Equitable claim against a trustee in bankruptcy transferred to the Federal Court

In the light of a recent Court of Appeal decision, great care should be exercised in choosing the court in which to issue proceedings claiming an equitable interest in the property of a bankrupt.

In Turner v Gorkowski [2014] VSCA 248, the Victorian Court of Appeal transferred to the Federal Court a Supreme Court proceeding in which the mother of a bankrupt claimed an interest in property held by her son’s trustee in bankruptcy.  Mrs Gorkowski challenged the trustee’s title on the basis of a common intention constructive trust.

The trustee in bankruptcy appealed against the first instance decision of Vickery J in Gorkowski v Turner [2014] VSC 200, arguing that the proceeding was a ‘special federal matter’ under s. 6 of the Jurisdiction of Courts (Cross Vesting Act) 1987 (Cth) which could not be heard by the Supreme Court unless the court was satisfied there were special reasons for doing so, within s. 6(3) of that Act. 

Noting its surprise that there was no authority directly on point, the Court concluded that although Mrs Gorkowski’s claim, based on equitable principles, was not of a kind that would make it a special federal matter, the fact that the trustee needed to rely on his title conferred by the Bankruptcy Act, and Mrs Gorkowski needed to overcome that title to succeed in her equitable claim, led to the conclusion that the proceeding was a ‘special federal matter’ (at [41]):

Although the matter is not without difficulty, we consider that his Honour should have held that the proceeding was a ‘special federal matter.’ We reach that conclusion because it was necessary for the trustee in bankruptcy to rely on the sequestration order made under the Bankruptcy Act and the title conferred on him as a consequence of that order to resist Mrs Gorkowski’s claim. Although his title was not ‘a defence’ to Mrs Gorkowski’s claim, s 58 of the Bankruptcy Act, which vested the property of the bankrupt in him, was the basis on which the proceedings had to be brought against him. The onus lay on Mrs Gorkowski to establish her interest in the property, which the trustee claimed was vested in him. This was not a case where the bankruptcy was simply ‘lurking in the background’ to the proceedings.

There is a real likelihood that any equitable claim against a trustee in bankruptcy (including the commonly occurring resulting trust claims on behalf of spouses of bankrupts) may be outside the jurisdiction of State courts.  This fairly short decision will repay close reading before you issue proceedings of that kind.

 

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