• Post category:Court Cases

Firepower Debt GP Inc. v. TheRedPin, Inc.

Can real estate commissions owing to agents be protected as trust funds in an insolvency?

The Debtors operated a technology assisted real estate brokerage, which provided an online platform to consumers that included listings for new and pre-construction projects. They were indebted to the Applicants for over $6.4 million. The Receiver of the Debtors sought direction from the Court about whether certain third party commissions—totalling $3.7 million—collected by the Receiver are to be held in trust for the benefit of the Debtors’ licensed salespersons (the “Agents”). If the commissions were not subject to a trust, these funds would form part of the Debtors’ assets subject to the Applicants’ security, leaving the Agents with unsecured claims against the Debtors.

The parties agreed that there was no statutory or regulatory requirement to hold the agents’ commissions in trust, and that there was no definitive document that unambiguously established a trust in favour of the agents. A valid trust exists where three certainties are satisfied: certainty of intent, certainty of subject matter, and certainty of object. The issue in this case was the certainty of intent. The parties disagreed about whether the Debtors intended to establish a trust over the commissions on behalf of the agents. The agents argued that the existence of a trust must be implied from surrounding circumstances, transaction documents and the Debtors’ conduct.

Certainty of intent requires that it be clear that the donor or settlor intended for the property in question to be held for the benefit of another. The intent may be express or implied. Where a trust is to be implied, effect must be given to inferences as to the intent of the parties that a reasonable person would draw from the words or conduct of the parties.

The Debtors banked with Comerica Bank, through the facilities of the Royal Bank of Canada (“RBC“). The Debtors maintained three bank accounts:
  • a real estate trust account, which is where the Debtors deposited buyer deposits, as required by s. 27(1) of the Real Estate and Business Brokers Act;
  • a commission account, which is where all commissions earned on transactions were ultimately deposited and from which commissions belonging to the Debtors and the Agents were paid; and
  • an operating account, from which the Debtors paid payroll and overhead expenses and into which they transferred commissions that they earned on transactions from the commission account. 

The contracts entered into by the Agents and the Debtors in respect of each Agent’s provision of real estate services to the Debtors contained an “entire agreement” clause, which provided that the contracts superseded all prior agreements between the parties. There was no provision that the commissions were to be held in trust by the Debtors for the benefit of the Agents, nor any other language that could reasonably be construed as having this meaning or intent.

The Agents argued that the commissions were held in trust because: 
  • the commissions were placed in a separate account (the commission account), which earned no interest and incurred no bank charges or fees;
  • bank statements for this account contained the words “commission trust” in the address line; and
  • some of the standard form transaction documents concerning the Debtor-Agent relationship contained references to commissions being in a trust (even though, as mentioned above, the contracts did not actually provide for any trust).
The Debtors swore that they set up the commission account on the basis that the commissions that they were obliged to pay out to third parties did not belong to them and that they could not use these funds in the ordinary course of business. From RBC’s perspective, the commission account was a standard operating account, not a trust account. In order to open and operate a trust account, RBC typically requires a Trust “Know Your Client” form and a Trust Agreement, neither of which were provided to or held by RBC in relation to the commission account.
The Agents relied on Eu v Rosedale Realty Corp. (Trustee of), where the court held that it made no business sense to place commissions into a commission trust account if such funds were not intended to be held in trust, and found an implied trust. The Court was not persuaded and distinguished the present case from Eu on three grounds: 
  • while the contract between the Agents and the Debtors was clear that the relevant split of commissions earned were owed to the Agents once the deal closed, it was conspicuously silent on how those funds would be held by the Debtors before becoming due and payable;
  • there was no evidence that, as a matter of substance, the commission account was, in fact, a trust account; and
  • financial documents unambiguously classify the commissions owing to the Debtors and the Agents as gross revenues of the Debtors, and the Agents’ split of those commissions as an unsecured debt owed to the Agents.
The Court held that the best evidence of the Debtors’ intention was to be found in their contracts with the Agents and in the audited financial statements. The contracts did not require the Debtors to hold commissions in trust for the Agents. The audited financial statements represented to the world that the commissions at issue were not held in trust and constituted an unsecured debt owing to the Agents. The Court attributed gravity and formality to this evidence and contrasted it with the ambiguous inferences relied on by the Agents in their arguments.

Further, the Court found that the operation of the commission account made “commercial sense” even if it was not a trust account. It found ample accounting and cash tracking and management reasons to direct the commissions into a separate account.
 
Given the foregoing, the Court concluded that the commissions, while clearly a debt owing to the Agents, were not held in trust, and were, therefore, not excluded from the Debtors’ available assets subject to the Applicants’ security.

CounselHarry Fogul of Aird & Berlis LLP for the Receiver, MNP Ltd., Harvey Chaiton of Chaitons LLP for Firepower Debt GP Inc., Aubrey Kauffman of Fasken Martineau DuMoulin LLP for Trilogy Growth Fund LP, Jordan Goldblatt and Iris Graham of Adair Goldblatt Bieber LLP for the Agents and Jeffrey Klein of Klein & Schonblum Associates for certain underwriters at LLoyds.