Can real estate commissions owing to agents be protected as trust funds in an insolvency?
Prior to its insolvency, TheRedPin.Com Realty Inc. (“TRP Realty”) operated a real estate brokerage business registered under the Real Estate and Business Brokers Act. TRP Realty’s registration entitled it to effect trades in real estate and earn and be paid commissions. An important focus of its business was the new and future condominium market.
TRP Realty engaged real estate salespersons (the “Agents”) to perform the listing and selling activities that generated trades in real estate and TRP Realty’s entitlement to commissions. Under agreements with each of the Agents, TRP Realty was required to pay a specified portion of the commissions it earned and received to the Agents.
In June 2018, MNP Ltd. was appointed receiver of TRP Realty. The respondents in this appeal were secured creditors of TRP Realty. The issue on appeal was whether the commissions collected by the Receiver were trust funds for the Agents, or whether they formed part of the assets of TRP Realty available to its creditors. If the commissions were not required to be held in trust for the Agents, the Agents’ claims to their share of commissions would be as unsecured creditors in the insolvency, ranking behind those of secured creditors.
The motion judge rejected the claim that there was a trust. He concluded that the requirement for certainty of intention to create a trust had not been established. The commissions, while clearly a debt owing to the Agents, were not excluded from TRP Realty’s available assets subject to the secured creditors’ security.
The appellants attacked the motion judge’s conclusion that certainty of intent had not been established. The appellants argued that the motion judge erred when he placed weight on the fact that the agreements between TRP Realty and the Agents did not contain a provision that commissions are to be held in trust by TRP Realty for the benefit of the Agents. A formal agreement to hold funds in trust is not necessary for an implied trust to arise.
The Court of Appeal did not accept the appellants’ argument. It is one thing to say that a trust may arise without a formal agreement. It is quite another to say that where there is a formal agreement that does not provide for a trust, it must be ignored when considering whether an intention to create a trust existed.
The appellants also argued that the motion judge erred when he found that TRP Realty’s audited financial statements were a clear statement of its intention that the pending commissions are not held in trust, and that the Agents’ split of the commissions represented an unsecured debt owing to them. According to the appellants, the flaw in the motion judge’s approach was that he contrasted only two relevant categories of entries: Agent’s commissions, which were not indicated to be held in trust, and purchasers’ deposits, which were expressly noted as being held in trust. However, there was a third relevant category, namely, amounts that were to be paid by TRP Realty to Cooperating Brokerages, which the appellants say were unambiguously required to be held in trust by TRP Realty, but were not shown in the financial statements as amounts being held in trust. They argued that this fact undermined the motion judge’s inference that the financial statements were a reliable indicator of what were and were not intended to be trust funds.
The Court of Appeal did not accept this argument either. TRP Realty’s financial statements reflected certain amounts as held in trust in the “Restricted cash” category. It did not include Agents’ commissions in that category, and instead showed them as assets of TRP Realty in the “Cash and cash equivalents” category. The financial statements were represented by TRP Realty management to its auditors as accurate and not misleading. The auditors opined that the statements fairly presented TRP Realty’s financial position. They were approved by its Board of Directors. The motion judge properly treated the financial statements as supporting an inference inconsistent with the existence of a certainty of intention that the Agents’ commissions were to be held in trust.
The motion judge concluded that the ambiguous evidence in favour of the trust provided “relatively weak indicators of an inference of TRP Realty’s intention”. He concluded that the evidence in favour of the trust was outweighed by the absence of a mention of a trust requirement in the agreements with the Agents and the representations in TRP Realty’s financial statements, which were inconsistent with a trust. The Court of Appeal held that such weighing of evidence was entitled to deference.
The Court of Appeal dismissed the appeal.
Counsel: Jordan Goldblatt of Adair Goldblatt Bieber LLP for the appellant Agents, Jeffrey Klein of Klein & Schonblum Associates for certain underwriters at LLoyds, Harvey Chaiton of Chaitons LLP for Firepower Debt GP Inc., Aubrey Kauffman of Fasken Martineau DuMoulin LLP for Trilogy Growth Fund LP and Harry Fogul of Aird & Berlis LLP for the Receiver, MNP Ltd.