startling results. On Mr McInnes' construction, any residence acquired by the bankrupt, no matter what its cost and no matter whether any contribution was made in the purchase price from the proceeds of the Kendall Street property, would be held in trust for the children of the marriage. This would be so even if many years had elapsed since the dissolution of the marriage and, indeed, even if the whole of the purchase price were provided by a third party, provided only that the property was "acquired" by the bankrupt "as a residence". It must be remembered that the bankrupt was 38 years of age at the date of the decree nisi and could reasonably have expected at that time (as indeed turned out to be the case) to acquire other residences over the course of her life.

In determining whether the parties to a transaction intended to create a trust, the Court looks to the language they have used,
the nature of the transaction and the whole of the circumstances attending the relationship between them: Walker v Corboy (1990) 19 NSWLR 382 (NSW CA), at 397, per Meagher J.A.; Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491 (FCA/Gummow J.), at 503. Similarly, in construing the terms of a trust expressly created or recognised, it is necessary to have regard to the same considerations: see Kauter v Hilton (1953) 90 CLR 86, at 100. In the present case, the circumstances in which the Terms of Settlement came to be signed suggest a more limited construction of the trust declared by the bankrupt. The Terms of Settlement were entered into as part of the resolution of the divorce proceedings between the bankrupt and her then husband, Keith Connor Donaldson.

The bankrupt filed a petition in the Supreme Court of New South Wales in March 1971, seeking a decree of dissolution of the marriage, which had taken place in December 1951. The petition was based on the alleged cruelty of the husband: Matrimonial Causes Act 1959, s.28(d). In the petition, the bankrupt claimed that she should have sole and permanent custody of the two children of the marriage, the second and third appellants in this appeal. The children were aged 15 and 13, respectively, at the date of the petition. The bankrupt also sought an order against the husband for the maintenance of the children.

In the petition the bankrupt claimed that she lived in the home, at Kendall Street, Sans Souci. She sought an order, pursuant to s.86 of the Matrimonial Causes Act 1959 (Cth), for the transfer
of the Kendall Street property to her absolutely. In support of this claim the bankrupt relied on a number of matters, including the following:

"(c)The petitioner resides in the home and the respondent does not. The home is and at all material times has been and will continue in the future to be a home for the petitioner and the children of the marriage.

(d)The petitioner requires the home as a security for herself and the children of the marriage."

The bankrupt's petition provoked a detailed answer and cross-petition from the husband, filed on 24 May 1971. This denied cruelty and made many allegations against the bankrupt. The cross-petition was based on a number of grounds, including cruelty, desertion (s.28(b)) and separation for a period of at least five years (s.28(m)). In support of the last ground, the cross-petition alleged that the bankrupt and the husband had lived separately and apart continuously since 1965.

The cross-petition acknowledged that the husband was the sole registered proprietor of the Kendall Street property, which the husband valued at $15,000, subject to a mortgage to the War Service Homes Division of about $4,500. The husband admitted that the bankrupt had contributed about $500 to the costs of acquisition of the home and that, over a period of 11 years, she had paid some mortgage instalments, amounting in total to the value of three years instalments. The cross-petition sought the following orders in relation to the Kendall Street property:

"(a)An order that [the property] be sold and that the nett proceeds thereof do be held in trust to provide for the maintenance and education at boarding schools of the two children of the marriage.

(b)An order that the Petitioner do vacate the said premises forthwith upon the aforesaid order being made."

In support of his claim for this relief, the matters relied on by the husband included the following:

"The Respondent says that it has become a matter of urgency that the influence of the Petitioner over the children should be removed and that they should receive proper training and education at boarding school. The Respondent does not have sufficient means to make proper provision for this education without obtaining the proceeds of the sale of the house. The Respondent seeks that these proceeds be held in trust by trustees appointed by the Court to ensure that the maintenance and education of the said children should be properly attended to. Any proceeds remaining after the said children are both self-supporting should be divided between the Petitioner and the Respondent proportionate to their contributions to the purchases of the said home."

The proceedings came on for hearing in the Supreme Court of New South Wales on 13 September 1971. The evidence does not include a transcript of the hearing before Carmichael J. However, a deed of settlement was executed by the bankrupt and the husband. (Although the copy deed in the Appeal Book bore only the signature of the husband, I infer from the terms of the court's order that the bankrupt also executed the deed.) The recitals in that deed plainly show that the husband's concern was to terminate any obligations he might otherwise have had to provide maintenance and support to the bankrupt and also to define for
all time his liability to support the children. The deed went on to provide that, subject to the sanction of the court under s.87(1)(k) of the Matrimonial Causes Act 1959, the parties agreed that the husband would transfer to the bankrupt his fee simple estate in the Kendall Street property, subject to the mortgage. Section 87(1)(k) empowered the court to sanction an agreement for the acceptance of a lump sum or other benefits in lieu of the right to seek an order for maintenance or settlement of property. In the absence of such an order, an agreement of this nature would have been void as against public policy: Toose, Watson and Benjafield, Australian Divorce Law and Practice (1968), para.708.

For her part, the bankrupt accepted the transfer

"...in full satisfaction and discharge to all and sundry her rights to maintenance permanent maintenance and or any settlement under Part VIII of the Matrimonial Causes Act and this Deed may be pleaded in Bar in any application by her or on behalf by virtue of the said Act."

On 13 September 1971, at a hearing at which each of the parties was represented, the court decreed that the marriage should be dissolved on the ground of separation. The bankrupt's petition was dismissed, but she was granted custody of the two children of the marriage. The court sanctioned and approved, pursuant to s.87(1)(k) of the Matrimonial Causes Act 1959, the deed of settlement between the parties. The court "noted the contents of the document titled 'Terms of Settlement'" dated 13 September 1971 and declared, in terms of s.71 of the Act, that it was satisfied that proper arrangements had been made for the welfare of the younger child, Kim Donaldson. The requirement for such
a declaration was limited to the younger child, since the older child had attained 16 by the date of the decree nisi. In the absence of special circumstances, s.71 required the court to be satisfied as to the welfare of a child of the marriage only if the child was under the age of 16 at the date of the decree nisi.

The context in which the Terms of Settlement were prepared and signed by the solicitors for the parties shows that the husband's concerns were that

l the Kendall Street property should be sold to provide funds for the maintenance and education of his two children, aged 14 and 16 at the date of the decree nisi, preferably at boarding schools;

l the proceeds should be held for this purpose, until the children were both self-supporting; and

l under no circumstances should he be liable in the future to contribute to the maintenance and support of either his wife or his children.

There was no dispute between the parties that the bankrupt had contributed some moneys in connection with the acquisition and repayment of the mortgage of the Kendall Street property. The husband had expressed his willingness to divide the proceeds of sale of the Kendall Street property, proportionate to the parties' contributions, after the children became self-supporting.

The final agreement reached between the parties did not require the Kendall Street property to be sold, as the husband had sought. The Terms of Settlement (which were probably prepared shortly before the court hearing on 13 September 1971) contemplated, however, that a sale might occur in the future. The Terms of Settlement explicitly linked the bankrupt's undertaking to support herself and the children, and her undertaking not to apply for maintenance for the children, to her acknowledgment

"that she will hold [the Kendall Street] property or such other residence as she may later acquire on trust for the two said children of the marriage".

Taken in context, in my view, the acknowledgment contained in the Terms of Settlement was not intended by the parties to mean that the bankrupt would hold any residence required by her, no matter when or how acquired and regardless of the age or self-sufficiency of the children of the marriage. The principal purpose of the arrangement summarised in the Terms of Settlement, from the husband's point of view, was to give effect to his desire to be free of any future maintenance obligations and to provide for the welfare of the children, as "children of the marriage". The arrangement was also intended to ensure that the children had a home in which to live and would receive support from their mother while they remained dependent upon her.

I think that there is a reasonably strong argument, although it
was not put by Mr Ronzani, who appeared for the respondent, the Official Trustee, that the trust recorded in abbreviated form in the Terms of Settlement, was intended to continue only until the children became self-supporting. So far as appears from the documentation to which I have referred, neither party was concerned to ensure that the children were provided for after they became self-supporting. If this argument is correct, the trust presumably has come to an end, since it is reasonable to infer that the children attained self-sufficiency many years ago. However, since the argument was not put, I am prepared to assume for the purposes of the construction question, that the trust was not intended to be subject to a temporal limitation of this kind.

On this assumption, it seems to me that the terms of the trust recorded in the Terms of Settlement were intended to be more limited in scope than suggested by Mr McInnes. Clearly enough, the bankrupt undertook to hold the Kendall Street property, and the proceeds of sale of that property, in trust for the children. However, I think the parties intended that any later residence acquired by the bankrupt would be held in trust for the children only to the extent that the proceeds of sale of the Kendall Street property were used by the bankrupt to acquire that later residence. The reference to "or such other residence as she may later acquire" was intended to refer to any other residence acquired out of the proceeds of sale of the Kendall Street property. If the proceeds of sale were used to pay portion of the purchase price paid to acquire a residence, the children would obtain a beneficial interest in the residence proportionate
to the contribution. In that case, to use the language employed in argument, the proceeds of sale of the Kendall Street property could be traced into the later residence, and that residence would be held in trust for the children, in proportion to the contribution represented by the trust fund.

If the bankrupt failed to hold the proceeds of sale of the Kendall Street property in trust for the children, and also failed to apply the proceeds of sale to a new residence, she would doubtless be liable to the children for breach of trust. But the children would have no beneficial interest in, or proprietary claim against, any residence subsequently acquired by the bankrupt, in the absence of proof that the proceeds of sale of the Kendall Street property could be traced into that residence.

It seems to me that this construction is consistent with the circumstances known to the parties at the time they agreed on the arrangements recorded in the Terms of Settlement. It is also consistent with the express link in the Terms of Settlement between the declaration of trust and the bankrupt's undertaking to support herself and the children and the undertaking not to apply for maintenance on behalf of the children. That link suggests that the parties did not contemplate that the children would obtain a beneficial interest in any residence subsequently acquired by the bankrupt, except to the extent its acquisition could be traced to the only substantial family asset available at the time of the decree nisi.

Since no other construction of the Terms of Settlement was suggested in argument, I do not think it necessary to consider any alternative construction of the trust recorded in the document.

Can the Proceeds of Sale be Traced?

As I have noted, his Honour held that, assuming the bankrupt had declared an enforceable trust in favour of her two children, the proceeds of the sale of the Kendall Street property could not be traced into the property at Redgum Avenue, Cronulla. The bankrupt and her present husband became registered as proprietors as tenants in common of the Redgum Avenue property on 4 June 1981. The transfer, which was for an expressed consideration of $250,000, was registered before the bankrupt had ceased to be registered as proprietor of her previous residence located at 62 Water Street, Caringbah. His Honour concluded that the evidence did not establish that any of the proceeds of the sale of 62 Water Street had been used for the acquisition of the Redgum Avenue property.

Mr McInnes sought to challenge this conclusion. However, it became clear in the course of argument that, in order for the children to trace the proceeds of the Kendall Street property to the Redgum Avenue property, it was necessary for them to rely on the affidavit evidence of the bankrupt. It also became clear that the case below was conducted on the basis that the tracing issue would be dealt with on the documents only, and without reliance by the children on the bankrupt's affidavit evidence.
His Honour did not formally reject the bankrupt's affidavit evidence, although Mr Ronzani objected to the bulk of it being read. However, his Honour stated that he would only take into account what he described as "factual material", by which I take his Honour to mean independent documentary evidence annexed to the affidavit. The then counsel for the children approached the matter on this basis. Mr Ronzani accordingly abandoned his expressed intention of cross-examining the bankrupt, with a view to showing that she was a person "lacking wholly in credibility".

In these circumstances, it would be quite wrong to permit Mr McInnes on this appeal to rely on the bankrupt's affidavit evidence to trace the proceeds of the Kendall Street property to the Redgum Avenue property. Mr McInnes conceded that, in the absence of that evidence, he could not trace the proceeds of sale of the Kendall Street property to the acquisition of the Redgum property.

Conclusion

It follows that, in my opinion, the children cannot establish any beneficial interest in the Redgum Avenue property. The appeal should be dismissed, with costs.

I certify that this and the preceding

17 pages are a true copy of the

Reasons for Judgment of the Honourable

Justice Sackville.

Associate:

Heard: 15 May, 1995

Appellants' Counsel: Mr A.T. McInnes QC

Appellants' Solicitors:Ferrier and Associates

Respondent's Counsel: Mr D. Ronzani

Respondent's Solicitors: Abbott Tout

IN THE FEDERAL COURT OF AUSTRALIA )

NEW SOUTH WALES DISTRICT REGISTRY ) No. G908 of 1994

GENERAL DIVISION )

On Appeal from a Single Judge of the Federal Court of Australia

BETWEEN: ELIO DI PIETRO

First Appellant

KIM BONNIE DONALDSON

Second Appellant

KEITH CONNOR DONALDSON

Third Appellant

AND: OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE BANKRUPT ESTATE OF PATRICIA WILLIAMS

Respondent

CORAM: Jenkinson, Tamberlin and Sackville JJ.

PLACE: Sydney

DATE: 7 September, 1995

REASONS FOR JUDGMENT

JENKINSON J.

Appeal against orders in the bankruptcy of Patricia Williams, who has also been known as Aileen Patricia Di Pietro.

The appellants are respectively the present husband of the bankrupt and her daughter and her son, each by a previous marriage to Keith Connor Donaldson. In 1971 the
bankrupt petitioned the Supreme Court of New South Wales for a decree of dissolution of her marriage to Mr. Donaldson, which had subsisted since 1951, when the bankrupt was eighteen and Donaldson was twenty four. Their son was born on 7 August 1955 and their daughter on 27 April 1957. Copies of documents in the court file of the divorce proceedings were tendered in evidence in the proceedings in this court which were determined by the orders the subject of this appeal. Allegations in the bankrupt's petition and in Mr. Donaldson's answer in that file concur in representing that land comprised in Certificate of Title Volume 7113 Folio 142 and known as 33 Kendall Street Sans Souci ("Kendall Street"), of which Mr. Donaldson was the registered proprietor, had been acquired as a matrimonial home for the parties in 1962, that the matrimonial relationship had been disturbed by physical violence between the parties, prostitution on the part of the bankrupt, periods of separation and periods when their residence in the matrimonial home was in isolation the one from the other, and that the children of the marriage had resided, and were then residing, in the matrimonial home. Each party to the marriage blamed the other for those disturbances. The court documents disclose valuations of Kendall Street ranging from $13,000 to $18,000. The parties gave very different estimates of what aggregate amount of money each had contributed to the acquisition and maintenance and improvement of Kendall Street. The petitioner claimed and on decree nisi was granted custody of both children, notwithstanding that by that date, 13 September 1971, the son had attained sixteen. She claimed an order that Kendall Street be transferred to her "absolutely" and she claimed an order that Mr. Donaldson pay $12.50 for the maintenance of each child. Mr. Donaldson claimed custody of both children. But he confessed his inability personally to care for the children. He proposed that they "should both enter Roman Catholic boarding schools" and that during school holidays he and his wife should have liberal access to the children. Mr. Donaldson's answer, the contents of which were verified by his affidavit, stated Kendall Street to be his only property of significant value, and $70 per week in wages to be his only income. He claimed orders that Kendall Street be sold and that the net proceeds of the sale "be held in trust to provide for the maintenance and education at boarding schools of the two children of the marriage".

The order of the Supreme Court of New South Wales on 13 September 1971 dismissed the bankrupt's petition for divorce on the ground of cruelty, granted a decree nisi for divorce on the ground of separation in accordance with Mr. Donaldson's cross-petition, granted the petitioner custody of the two children, sanctioned pursuant to section 87(1)(k) of the Matrimonial Causes Act 1959-1966 a deed, described in the order as a "Deed of Settlement between the parties dated the thirteenth day of September 1971 a copy of which is filed herein and marked as Exhibit C", provided that each party should pay his own costs of the suit and declared the court's satisfaction that "the only child of the marriage in relation to whom Section 71 of the Act applied is the said Kim Bonnie Donaldson and that proper arrangements in all the circumstances had been made for the welfare of the said child of the marriage". The order included also, between the provision about costs and the declaration, the following:

"And The Court Noted the contents of the document titled `Terms of Settlement' dated the thirteenth day of September marked as Exhibit 'B' and filed herein."

The copy of the deed of settlement to which the order refers, marked as Exhibit "C", is reproduced:

The document the noting of which by the court is recorded in the order, marked as Exhibit "B", is reproduced:

On 12 November 1991 a sequestration order against the estate of the debtor was made by this court on the petition of a Deputy Commissioner of Taxation. Since 1981 the bankrupt and her present husband, the first-named appellant Elio Di Pietro, have been the registered proprietors as tenants in common in equal shares of the land comprised in Certificate of Title Volume 9623 Folio 39 and known as 31 Redgum Avenue Cronulla ("Redgum Avenue"). On the land is a dwelling in which at material times the bankrupt lived with Mr. Di Pietro. The Official Trustee in Bankruptcy as trustee of the bankrupt's estate ("the Official Trustee") made application to this court for orders appointing two named persons trustees of Redgum Avenue, vesting the land in those persons upon the statutory trust for sale which may be created in exercise of power conferred on the Supreme Court of New South Wales in Division 6 of Part IV of the Conveyancing Act 1919 (N.S.W.) and empowering those persons to sell the land and to hold the net proceeds of sale on trust for the Official Trustee and Mr. Di Pietro in equal shares.

The Official Trustee's entitlement to invoke the jurisdiction to make the orders he sought is dependent on his being a co-owner with Mr. Di Pietro of Redgum Avenue. His co-ownership could derive only from the operation of s.58(1) of the Bankruptcy Act 1966, by which the property divisible amongst the bankrupt's creditors and any rights and powers in relation to that property that would have been exercisable by her if she had not become a bankrupt vested in him forthwith upon her becoming a bankrupt. But the respondent to the Official Trustee's application, Mr. Di Pietro, joined with the bankrupt's children in another application to this court for declarations that the Official Trustee has no estate or interest in Redgum Avenue by reason of the operation of that section or otherwise, and that the bankrupt holds her undivided share in Redgum Avenue in trust for those children as tenants in common in equal shares. Paragraph 116(2)(a) of the Bankruptcy Act excludes property held by a bankrupt in trust for another person from the property divisible amongst the bankrupt's creditors, and so excludes such property from the operation of s.58(1). The two applications to this court, in the first of which the Official Trustee was applicant and in the other of which he was respondent, were heard together.

The learned trial judge concluded that no such a trust as the bankrupt's children alleged had been declared in compliance with the requirements of s.23C of the Conveyancing Act 1919 (N.S.W.), which provides:

"(1) Subject to the provisions of this Act with respect to the creation of interests in land by parol -

(a) no interest in land can be created or disposed of except by writing signed by the person creating or conveying the same, or by his agent thereunto lawfully authorised in writing, or by will, or by operation of law;

(b) a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by his will;

(c) a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same or by his will, or by his agent thereunto lawfully authorised in writing.

(2) This section does not affect the creation or operation of resulting, implied, or constructive trusts."

Concerning a very similarly worded provision of the Property Law Act 1969 (W.A.) Lee J. observed in Secretary, Department of Social Services v. James (1990) 95 A.L.R. 614 at 620-622:

"The remaining questions of law relate to the proper construction of s.34(1)(a) and 34(1)(b) of the Property Law Act 1969 (W.A.) and the application of that Act, so construed, to the facts as found by the tribunal.

Section 34 of the Property Law Act 1969 (WA) reads as follows:

`34(1) Subject to the provisions hereinafter contained in this Act with respect to the creation of interests in land by parol -

(a) no interest in land is capable of being created or disposed of except by writing signed by the person creating or conveying the interest, or by his agent thereunto lawfully authorised in writing, or by will, or by operation of law;

(b) a declaration of trust respecting any land or any interest therein shall be manifested and proved by writing signed by a person who is able to declare the trust or by his will;

(c) a disposition of an equitable interest or trust subsisting at the time of the disposition shall be in writing signed by the person disposing of the interest, or by his agent thereunto lawfully authorised in writing or by will.

The applicant submitted that s.34(1)(a) extended to prevent the creation of any equitable interest in land including an equitable interest created by a declaration of trust unless created in writing, or by will, or by operation of law.

The applicant submitted that the application of the reasoning applied by the majority of judges in Adamson v. Hayes (1973) 130 CLR 276 required a conclusion that a trust of land could only be created by writing.

Adamson v. Hayes was concerned with the dealing in equitable interests in lands by oral agreement and the application thereto of s.34 of the Property Law Act 1969 (WA). It was not a case restricted to the specific question of the application of s.34(1)(a) to a declaration of a trust although several judgments considered that question. Menzies J. held (at 292-3) that s.34(1)(a) had no application to an equitable interest created by a declaration of trust. Walsh J. (at 297) went no further than to hold that s.34(1)(a) applied to the creation and disposal of equitable interests by oral agreement. Gibbs J. held (at 303-4) that the arrangements amounted to a declaration of trust to which s.34(1)(b) applied and his Honour appeared to accept that s.34(1)(b) was not overtaken by the provisions of s.34(1)(a) of the Act. Stephen J. (at 318-19) considered that s.34(1)(a) and (b) both applied to a declaration of trust.

The decision in Adamson v. Hayes has been the cause of much debate as to its consequences: see D. Everett, `Reconciliation of the Statutory Requirements for Writing in Land Transactions' (1987) 17 UWAL Rev. 301 at 311-12.

In Abjornson v. Urban Newapapers Pty. Ltd. [1989] WAR 191 at 198-9, Kennedy J. reviewed the state of the law before the introduction of s.34 of the Property Law Act 1969 (WA):

`Section 34 has its origin in ss. 3, 7, 8 and 9 of the Statute of Frauds. Section 3 is now to be found in para (a) of s.34(1), ss. 7 and 8 in para. (b) and s.9 in para. (c). The different forms of expression to be found in sub-s. (1) may be traced to the different authorship of the various sections of the Statute of Frauds: see W. S. Holdsworth, History of English Law vol. 6, pp. 389 and following [1677 Imp].

...

`The Western Australian Act was modelled to a very large extent upon the Victorian property legislation. The provisions in the United Kingdom Law of Property Act and in its associated legislation could be divided into two distinct categories. The first made quite drastic changes in the law, whereas the second made only minor changes. The provisions falling into the first category were not adopted in Victoria, where the work of Sir Leo Cussen effectively determined the course which the great majority of Australian States would follows. This was on the simple ground expressed in the Preface to Vol. 1 of the Victorian Statutes, 1929, p.1xxx, that it was not desirable in Victoria. Most of the provisions falling into the second category were, however, adopted in Victoria and eventually found their way into the legislation of Western Australia.

`The significance of this is that the Property Law Act was, in large measure, a consolidating Act. Of course, this is not to suggest that the new Act simply reproduced earlier legislation: see Gibbs J. in Adamson v. Hayes (1973) 130 CLR 276 at 304, but it would be surprising if, in the absence of clear language, well established rules under the replaced legislation should be taken to have been brushed aside.'

The provisions of the Statute of Frauds were not construed as requiring a declaration of trust to be created in writing. As Lord Alvanley said in Forster v. Hale (1783) 3 Ves Jun 696 at 707: `It is not required by a statute that a trust should be created by a writing; and the words of the statute are very particular in the clause (s.7), respecting declarations of trust. It does not by any means require that all trusts shall be created only by writing; but that they shall be manifested and proved by writing; plainly meaning that there should be evidence in writing, proving there was such a trust. Therefore, unquestionably, it is not necessarily to be created by writing, but it must be evidenced by writing; and then the statute is complied with; and indeed the great danger of parol declarations, against which the statute was intended to guard, is entirely taken away. I admit it must be proved in toto, not only that there was a trust,but what it was.'

Similar provisions in the Law of Property Act 1925 (UK) have been long construed as excluding declarations of trusts of land from the operation of a provision such as s.34(1)(a): Ford and Lee, Principles of the Law of Trusts, para 606.

Authors of texts on trusts and equity have also contended that s.34(1)(a), or its equivalent, does not extend to the equitable interest in land created by a declaration of trust referred to in s.34(1)(b): Meagher, Gummow and Lehane, Equity Doctrines and Remedies 2nd ed, 1983, para. 706; Ford and Lee, para. 606; but of Jacobs, Law of Trusts in Australia, 5th ed, para. 705.

In my view, the proper construction of s.34(1)(a) and 34(1)(b) does not require a declaration of a trust in land to be treated as a special class of equitable interest only capable of being created in writing and further, to be manifested and proved by writing signed by the declarant. Section 34(1)(b) would be either an odd exception, or otiose, if s.34(1)(a) were to be construed as including the declarations of trust in respect of land specifically provided for in s.34(1)(b).

The applicant further submitted that s.34(1)(b) of the Property Law Act 1969 (WA) had not been satisfied in that there was no writing which sufficiently set out the terms of the trust and described a clear intention to create a trust: Smith v. Matthews (1861) 3 De GF & J 139 at 151; 45 ER 831 at 835; Morton v. Teward (1842) 2 Y & C Ch Cas 67 at 80; 63 ER 29 at 35.

The requirements of s.34(1)(b) may be satisfied by a combination of documents capable of being read together. Any informal writing may stand as evidence of the existence of a trust including correspondence from third parties, a telegram, an affidavit or an answer to interrogatories.

The date of creation of the writing is not material. It may come into existence at any time after the declaration of the trust."

The construction of s.34(1) of the Property Law Act 1969 (W.A.) expressed in that passage was adopted by Kearney J. as applicable to s.23C(1) in Hagan v. Waterhouse (1991) 34 N.S.W.L.R. 308 at 385-386, and was accepted by Meagher, Gummow and Lehane in Equity Doctrines and Remedies (3rd ed.), p.211. I adopt it. But there is not in the evidence in these proceedings a manifestation or proof of a declaration of a trust for the bankrupt's children by any writing signed by a person who is able to declare such a trust. Not only was the copy of the deed of settlement which was in evidence before this court unsigned by the bankrupt, but also the copy of the instrument of transfer of Kendall Street by Keith Connor Donaldson to her was signed by her solicitor because, according to that instrument, her "signature cannot be obtained without difficulty and delay". The required writing cannot be proved by connecting several documents of which one is signed by the bankrupt. However, equity regards as a fraud denial of the trust by a person taking an interest in land as trustee and permits the beneficiary of the trust to prove it by parol evidence and enforces the trust against the trustee and those claiming through the trustee. "The fraud which brings the principle into play arises as soon as the absolute character of the conveyance is set up for the purpose of defeating the beneficial interest, and that is the fraud to cover which the Statute of Frauds or the corresponding provisions of the Law of Property Act, 1925, cannot be called in aid in cases in which no written evidence of the real bargain is available". (Bannister v. Bannister [1948] 2 ALL E.R. 133 at 136.) The evidence which the documents executed by the bankrupt's solicitor afford justifies the finding that she took Kendall Street knowing it to be subject to the trust acknowledged on her behalf by her solicitor in the document entitled "Terms of Settlement". The terms of the documents, their tender together on the hearing of the petition and the orders granted by the Supreme Court of New South Wales with the consent of the parties compel the finding that the acknowledgment of trust was not a voluntary declaration of trust by the bankrupt as a person beneficially owner in fee simple of Kendall Street, but was a complementary part of a single transaction to vest the legal fee simple in the bankrupt and the beneficial fee simple in the children. (See Last v. Rosenfeld [1972] 2 N.S.W.L.R. 923 and compare Wratten v. Hunter [1978] 2 N.S.W.L.R. 367.)

On the trial of the two applications the appellants essayed proof that the consideration paid by the bankrupt for her undivided share in the fee simple of Redgum Avenue included the proceeds of the sale by her of land at 62 Water Street Caringbah, the consideration for her purchase of which was alleged by the appellants in include the proceeds of the sale by her of Kendall Street. The learned trial judge was unable on the evidence adduced to find that the proceeds of the sale of Kendall Street were in any relevant sense part of the consideration paid for the bankrupt's interest in Redgum Avenue. In my opinion the evidence on which the appellants relied could not support such a finding.

There remains the question whether, absent any such a finding, each of the children held a beneficial interest in the bankrupt's estate as a tenant in common of the fee simple in Redgum Avenue when the bankrupt became a bankrupt.

The learned trial judge observed : "In any event, the bankrupt has not acquired another residence. She had an interest in land and in one sense was the owner of that land but her husband had a similar interest". If for present purposes attention is confined to fee simple tenure, land so improved as to be capable of use as a place of habitation for more than one person and held as a tenant in common with another natural person may in my opinion fall within the meaning of the word "residence" in the Terms of Settlement, notwithstanding that the tenancy in common gives no right of exclusive possession. Nor in my opinion does the word "acquire" in that document require more than that there be conferred on the bankrupt such a proprietary interest as has incident to it a right to possession of land so improved as to be capable of use as a place of habitation for her. The proprietary interest may be that of a shareholder in a company or that of a tenant of land from week to week or at will or for a term or that of a freeholder. The phrase "or such other residence as she may later acquire" is in my opinion to be construed as requiring that at the time when the proprietary interest is acquired the bankrupt should form the intention to use the land as her residence. An alternative construction, that the intention required include that of using the land as one of her several residences should be rejected, in my opinion, upon a consideration of the economic circumstances and prospects of the bankrupt and of Mr. Donaldson at the time of their divorce, and by reference to the collocation of "this property" and "other residence" as alternatives. A further consequence of the alternative form is that whenever the bankrupt later acquired a residence the property subject to the trust (whether Kendall Street or another residence or any other form of property into which either residence had been converted) would cease to be subject to the trust as the trust of the latest residence arose.

Other circumstances obtaining at the time of the divorce, and what are said to be the strange possible consequences of adopting the construction advanced to this court by counsel for the appellants and in substance accepted by me, are said to justify a construction of the 24 concluding words of the Terms of Settlement which substantially expands their content. But the words, literally understood, yield in my opinion a tolerably clear meaning. They were employed by a lawyer in a legal document intended to inform a judge of a superior court of arrangements having serious legal consequences for the parties and for children, whose welfare the Matrimonial Causes Act 1959 evinces - and not only in s.71 - a clear intention that courts should seek to advance. The judge would expect a text in the Terms of Settlement which expressed the essential terms of the whole agreement between the parties on the topics with which those Terms dealt. And the draftsman of the Terms could be expected to know that. As to the strangeness of the possible consequences of adopting the construction I have suggested, experience of the bitterness and apparent irrationality of many divorcing spouses suggests that strangeness in the consequences of what they appear to have agreed is an unsafe justification for so construing the text of the agreement as to eliminate the possibility of such consequences.

For the foregoing reasons I conclude that when the bankrupt became a bankrupt her property did not include any beneficial interest in Redgum Avenue and that her undivided share in the fee simple estate in Redgum Avenue was held by her on trust for her children in equal shares. I would allow the appeal, set aside the orders made by the learned trial judge and substitute for them orders giving effect to that conclusion.

I certify that this and the 17 preceding pages are a true copy of the Reasons for Judgment of the Honourable Justice Jenkinson.

Associate

Dated: 7 September, 1995

IN THE FEDERAL COURT OF AUSTRALIA)

NEW SOUTH WALES DISTRICT REGISTRY) No. G908 of 1994

GENERAL DIVISION )

ON APPEAL FORM A JUDGE

OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: ELIO DI PIETRO

First Appellant

KIM BONNIE DONALDSON

Second Appellant

KEITH CONNOR DONALDSON

Third Appellant

AND: OFFICIAL TRUSTEE IN

BANKRUPTCY AS TRUSTEE OF

THE BANKRUPT ESTATE OF

PATRICIA WILLIAMS

Respondent

CORAM: JENKINSON, TAMBERLIN and SACKVILLE JJ.

PLACE: SYDNEY

DATED: 7 SEPTEMBER 1995

REASONS FOR JUDGMENT

TAMBERLIN J:

In this matter I agree with the reasons for judgment given by his Honour Sackville J.

I certify that this page is a true

copy of the reasons for judgment

of his Honour Justice Tamberlin.

Associate:

Date: 7 September 1995

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