Establishing a constructive trust in a CCAA proceeding?

Overview: In this case, the Court considered whether certain airport authorities had trust claims over pre-filing airport improvement fees in priority to all other claims. The Court found that a constructive trust could not be established having regard to the agreement between the parties, which expressly precluded any intention to create even an implied trust.

On February 22, 2024, Lynx Air Holdings Corporation and 1263343 Alberta Inc. (collectively “Lynx”) were granted an initial order under the Companies’ Creditors Arrangements Act. Lynx subsequently sought an order declaring that the Vancouver Airport Authority, the Calgary Airport Authority, the Edmonton Regional Airport Authority, the Winnipeg Airport Authority Inc., and the Halifax International Airports Authority (collectively, the “Airport Authorities”) did not have a trust claim over pre-filing airport improvement fees (“AIF”) in priority to all other security interests, trusts, liens, charges, encumbrances, and claims of secured creditors, statutory or otherwise. The Airport Authorities, respectively, sought declarations that the unremitted AIF collected and held by Lynx on behalf of the Airport Authorities were subject to either an express, implied or constructive trust in favour of the Airport Authorities.

AIF were collected by Lynx from passengers on behalf of the Airport Authorities. These fees were charged to passengers and were used to fund capital development and improvement of the respective airports. As of April 6, 2022, Lynx became a signatory to a Memorandum of Agreement, dated May 31, 1999, as amended (the “MOA”). The parties to the MOA included the Airport Authorities. Lynx did not negotiate the MOA with the Airport Authorities: it was required to sign it in order to use the Airport Authorities’ airports. Among other things, the MOA contained terms regarding Lynx’s collection of AIF from air carrier passengers on behalf of the Airport Authorities.

Section 20.1 of the MOA clearly disclaims any intention to create a trust relationship. While there is no need for any technical words or expressions for the creation of a trust, the first sentence of that section precludes any intention to create even an implied trust. Nothing in the MOA nor any acts of any party can “be deemed to constitute a partnership, joint venture or principal /agency relationship”, except for the principal / agent relationship that exists with respect to the collection of AIF. While an agency relationship clearly exists, it does not follow that a trust is created.

Alternatively, the Airport Authorities submitted that the relationship between them and Lynx gave rise to a constructive trust. The following criteria is to be considered in determining the availability of the remedial constructive trust:

• the defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;

• the assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;

• the plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties; and

• there must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected.

The constructive trust comprehends the imposition of trust machinery by the court in order to achieve a result consonant with good conscience. The court will not allow a party to unjustly appropriate the value earned by the labours of another. One of the essential requirements for a finding of unjust enrichment is an absence of a juristic reason for the enrichment. The MOA specifically disclaimed the creation of a trust relationship.  While such an intention is not always required to support a finding of constructive trust as it depends instead upon a breach of an equitable obligation, the clear language in a contract between sophisticated entities must be a factor in determining whether a constructive trust can be imposed.

Lynx argued that the MOA provided a juristic reason why a constructive trust should not be imposed.  This gave rise to the question of whether equity should intervene in a commercial transaction between sophisticated parties where the Airport Authorities could have protected themselves contractually. The Airport Authorities argued that, without the imposition of a constructive trust, allowing the outstanding AIF to remain in the Lynx estate would be unfair to the Canadian public, and the imposition of such a trust was necessary, not only to do justice between the parties, but “to maintain the integrity of the system.”  However, there were ways for the Airport Authorities to protect the system.  While the mere fact that the MOA was a contract between sophisticated commercial parties did not preclude a finding of a constructive trust, the equities of the situation did not favour that outcome.

There was no reason in this case to rewrite the MOA between the parties. There was no equitable reason to grant the Airport Authorities the additional rights that flow from recognition of a right of property. The creation of such a trust would in fact violate the pari passu principle by giving an unsecured, or partially unsecured creditor an advantage over any other unsecured creditor.

Judge: Honourable Justice B.E. Romaine

Counsel: Tommy Gelbman and Julie Treleaven of Osler for Lynx; Jason Wadden of Goodmans for the Toronto Airport and Karen Fellowes, K.C., Archer Bell of Stikeman Elliott for the Airport Authorities