Khalif & Khalif and Anor (2020) FamCA 39

The case of Khalif & Khalif and Anor [2020] FamCA 39 is an interesting case.

The wife sought a declaration that the husband’s brother held the former matrimonial home by way of constructive trust for the husband. The court determined that the husband’s beneficial interest is 61.5% of the value of the property on an unencumbered basis.

The case reminds us that establishing the property pool on some occasions will not be simple and is of assistance in reviewing these principles.

The husband is an undischarged bankrupt in this case and the interest in the property would then be added to the husband’s bankrupt estate and the husband’s trustee would then participate in the wife’s application for a property settlement order.

The court had set up a scheme whereby the parties were to provide a document called “Points of Claim”.

Watts J reminded the parties at paragraph 17:

“Whilst the points of claim only assert a constructive trust based on a common intention or understanding, a constructive trust can also arise out of the enquiry as to what appropriate equitable remedy is available on the facts of the case, irrespective of intention.”

Paragraphs 21 to 33 deal with the law in relation to constructive trusts and lesser equitable remedies.

At paragraph 22, the court referred to Hohol & Hohol [1980] FLC 90-824 at [225], O’Brien J described the essential elements of common intention constructive trusts as follows:

“First that the parties formed a common intention as to the ownership of the beneficial interest.  This will usually be formed at the time of the transaction and may be inferred as a matter of act from the words “˜or conduct of the parties to’. Secondly, that the party claiming a beneficial interest must show that he, or she, has acted to his, or her, detriment. Thirdly, that it would be a fraud on the claimant for the other party to assert the claimant had no beneficial interest in the property”.

The wife also relied upon Muschinski v Dodds (1985) 160 CLR 583 and Baumgartner v Baumgartner (1987) 164 CLR 137 or [1987] HCA 59.

The court accepted Dean J in Muschinski v Dodds at 613-616, considering a constructive trust as primarily remedial.

At 614:

“The constructive trust can properly be described as a remedial institution which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle.”

Further, at 620, Dean J reminds us that a constructive trust can be imposed in the absence of common intention.

“The content of the principle is that, in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do.”

This was endorsed in Baumgartner at 147 by Mason CJ, Wilson and Dean JJ:

“… the foundation for the imposition of a constructive trust in situations of the kind mentioned is that a refusal to recognize the existence of the equitable interest amounts to unconscionable conduct and that the trust is imposed as a remedy to circumvent that unconscionable conduct.”

Dean J again, at 615, Muschinski v Dodds:

“The fact that the constructive trust remains predominantly remedial does not, however, mean that it represents a medium for the indulgence of idiosyncratic notions of fairness and justice. As an equitable remedy, it is available only when warranted by established equitable principles or by the legitimate processes of legal reasoning, by analogy, induction and deduction, from the starting point of a proper understanding of the conceptual foundation of such principles.”

Watts J, the trial judge, then went on to consider the lesser equitable remedies. He considered the remedy of equitable proprietary estoppel which he said:

“…can arise as a result of a finding that a party had an “expectation interest” (where the object of the remedy is to put the party in as good as position as they would have been had the other party performed the promise) or a “reliance interest” (where a party has acted to their detriment relying upon the promise).”

The trial judge referred to Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566 at [42] said:

“An equitable remedy which falls short of the imposition of a trust may assist in avoiding a result whereby the plaintiff gains a beneficial proprietary interest which gives an unfair priority over other equally deserving creditors of the defendant.”

Dean J again, in Commonwealth v Verwayen (1990) 170 CLR 394 at [443] said:

“Prima facie, the operation of an estoppel by conduct is to preclude departure from the assumed state of affairs. It is only where relief framed on the basis of that assumed state of affairs would be inequitably harsh, that some lesser form of relief should be awarded.”

That passage was referred to with approval by the High Court in Giumelli v Giumelli (1999) 196 CLR 101 at [42]. In that case, at [10], Gleeson CJ, McHugh, Gummow and Callinan JJ said:

“Before a constructive trust is imposed, the court should first decide whether, having regard to the issues in the litigation, there is an appropriate equitable remedy which falls short of the imposition of a trust.”

The High Court again, in Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [47] said:

“…the term “constructive trust” may be used not with respect to the creation or recognition of a proprietary interest but to identify the imposition of a personal liability to account upon a defaulting fiduciary.”

The court is wary of granting equitable relief which goes beyond the necessities of the case as pointed out at [129] in John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1.

The court begins its discussion of the issues in the context of the legal principles at paragraph 108.

A property described as the L Street property was purchased in the name of the Second Respondent, Mr B Khalif, as the former matrimonial home for the husband and the wife in late 2002.

The husband had said words to the wife to this effect:

“Because we can’t get the loan in our name, this is [the 2nd respondent]’s way of paying me back for all of my help I gave him prior to him purchasing [one of his businesses]. During that time I was driving taxis and giving him the money I earnt.”

The wife deposed to how the C Street property was acquired. The husband denied her version. The Second Respondent’s version is similar to the husband’s.  The wife relied upon the evidence of Mr Kay who was the real estate agent who listed the C Street property for sale and who acted on the sale of the L Street property.

The wife gave evidence of the words she heard the husband say to his brother on the evening of the day she and the husband had first seen the C Street property.  The trial judge set it out in full:

“I am looking at buying a property at C Street, we need to crunch the numbers, I can more than afford the house, but I’m not declaring how much the business or I am making. Based on the amount of money that I am declaring I would never manage to obtain a loan. I am also concerned of any liability to the ATO. Can we put the house in your name [the 2nd respondent]? That way my house would be protected, I can’t have a $1.3 million home registered in my name that my wife and I have just decided to purchase.”

L Street property was eventually sold. The wife said they sold it in 2009 because they couldn’t pay for both it and the C Street property.

The Second Respondent received the net proceeds of sale of the L Street property.

The Second Respondent secured a loan arrangement with V Bank for the acquisition of the C Street property.

At paragraph 156, the trial judge said:

“As referred to above, it is unclear how inter-entity movements of monies between J Pty Ltd and N Pty Ltd have been treated on the books of those companies. The 2nd respondent feigned to assert that he was not aware of the ordinary obligations of directors under company laws to properly account for monies received. I do not accept his assertion that he had a lack of understanding of these obligations. As mentioned above, the 2nd respondent is a highly successful entrepreneur. He holds interests in businesses, which according to a credit risk assessment obtained in respect of the loan facility on the C Street property in May 2009, have a total value (which he shares with various partners) of $15,381,000.”

At paragraph 162:

“Notwithstanding the fact that the 2nd respondent asserted that his brother owed him a large amount of money, the 2nd respondent was not a creditor in his brother’s bankruptcy.”

At paragraph 178:

“After the husband and wife moved into the C Street property they treated it as their own home.”

When work was done on the property, the labourer “took all instructions from the husband and wife”.

The Second Respondent, at [183]:

“…asserted that he considered the C Street property to be his residence. That assertion sits uneasily with representations the 2nd respondent made to V Bank upon which he otherwise sought to rely.”

The Second Respondent had been tested about what residential address he’d indicated on documents with the Immigration Department associated with his international travel.  He confirmed that every time he’d entered the country prior to February 2018, he’d recorded his principal place of residence as being his mother’s and father’s address at BB Street, Suburb CC and said this was because it was his primary place of business. He then “feigned to not understand the question as to why on Immigration Department records he changed his residential address to the C Street property in February 2018″.

The wife called a series of tradesmen to give evidence about the conversations they’d had with the husband and the wife in relation to work done on the C Street property.

The judges’ conclusions in relation to the existence of constructive trusts start at paragraph 233.

At [235], the judge said:

“Based upon the findings that I have made, I conclude that:

a. Arrangements were entered into between the 2nd respondent and the husband with the intent that the husband would become the beneficial owner of the C Street property and that it would be the matrimonial home in which the husband, wife and their children would reside;

b. The husband was to pay monies to the 2nd respondent over time…;

c. Because the respondents have not been frank about the details of their arrangement…”

At [236], the judge said:

“In those circumstances, a constructive trust can arise absent the 2nd respondent’s intention.”

He then went on the establish a percentage of the C Street property in respect of which a constructive trust could be imposed.

The orders included the requirement the husband forthwith give his Trustee in Bankruptcy notice of these orders.

This was a long decision and I have only extracted matters relevant to the discussion of the declaration of the constructive trust.

It reminds us again that it is difficult to rewrite history.