Cross Vesting Legislation and the Bankruptcy Act

It is not uncommon that after a Trustee in Bankruptcy has been appointed to an estate, that they become involved in litigation relating to real property either in the bankrupt estate or which might be available to the bankrupt estate. Practitioners need to be wary of the proper jurisdiction in which to litigate disputes relating to bankrupt estates.

For example, a frequent type of claim that is made is about the nature or extent of a bankrupt’s interest in jointly held real property. Frequently husbands, wifes, de facto partners and/or children of a bankrupt to claim that the bankrupt’s interest in a property is held on trust for them.

These types of claims are often brought in the Supreme Court, likely because of the equitable nature of the relief sought. However, it is important to remember that these types of claims effectively challenge the title of the Trustee in Bankruptcy. That title is derived from the Commonwealth Bankruptcy Act.

In Turner v Gorkowski, Justice Vickery refused, at first instance, to transfer a claim based on a common intention constructive trust to the Federal Court.  Justice Vickery decided that the claim was not a ‘special federal matter’ under the Jurisdiction of Courts (Cross Vesting) Act 1987 (Cth) (‘Cross Vesting Legislation‘) and could be heard in the Supreme Court of Victoria.

Section 6 of the Cross Vesting Legislation provides that a Supreme Court must transfer special federal matters to the Federal Court.

In his reasons, at paragraph 47, Justice Vickery observed:

“In the present case, although the outcome of the proceeding will affect the property of the Trustee in Bankruptcy, the proceeding does not owe its existence to the Bankruptcy Act in the relevant sense. The issue in question in this proceeding does not owe its existence to any Federal law or nor will the outcome depend upon Federal law for its enforcement. No provision of the Bankruptcy Act is relied upon by either the Plaintiff or the Defendant in the pleadings either to found the Plaintiff’s causes of action or to provide a defence to the Defendant, other than paragraph [16] of the defence which pleads that this Court does not have jurisdiction to hear this dispute, founded upon s 27 of the Bankruptcy Act.”

The Trustee in Bankruptcy appealed that decision.

Noting that there was no direct authority on point, the Court of Appeal decided that the claim was a ‘special federal matter’ and warranted a transfer to the Federal Court. It supported that conclusion by the fact that in the proceedings the Trustee in Bankruptcy would have to rely on the sequestration made and the title derived from it. The Court of Appeal pointed out that the Trustee in Bankruptcy’s title was central to the proceedings and that the bankruptcy was not merely “lurking in the background“.

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