Case: Official Trustee in Bankruptcy v Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234
Outcome: followed
claiming that the alleged relinquishment and forfeiture of claims by the respondent did not constitute valid consideration the trustee relied in particular on the decision of the Full Court in Official Trustee in Bankruptcy v Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 , in which case their Honours had in turn considered the earlier Full Court decision in Official Trustee in Bankruptcy v Mateo [2003] FCAFC 26 ; (2003) 127 FCR 217. The respondent claimed that her forbearance to sue and relinquishment of claims as pleaded in both the Amended Defence and the Cross-Claim constituted consideration in the circumstances of this case, and that accordingly those pleadings were not untenable as claimed by the trustee. Submissions of the trustee In summary Mr McQuade for the trustee submitted that: The claims in relation to the properties listed in para 10j of the Amended Defence, in respect of which the respondent alleges relinquishment and forfeiture of her claims and in respect of which the respondent also claims forfeiture of her claims to spousal maintenance, are inconsistent with the recitals and terms of the Financial Agreement (in particular Recital N and cl 6) and are therefore untenable. Recital K to the Financial Agreement stated that the agreement was entered into in substitution for any rights for spousal maintenance and property under Pt VIII of the Family Law Act . Whitlam and Jacobson JJ in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at [97] - [102] rejected the proposition that valuation of consideration in the form of a forbearance to sue could be undertaken by assessing the non-financial and financial contributions to the marriage as if an application had been made under s 79 of the Family Law Act . The respondent's pleaded case is underpinned by the allegation of assessment of the value of the consideration, namely the relinquishment of causes of action on the basis of the factors set out in paras 10a to 10d and 10f to 10(ia) of the Amended Defence and Cross-Claim. For the reasons set out in Mateo [2003] FCAFC 26 ; (2003) 127 FCR 217 and Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 that is untenable. Submissions of the respondent In summary, Mr Griffin QC for the respondent submitted that: The decision in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 does not support the proposition that forbearance to sue in matrimonial proceedings is of no commercial value and therefore not consideration within the meaning of s 120 of the Bankruptcy Act . Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 is distinguishable because in that case the parties made an informal agreement which did not prevent the wife from applying for relief under s 79 of the Family Law Act , whereas in this case: the parties signed a formal agreement recognised under the Family Law Act ; the respondent expressly relinquished and forfeited any claims and entitlements to property in Mr Jensen's name as well as an entitlement to spousal maintenance; the respondent has, by entering into the financial agreement and by virtue of s 71A of the Family Law Act , lost the right to apply for relief under s 72 and s 79 of the Family Law Act in relation to spousal maintenance and alteration of property interests. Insofar as the decision in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 related to the meaning of the phrase "consideration of less than market value" it was obiter because: the primary judge in Lopatinsky found that a forbearance to sue under s 79 of the Family Law Act was consideration within the meaning of s 120 of the Bankruptcy Act ; the Full Court found that there was no agreement to compromise Mrs Lopatinsky's claims and if there had been an implied forbearance to sue it was worthless because there were no consent orders entered under s 79 of the Family Law Act nor was the agreement approved under s 87 of the Family Law Act ; the trustee in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 accepted that an implied forbearance to sue can constitute good consideration. The appeal in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 was allowed because the agreement of Mrs Lopatinsky not to sue was found to be unenforceable and therefore was not valid consideration. The outcome would have been different had the agreement been binding and enforceable. In any event the whole issue of consideration and forbearance to sue are matters of judicial debate, and the pleadings ought not be struck out on an interlocutory application. Forbearance to sue and bankruptcy The concepts of forbearance to sue and consideration sit uneasily with circumstances where property interests are altered in a matrimonial context and one of the spouses becomes bankrupt. This issue was considered in detail by the Full Court in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234. It is useful at this point to turn to that decision. Official Trustee in Bankruptcy v Lopatinsky A property was registered in the name of Mr and Mrs Lopatinsky as joint tenants. The property was sold. Approximately eighteen months after the settlement of the sale Mr Lopatinsky became bankrupt. It appears that the Lopatinskys had agreed informally that, on settlement of the sale of the property, Mrs Lopatinsky would receive $81,387 more than she would have been paid out of the net proceeds if those proceeds had been equally divided between them. Mr Lopatinksy's trustee in bankruptcy claimed that Mrs Lopatinsky gave no consideration for the transfer to her of the $81,387 or alternatively that she gave consideration which was less than the market value of the sum transferred to her, and that accordingly the payment of that sum was void pursuant to s 120 of the Bankruptcy Act . So far as relevant the trial judge found that: Mrs Lopatinsky gave consideration for the transfer of the $81,387 in the form of a forbearance to sue under s 79 of the Family Law Act for an adjustment of property rights to reflect her contribution to the acquisition of the property and to the welfare of the marriage; Mr Lopatinsky had agreed to this arrangement: because he was settling, in a general sense, with his wife following the failure of their marriage in relation to all the matrimonial property. It is to be recalled that the bankrupt told the applicant she could take whatever money was necessary to purchase something for her and the children to live in and that he believed she would be fair. I also infer from these remarks of the bankrupt, having regard to he context in which they were made, that his offer was in recognition of the applicant's contribution to the family and the property they jointly owned as well as her future needs in raising their children, and an acceptance that a fair distribution of that property would result in her receiving a disproportionately large sum of the proceedings. ( Official Trustee in Bankruptcy v Lopatinsky (2002) 29 Fam LR 274 at 287 [43]) Accordingly the trial judge ordered that the relevant s 139ZQ notice be set aside. Before the Full Court the trustee contended that: The Full Court allowed the appeal against the decision of the primary judge. The majority judgment in the case was delivered by Whitlam and Jacobson JJ. Their Honours considered the earlier decision of the Full Court in Mateo [2003] FCAFC 26 ; (2003) 127 FCR 217 upon which the trial judge in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 relied, and in summary observed that: The trial judge in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 had found that there was implied in the settlement a forbearance on the part of Mrs Lopatinsky to make a claim against Mr Lopatinsky under the Family Law Act , and that an implied forbearance to sue constitutes good consideration. ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 245-246) Mateo [2003] FCAFC 26 ; (2003) 127 FCR 217 was not a case involving express or implied forbearance to sue rather consent orders had been made and entered pursuant to s 79 of the Family Law Act which provided for , inter alia, the transfer of the matrimonial home. ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 244) All the members of the Full Court in Mateo [2003] FCAFC 26 ; (2003) 127 FCR 217 were of the view that where a consent order is made under s 79 of the Family Law Act the transfer of property takes place pursuant to the order of the Court. Accordingly, as a matter of construction of s 121 , there can be no "transfer of property by a person who later becomes a bankrupt". ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 246) The purpose of s 120 of the Bankruptcy Act is to prevent properties, including the matrimonial home, from being transferred to related parties to the disadvantage of the bankrupt's creditors. Disadvantage will occur if the property is transferred for no consideration or for less than market value. ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 249) There is nothing in s 120(5) to suggest that Parliament intended that the term "consideration" in s 120(1)(b) is to be read in anything other than its legal sense. It would be inconsistent with the observations of Wilcox and Branson JJ in Mateo [2003] FCAFC 26 ; (2003) 127 FCR 217 to proceed upon the basis that "consideration" could be something less than the ordinary legal and commercial understanding of that term. ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 249) In applying s 120(1)(b) the first step is to identify the consideration which was actually given. If consideration was given, the second step is to determine whether its value was less than the market value of the property transferred. ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 249) As Wilcox J observed in Mateo [2003] FCAFC 26 ; (2003) 127 FCR 217 at [66] , the issue of the value of contributions is to be determined at a time when the marriage has come to an end and any contributions to the marriage were made in the past. Past consideration is, generally speaking, no consideration. The only significant exception to that rule arises where there is an earlier promise to pay (express or implied), an exception which is difficult to apply to matrimonial contributions unless for example there is a valid prenuptial agreement to that effect. ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 247) The primary judge acknowledged that there was no express agreement between the Lopatinskys that Mrs Lopatinsky would not maintain proceedings for an adjustment of her property rights under the Family Law Act. ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 250) The trustee accepted that an implied forbearance to sue can constitute good consideration. While the evidence of such a forbearance was slim, it was in any event unnecessary to decide whether the primary judge was correct in drawing the inference that Mrs Lopatinsky had so acted because the approach of the primary judge as to what constituted consideration and the value of it was contrary to the decision in Mateo [2003] FCAFC 26 ; (2003) 127 FCR 217. Their Honours continued: [Findings of the primary judge] indicate that his Honour endeavoured to value the "consideration" provided by Mrs Lopatinsky upon the basis of her financial and non-financial contributions to the marriage in accordance with the criteria referred to in s 79 of the Family Law Act . The short answer to this appeal is therefore that the primary judge's view of the value of the consideration given by Mrs Lopatinsky depended upon factors which cannot provide a basis for assessing the value of the consideration which was given. ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 250) In any event, actual forbearance to sue does not constitute consideration unless it is evidence of an implied promise to forbear or unless it is given at the express or implied request of the other party. There was no evidence to support a finding that Mrs Lopatinsky promised to give up a claim under s 79 of the Family Law Act , in that there were no proceedings on foot in the Family Court and no mention by either party of the possibility of such a claim. ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 250) Further, even if the informal agreement between Mr and Mrs Lopatinsky was supported by consideration in the form of an implied promise not to sue, it would not amount to a legally binding agreement for a compromise of Mrs Lopatinsky's entitlement to make a claim for a further property adjustment. ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 251) Findings 2. Second, even had such inconsistencies not existed between the terms of the financial agreement and the terms of para 10 and para 24 of the Amended Defence and Cross-Claim, I consider that the reliance by the respondent on her financial and non-financial contributions to the marriage as consideration for the transfer of the relevant properties is untenable. This is because the consideration pleaded by the respondent in para 10 and para 24 of the Amended Defence and Cross-Claim "depended on factors which cannot provide a basis for assessing the value of the consideration which was given" (Whitlam and Jacobson JJ in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 250). Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 is clear authority that previous financial and non-financial contributions to a marriage do not constitute "consideration" (within the meaning of s 120 or s 121 of the Bankruptcy Act ) for the transfer of property from a person who subsequently becomes bankrupt to his or her spouse. Specifically, paras 10a, 10b, 10c, 10d, 10f, 10g, 10h, 10i, 24a, 24b, 24c, 24d, 24g, 24h, 24i and 24j of the Amended Defence and Cross-Claim plead facts relevant to the circumstances of the marriage of the respondent and Mr Jensen and the financial and non-financial contributions they have each made. In my view: In light of these findings, I do not accept the respondent's submission that the facts pleaded in these paragraphs are directly relevant to support the respondent's allegation that the respondent provided consideration to Mr Jensen for the transfer, being either in the form of the consideration for the transfer of the relevant properties, or the consideration being in the form of the forbearance to sue for spousal maintenance and the respondent's abandonment of her interest in various specified assets. Accordingly these paragraphs in the Amended Defence and Cross-Claim are untenable. 3. Third, I do not accept the submission of the respondent that the decision in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 with respect to the meaning of the phrase "consideration of less value than market value" was obiter. The Full Court in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 accepted the general proposition that forbearance to sue could constitute good consideration, but found that the approach of the primary judge in endeavouring to "value" the alleged consideration provided by Mrs Lopatinsky upon the basis of Mrs Lopatinsky's financial and non-financial contributions to the marriage in accordance with the criteria referred to in the Family Law Act was incorrect (at [101]-[102]). In light of these clear findings I do not accept the submission by the respondent that Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 was distinguishable because no consent orders pursuant to s 79 of the Family Law Act had been entered in those proceedings. 4. Fourth, I do not accept the submission of the respondent that the decision in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 is distinguishable because in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 there was only an informal agreement whereby the wife had relinquished her entitlement to sue, whereas in this case the respondent and Mr Jensen had executed a financial agreement pursuant to the Family Law Act in which the respondent had expressly relinquished and forfeited any claims and entitlements to property in Mr Jensen's name as well as an entitlement to spousal maintenance. I take this view because: (a) Although one of the reasons for the decision of the Full Court in Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 was that there was no evidence to support a finding that Mrs Lopatinsky had promised to give up a claim under s 79 of the Family Law Act , in fact the primary reason described by Whitlam and Jacobson JJ as "the short answer to this appeal" (at [101]-[102]) was the incorrect view the primary judge had taken of the alleged consideration provided in the circumstances of the case. (b) It is not in dispute that a binding financial agreement which is valid under the relevant provisions of Pt VIIIA of the Family Law Act has the effect of ousting the jurisdiction of the court in respect of certain matters covered by the agreement, including financial matters or financial resources to which a binding financial agreement applies: Black &amp; Black [2008] FamCAFC 7 at [29] . However the simple fact of acknowledgment by one spouse in a financial agreement of the provision of consideration for the transfer of property does not mean that the alleged consideration is adequate for the purposes of s 120 and s 121 of the Bankruptcy Act if a transaction is subsequently challenged by a trustee in bankruptcy. As I noted earlier in this judgment, "consideration" in the context of the bankruptcy legislation has its ordinary legal and commercial meaning ( Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 at 249). The fact that the movement of consideration is acknowledged in a financial agreement does not give the consideration validity it would not otherwise have. (c) Further, and in any event, as I have already found in Combis, Trustee of the Property of Peter Jensen (Bankrupt) v Jensen [2009] FCA 778 , the transfer of property pursuant to a financial agreement does not equate to a transfer of property pursuant to Court order, as was the case in Mateo [2003] FCAFC 26 ; (2003) 127 FCR 217. The current legislative framework applicable to financial agreements contemplates that a trustee in bankruptcy may make application pursuant to both s 120 and s 121 of the Bankruptcy Act to set aside a transfer pursuant to a financial agreement executed by the parties. Similarly, it is open to the Court to review the nature of the consideration stated in a financial agreement. The Court is not in any way prevented from doing so by the fact that the financial agreement is enforceable as between the parties under the Family Law Act. (b) Alleged payment by the respondent and her mother for the Carrara property, resulting in the transfer of that property to the respondent by Mr Jensen was merely a transfer of the bare legal title