Can a payment made to the debtor one day before bankruptcy be returned on the basis of a constructive trust?
Ayerswood was the general contractor on an apartment building project in Guelph, Ontario. Sirius, a concrete forming company, was hired by Ayerswood in 2018 to provide the labour, equipment, and materials to construct the concrete structure for the project. Sirius’s performance was marked by delays and deficiencies. While Ayerswood had been paying Sirius’s periodic invoices to incentivize Sirius to get its work done, it decided to take a different approach with an invoice that Sirius rendered in January 2019 for $381,578.40. Ayerswood decided not to pay the invoice until Sirius demonstrated progress in rectifying the problems and getting the project back on track.
A site meeting was planned for March 1, 2019, at which Sirius was to present a detailed plan that would address the problems with its deficiencies and delays, but Sirius failed to attend. Sirius asked for the meeting to be delayed until March 5, 2019 because Sirius was discussing its plan to get back on track with its work at the project and needed a bit more time. Sirius asked for a cheque for the January 2019 invoice, and when Ayerswood expressed reluctance to pay without a satisfactory plan from Sirius, Sirius gave assurance that providing a cheque would ensure that Sirius would push things along to get its work done. Ayerswood believed this representation and provided a cheque. However, Sirius had no intention of doing any further work, and completed a statement of affairs for its bankruptcy filing on the very same day. Sirius made an assignment into bankruptcy on the next business day, March 4, 2019.
The bankruptcy judge directed that the $381,578.40 formed part of the bankrupt estate of Sirius and was to be distributed to its creditors. Ayerswood contended that payment of the funds had been induced by Sirius’s deceit, constituted an unjust enrichment, and it had a claim to a remedial or constructive trust over the funds. The bankruptcy judge rejected this argument, and Ayerswood subsequently appealed from the order.
Unjust enrichment, arising from certain types of debtor misconduct prior to bankruptcy, may impress funds with a constructive trust in favour of a third party. To establish unjust enrichment, a claimant must show an enrichment, a corresponding deprivation, and the absence of a juristic reason. Where an unjust enrichment is established, a court may award a proprietary remedy in the form of a constructive trust where a personal remedy is inadequate and the plaintiff’s contribution is linked to the property over which the trust is claimed. The successful assertion of a constructive trust means that the property subject to it does not form part of the property of the bankrupt that vests in the trustee under s. 71 of the Bankruptcy and Insolvency Act.
The Court of Appeal held that Ayerswood’s March 1, 2019 payment to Sirius would meet the requirements of a benefit and a corresponding deprivation. It was not clear that the existence of a contract would constitute a juristic reason, given that on Ayerswood’s evidence, the payment was procured by deceit and a breach of the duty of honest performance, and the amount paid was not owing. On Ayerswood’s uncontradicted evidence, it decided to treat that payment differently and would not have turned the funds over but for being lied to.
The Court rejected Sirius’ argument that policy reasons necessarily preclude the finding of a constructive trust since giving effect to one would allow money paid to the bankrupt to be clawed back by the payor instead of being shared rateably among all creditors. The Court noted that Parliament has answered this policy question by exempting property that the bankrupt holds in trust from property that is divisible among creditors.
Since, accepting the evidence of Ayerswood as true, a trust was a legally viable potential remedy, the decision of the bankruptcy judge, rendered on the basis that it was not a viable potential remedy, could not stand. The Court allowed the appeal, set aside the determination of the bankruptcy judge, and directed that the matter return to bankruptcy court for directions on the procedure to be followed for a determination of the issue on its merits.
Judges: Benotto, Zarnett and Sossin JJ.A.
Counsel: Scott Turton for the appellant Ayerswood Development Corporation; Melinda Vine and Jason DiFruscia of Harrison Pensa for the respondent BDO Canada Limited, as Trustee for the Estate of Sirius Concrete Inc.
By Matilda Lici