Can a pre-bankruptcy receivable collection be clawed back from a trustee?
Sirius’ business is insulated concrete forms, cast-in-place concrete and pre-cast panelling. On March 1, 2019, Ayerswood paid Sirius $381,578.40 (the “March Payment”) for services rendered and invoiced in January 2019. Three days later, on March 4, 2019, Sirius made a voluntary assignment in bankruptcy. Ayerswood subsequently alleged that it had been deceived by Sirius into making the March Payment after receiving assurances from Sirius that it would finish the work on an efficient schedule. Ayerswood argued that the March Payment should result in the imposition of a remedial constructive trust.
The Trustee sought direction from the Court regarding the March Payment. It argued that the March Payment constituted a pre-bankruptcy collection of a receivable and was not recoverable by Ayerswood. Any alleged deficiencies in the work performed by Sirius, even if established, would entitle Ayerswood to an unsecured claim in the bankruptcy proceedings. The Trustee conceded that if the March Payment were held in trust for Ayerswood, the funds would not have vested in the Trustee upon assignment. However, it argued that there was no evidence to support that position in the first place.
The Trustee pointed to the fact that Ayerswood made the March Payment in the same manner as it had for Sirius’ previous nine invoices. The Court agreed that the March Payment was indistinguishable from the previous nine invoices issued by Sirius and paid by Ayerswood. The fact that Sirius was assigned into bankruptcy after the March Payment did not transform the funds into an amount held in trust pending “the contract getting back on track as promised”.
The Court opined that a finding that a trust existed in the circumstances would lead to chaos. It would open the door for every payment made pursuant to an invoice for services rendered prior to the date of bankruptcy to be impressed with a trust. Ayerswood had a remedy—it could file a proof of claim with the Trustee for the deficiencies it alleged and attempt to establish that Sirius breached its contractual obligations. If the deficiencies are proven and Ayerswood is entitled to damages, then it would share in the vested assets proportionally with other unsecured creditors.
The Court held that a trust could not be established. Apart from any deficiencies in Sirius’ work, the real issue was payment of an outstanding debt. Sirius completed the work, issued an invoice and was paid for it. Any deficiency claim would be addressed as an unsecured claim in the bankruptcy. What Ayerswood was asking the Court to do was elevate its claim and give it priority over the remaining unsecured creditors.
The Court concluded that the March Payment formed part of the estate of Sirius and directed the trustee to distribute the funds to the creditors pursuant to the appropriate distribution scheme that conformed with the Bankruptcy and Insolvency Act.
Counsel: Melinda Vine of Harrison Pensa for BDO Canada as trustee; Scott Turton for Ayerswood
Judge: George J.