Trustee victorious in limitation period dispute

Chandos Construction Ltd v Deloitte Restructuring Inc, 2024 ABCA 403
What is the limitation period for a trustee to commence a builder's lien claim?

Summary: A trustee in bankruptcy filed a builder’s lien against a subcontractor on behalf of a bankrupt company. The trustee and subcontractor agreed to a consent order discharging the lien on payment into court of the funds purportedly owing. A dispute then arose over a clause in the subcontract that provided that, in the event that the company committed any act of bankruptcy, it would forfeit 10% of the subcontract price to the subcontractor as a fee. The trustee took the position that this clause was unenforceable as it violated the anti-deprivation rule in bankruptcy. The issue was litigated all the way up to the Supreme Court over a period of a few years and the trustee was ultimately successful. When the trustee sought an accounting from the subcontractor, the subcontractor took the position that the funds paid into court should be returned to it because the trustee had not issued and served a statement of claim to enforce the lien within the limitation period. The court disagreed, finding that the consent order which provided for the payment of funds into court, while unorthodox, was the commencement document for a remedial order that satisfied the requirements of the Limitations Act. The use of an order to commence the action, rather than a statement of claim, was at most a procedural irregularity but not a nullity.

Capital Steel Inc. was a subcontractor to Chandos Construction on a project in St. Albert. Capital Steel filed an assignment into bankruptcy on September 26, 2016, and Deloitte Restructuring was appointed as the trustee. On October 26, 2016, Deloitte, on behalf of the Capital Steel estate, filed a builder’s lien in the amount of $150,720.58. On November 8, 2016, Deloitte and Chandos agreed to a consent order discharging the lien on payment into court of $165,801.44.

A disagreement then emerged over the amount of money that Chandos might owe to Capital Steel, centred on the enforceability of a particular clause in the subcontract that provided that, in the event that Capital Steel committed any act of bankruptcy, among other things, it would forfeit 10% of the subcontract price to Chandos as a fee for the inconvenience of completing the work using alternate means and/or for monitoring the work during the warranty period. Deloitte took the view that this clause was unenforceable, as it violated the anti-deprivation rule in bankruptcy.

On March 6, 2017, Deloitte brought an application in the bankruptcy proceedings for advice and directions as to whether Chandos was entitled to rely on the provision and, if not, for a direction that the balance of funds paid into court, net of completion costs of $126,818.39 was payable to the Trustee. On March 17, 2017, a chambers judge found that the clause was enforceable, but in reasons issued on January 29, 2019, the Alberta Court of Appeal reversed that decision and found that the clause was unenforceable. The Supreme Court of Canada subsequently confirmed that conclusion.

On May 18, 2021, Deloitte filed an application in the bankruptcy proceedings seeking an accounting from Chandos of the estimated costs to complete and the value of outstanding warranty items. Chandos argued that this issue should be determined in the lien proceedings commenced by the consent order, and the judge hearing that bankruptcy application directed that it be heard by a Master in Chambers. Accordingly, on September 14, 2021, Deloitte filed an application in the lien action seeking a declaration that the lien was valid, and payment of the funds in court to it as trustee. Chandos filed a cross-application seeking the return to it of some or all of the funds that had been paid into court almost five years earlier, on the grounds that the Trustee had not issued and served a Statement of Claim on Chandos to either enforce the builder’s lien or collect the account receivable from Chandos and, accordingly, the limitation period had expired.

A Master in Chambers concluded that Deloitte’s application to declare the lien valid was brought after the expiration of the limitation period. While proceedings to enforce the lien could have been commenced under the consent order that discharged the lien upon payment of funds into court, that had never been done. Deloitte’s appeal to a judge in chambers was dismissed. The chambers judge held that in the circumstances, the filing of a statement of claim within the limitation period was necessary, and since that had never been done, the claim of the Capital Steel estate was barred. Deloitte appealed further.

On appeal, Deloitte argued that the “Action” started by the consent order of November 8, 2016 could qualify as a claim for a remedial order or, alternatively, the application brought in the bankruptcy proceedings on March 6, 2017 for a ruling on the validity of the impugned clause was such a proceeding. Chandos argued that neither of these proceedings were effective claims for a remedial order, and that the trustee had to issue a third claim to satisfy the Limitations Act.

Section 43 of the Builders’ Lien Act provides that a lien “ceases to exist” unless within 180 days of registration “an action is commenced under this Act” to realize on the lien. However, where funds are paid into court as security in place of the lien, s. 44 provides that the limitation period in s. 43 does not apply. Instead, the general limitation period in the Limitations Act comes into play. In this case, the Capital Steel estate knew of its “injury”, that is the amounts potentially unpaid on its subcontract, no later than the date it filed its lien. It also knew that Chandos was the party to whom that injury was attributable. The remaining issue was when the injury, assuming liability, warranted bringing a proceeding.

Deloitte argued that the Capital Steel estate did not know whether proceedings were justified until after the decision of the Supreme Court of Canada on the enforceability of the impugned provision, or possibly after the earlier decision of the Court of Appeal. However, the commencement of the limitation period does not depend on the plaintiff’s assurance or belief that the claim will ultimately be successful. The dispute or uncertainty about the enforceability of the clause did not delay commencement of the limitation period until that issue was resolved. Further, the uncertainty about the viability of the claim depended on a question of law, namely the enforceability of the clause. The limitation statutes are triggered by discoverability of facts, not knowledge about questions of law. Finally, it is not necessary for the quantum of the claim to be crystallized before the limitation period starts to run. The only thing that is required is that the potential claim, assuming liability on the part of the defendant, “warrants bringing a proceeding”. The potential claim of approximately $150,000 warranted proceedings. The exact quantum of the claim may have been contingent and uncertain, but it was still worth pursuing, assuming liability on the part of Chandos.

The limitation period started to run no later than the date that the lien was filed, October 26, 2016. At that point, the Capital Steel estate knew that it had suffered an injury attributable to Chandos, and that, assuming liability of Chandos, proceedings were warranted. The Capital Steel estate, accordingly, had to seek a remedial order no later than October 26, 2018. The consent order of November 8, 2016, while unorthodox, was the commencement document for a remedial order that satisfied the requirements of the Limitations Act. The use of an order to commence the action, rather than a statement of claim, was at most a procedural irregularity but not a nullity. 

The Court allowed the appeal and remitted the matter back to the trial court for determination of the quantum of the Capital Steel estate’s claim, and its entitlement to the funds.

Judges: The Honourable Justice Frans Slatter, The Honourable Justice April Grosse, The Honourable Justice Joshua B. Hawkes 

Counsel: Stuart Weatherill of Emery Jamieson for the Trustee, Deloitte Restructuring

Brad Angove of Duncan Craig for Chandos Construction