Unpaid contractor's trust claim fails to displace lender's security

Pacifica Mortgage Investment Corporation v 2490 Marine Drive Ltd., 2026 BCSC 1928
Can an unpaid contractor get ahead of a secured lender?

Summary: The British Columbia Supreme Court has ruled that an unpaid contractor cannot claim priority over a secured lender's interest in a $2.61 million municipal deposit connected to a West Vancouver development, rejecting arguments that the funds were protected by a Quistclose trust. The Court agreed with the position of MNP as receiver that the debtors' rights to the deposit constituted property available for sale in the receivership. The dispute arose after a contractor engaged by the development's project manager, asserted an indirect entitlement to the funds, while the project manager argued that they were held in trust for its benefit. The Court found that the secured lender held valid, perfected security interests in the funds and that, even if a Quistclose trust had arisen, it ceased to exist once the funds were paid to the municipality for their intended purpose. The project manager was left with contractual rights to any refunded amounts, and the contractor could not claim an interest through the project manager that the latter did not possess.

The Court-appointed receiver, MNP Ltd., applied for court approval of the proposed sale of a development property in West Vancouver, which was to be named the “Pierwell”. The central issue for the Court was who had the rights to approximately $2.61 million that the original developer (the “Debtors”) deposited with the District of West Vancouver (the “District”) to secure approval for certain public works to be completed for the Development. That issue was relevant to the proposed sale because the purchaser required the transaction to include whatever rights the Debtors had with respect to those funds.

The Receiver sought a declaration that the monies on deposit were “Property” of the Debtors within the meaning of the receivership order and could be included within the proposed sale. This relief was contested by (i) RTR Terra Contracting Ltd. (“RTR”), a contractor engaged by the Project Manager for the Development, (ii) the Project Manager, and (iii) the petitioner, Pacifica Mortgage Investment Corporation (“Pacifica”). RTR’s arguments were mostly derivative of the Project Manager’s claims. RTR’s main argument was that the Debtors’ interest in the Deposit was transferred to the Project Manager, who owed RTR a contractual debt for payment of services performed by RTR under the RTR Contract. The Project Manager’s claims centred on allegations of a Quistclose trust and a purported transfer of rights to the Deposit in its favour. Pacifica’s claim to the Deposit was based on its first-ranking security interests granted by the Debtors in respect of the outstanding advances pursuant to the Personal Property Security Act.

The Court agreed that Pacifica’s security interests met the requirements under the PPSA. The security interests were enforceable against third parties (such as the Project Manager and RTR). The collateral description contained in the signed security documentation included monies and cash, which adequately captured the essence of the Deposit. The security interests “attached” under the PPSA the moment the Debtors received Pacifica’s funds in March 2025, and were “perfected”.

What kind of interest, if any, the Project Manager had in the Deposit was unclear. Arguably, the rights of the Project Manager against the Debtors in respect of the Deposit were, in substance, “security interests” to which the PPSA applied and should have been registered. Even if the Project Manager had an unsecured claim against the Debtors for return of the funds under its agreement with the Debtors (the “Tripartite Agreement”), that claim would still be subordinate to Pacifica’s security interests. Notwithstanding the above, the Project Manager asserted that the funds placed with the District to create the Deposit were impressed with a Quistclose trust in its favour under the terms of the Tripartite Agreement. It argued that the Debtors only held bare legal title to those funds and that those funds were not an asset of the Debtors to which Pacifica’s security attached.

A Quistclose trust arises “when moneys are loaned by a lending institution expressly for the purpose for which the borrower intends to use the loan.” The lender advances the moneys on the condition that they are to be held “on trust” by the borrower until the funds are applied to their designated purpose. At that point in time, as authorized by the loan agreement, the borrower applies the moneys to the purpose and becomes a debtor vis-à-vis the lender. If the contemplated expenditure upon the purpose does not occur, the moneys are held in trust by the borrower for the lender – that is, ahead of all the unsecured creditors of the borrower.

Pacifica and the Receiver did not dispute that funds were advanced to the Project Manager and that the Project Manager directed those funds to be paid directly to the Debtors for the express purpose of allowing the Debtors to pay those funds to the District for the Deposit. However, they disputed that any Quistclose trust arose or, alternatively, argued that any such trust had ceased to be effective because the Debtors had used the funds for their intended purpose. Pursuant to the Tripartite Agreement, the Project Manager advanced monies to the Debtors on the condition that they be held “on trust” by the Debtors until they were expended for the designated purpose of satisfying the District’s “Municipal Requirements”

The Court held that it was not necessary to decide whether any Quistclose trust arose here. However, the Court found that if any Quistclose trust arose, it ceased to exist when the Debtors directed the funds to the District, thereby fulfilling the express purpose of the loan. At that point, all that remained was the Project Manager’s contractual right to require the Debtors to pay any amounts refunded by the District.

Lastly, the Court held that, as the Project Manager had no claim to the Deposit, RTR could not indirectly claim an interest through the Project Manager’s non-existent interest. The Deposit remained in the hands of the District, which was not a contractor or subcontractor, to secure performance of the Debtors’ obligations to the District pursuant to the Engineering Services Agreement with the District. It was unrelated to the Debtors’ obligations to pay the Project Manager or any of its subcontractors (such as RTR) for work they might have performed.

The Court granted the declarations sought in respect of the Deposit.

Judge: The Honourable Madam Justice Fitzpatrick

Professionals involved:

• Scott Stephens and Lily Zhang for Pacifica

• William Roberts and Baylee Hunt of Lawson Lundell for MNP as receiver

• Rajvir Nagra of Hamilton Duncan for C&WHB Construction

• Mark Robinson of McLean & Armstrong for RTR

• Elizabeth Anderson of Young Anderson for the District of West Vancouver

• John Sandrelli of Dentons for Basel Capital