Depositing funds in escrow does not beat insolvency

Re Earth Boring Co. Limited et al., 2026 ONSC 1242
Does depositing disputed funds with a lawyer create a trust that removes those funds from a debtor’s estate in insolvency proceedings?

Summary: The Ontario Court has concluded that $337,390.62 in adjudication proceeds held in escrow pending a judicial review application remained property of Earth Boring, a company under insolvency protection, when it filed its notice of intention under the Bankruptcy and Insolvency Act. The Court rejected the contractor’s argument that the funds were impressed with a trust or otherwise fell outside the debtor’s estate. The Court found no evidence that the escrow arrangement created a trust and concluded that merely depositing funds with counsel does not remove them from the debtor’s property for purposes of section 67 of the BIA. Because the Divisional Court’s dismissal of Earth Boring’s leave application occurred after the NOI filing and the adjudication order had not been fully executed beforehand, the creditor held only an unexecuted judgment and could not obtain priority over other unsecured creditors. The Court therefore directed that the escrowed funds be released to the restructured debtor in accordance with the reverse vesting order implemented in the Companies’ Creditors Arrangement Act proceedings.

On October 25, 2022, Earth Boring retained Tulloch to provide surveying services in connection with the South Georgetown Servicing Watermain project. A payment dispute arose concerning Tulloch’s invoices for the Project totaling just over $350,000. On May 31, 2024, Tulloch commenced an Adjudication under Part II.1 of the Construction Act. On August 2, 2024, Adjudicator Reynolds released her decision ordering Earth Boring to pay Tulloch $337,390.62 (the “Escrow Funds”).

Earth Boring sought leave to judicially review the Adjudication Order, and advised Tulloch of Earth Boring’s intention to commence proceedings against Tulloch relative to alleged deficiencies. In the circumstances, the parties negotiated and entered into the Tolling Agreement, which tolled any potential claims for one year, and the Escrow Agreement, which provided for the release of the Escrow Funds if there was a written agreement between Earth Boring and Tulloch or if there was an Order from the Divisional Court in respect of Earth Boring’s judicial review application.

On April 15, 2025, Earth Boring commenced the NOI Proceeding under the Bankruptcy and Insolvency Act, which was converted into a Companies’ Creditors Arrangement Act proceeding two days later. On April 17, 2025, the Divisional Court also released an endorsement dismissing Earth Boring’s application for leave for judicial review of the Adjudication Order. Subsequently, the shares of Earth Boring and certain other companies were sold pursuant to a Subscription Agreement and a Reverse Vesting Order granted in the CCAA proceedings on September 15, 2025.

Tulloch’s claims against Earth Boring were “Excluded Liabilities” as defined in the Subscription Agreement. Under paragraph 6 of the RVO, Excluded Liabilities were transferred to ResidualCo, which was subsequently adjudged bankrupt. On the other hand, also pursuant to the RVO, the Escrow Funds were a Retained Asset under the Subscription Agreement and remained with Earth Boring in its newly constituted form as Newco. At issue was whether the Escrow Funds were the property of Earth Boring when it filed its NOI. Tulloch argued that if the Escrow Funds were not the property of Earth Boring at the time the NOI was filed, they should be released to Tulloch as Tulloch’s property under the triggering terms of the Escrow Agreement. Earth Boring argued that if a creditor has not completed its enforcement prior to the debtor obtaining creditor protection, then enforcement of the debt must cease, and the funds in question remain part of the debtor’s estate.

Tulloch argued: first, that the Court should find (or infer) a trust such that once the Escrow Funds were paid in trust, they could no longer be considered property of Earth Boring in the absolute sense; and second, regardless of whether the Escrow Funds were impressed with a trust, Earth Boring’s interest in the Escrow Funds was no more than a contingent interest, which interest was dependent on the outcome of its Motion for Leave.

With respect to the first argument, there was uncontroverted evidence before the Court from Earth Boring that it never intended for the Escrow Funds to constitute a trust. An argument that the Escrow Agreement constituted or established a trust, in any event, fell short at the first hurdle: the question of certainty of intention. The Escrow Agreement did not mention the idea of a trust. The Court accepted that the Escrow Agreement was struck as an alternative to Earth Boring paying the adjudication amount into court, which may have been required for Earth Boring to obtain a stay of the Adjudication Order.

With respect to the second argument, section 70 of the BIA provides that an unsecured creditor is only entitled to the judgment amount if the judgment has been fully executed by the time of the bankruptcy. An assignment into bankruptcy takes precedence over any unexecuted judgment or order. Section 67 of the BIA provides that “a Bankrupt’s estate does not include any property that the bankrupt holds in trust for another.” The intent of s. 67 is relatively apparent when the bankrupt is a traditional trustee holding, for example, a real estate deposit from a purchaser or a broker holding stocks for her client. It becomes less clear when the property is paid into court or a lawyer’s trust fund pending the resolution of a dispute or litigation.

Does the simple fact of deposit with a lawyer automatically mean that there is a “trust” for the purposes of s. 67 of the BIA? The authorities ruling that ownership of posted money must be determined by resolution of the litigation on the basis of it being a s. 67(a) “trust” for whoever the ultimate victor might be run afoul of s. 70 of the BIA. If the litigation is pursued to judgment and the posted money paid without fully executing on the judgment, the creditor is bootstrapped to a better position than a pre-bankruptcy judgment creditor holding an unexecuted judgment. The effect operates to the detriment of the other creditors and violates the BIA’s foundational principles of creditor equality and rateable distribution of a bankrupt’s property.

Accordingly, the Court concluded that the decision of the Divisional Court dismissing Earth Boring’s leave application on April 17, 2025 was not executed as of Earth Boring’s NOI Proceeding on April 15, 2025. The appropriate result was to direct the Escrow Agent to release the funds to NewCo, in keeping with the scheme devised and approved within the CCAA proceedings.

Judge: W.D. Black J.

Professionals involved:

• Domenico Magisano and Matthew McGuckin of Lerners for the Applicant, Earth Boring Co.

• Stephane MacLean of Soloway Wright for Tulloch Geomatics Inc.

• Heather Fisher of Gowling WLG for the Monitor, BDO Canada Ltd.