• Post category:Court Cases

The Guarantee Company of Canada v. Royal Bank of Canada, 2019 ONCA 9

Are statutory lien trusts after bankruptcy valid in Ontario?

The Debtor was an Ontario corporation, engaged in the paving business. It filed a Notice of Intention to make a proposal on November 21, 2014, but subsequently failed to file such proposal and was deemed bankrupt on December 22, 2014. At the time of bankruptcy, the Debtor had four major ongoing paving projects (the “Projects”)—three with the City of Hamilton (the “City”) and one with the Town of Halton Hills (the “Town”)—all of which had outstanding accounts receivable for work performed by the Debtor.

The bankruptcy judge directed the Receiver to establish a “Paving Projects Account”, into which all receipts from the Projects as well as other paving projects were to be deposited, and a general post-receivership account. The City and the Town paid $675,372.27 (the “Funds”) to the Receiver, who deposited the Funds into the Paving Projects Account. The parties agreed that the Funds were “trust funds” within the meaning of s. 8 of the Construction Lien Act (“CLA”).

The Royal Bank of Canada (“RBC”), in its capacity as secured creditor of the Debtor, argued that the Funds formed part of the Debtor’s estate available to creditors. Guarantee Company of North America (“GCNA“) —a bond company and secured creditor of the Debtor that was subrogated to the claims of certain suppliers and subcontractors of the Debtor—and certain unionized employees that worked on the Projects (the “Unions”) argued that the Funds were s. 8(1) CLA trust funds that must be excluded from the Debtor’s property on bankruptcy, pursuant to s. 67(1)(a) of the Bankruptcy and Insolvency Act (“BIA”).

The Receiver brought a motion for advice and directions to resolve the priority dispute. On the motion, the parties agreed that if the Funds were not trust funds, pursuant to s. 67(1)(a), RBC and GCNA would share the remaining funds pro rata as secured creditors. The Unions could make a claim to any remaining funds under s. 136(1)(d) of the BIA.

The motion judge concluded that the Funds were not excluded from the Debtor’s estate, and were therefore available for distribution to creditors. She found that GCNA had failed to establish sufficient certainty of subject matter and that the Funds were not therefore held in trust within the meaning of s. 67(1)(a). The motion judge was of the view that some form of segregation of funds was required to maintain a trust. She rejected the proposition that the Receiver’s careful accounting records, which were capable of identifying the funds in the Paving Projects Account, could establish certainty of subject matter. Therefore, she concluded that the s. 67(1)(a) exemption for property held in trust did not apply, and GCNA was only entitled to a pro rata share of the Funds as a secured creditor and that the Unions were entitled to their share as unsecured creditors.

The Court of Appeal affirmed that a “deemed statutory trust” is a trust that legislation brings into existence by constituting certain property as trust property and a certain person as the trustee of that property. The legislation purports to deem the trust into existence independently of the subjective intentions of or actions taken by the trustee. Statutes that create deemed statutory trusts often also impose statutory trust obligations, such as an obligation to segregate the trust property or hold it in a trust account. The language of s. 8 of the CLA makes clear that it deems a trust into existence independently of the trustee’s actions or intentions.

To qualify as a “trust” that is excluded from the Debtor’s property for distribution to creditors pursuant to s. 67(1)(a) of the BIA, the deemed statutory trust created by s. 8(1) of the CLA must satisfy three elements: certainty of intention, certainty of subject matter, and certainty of object. The BIA refers to but does not define what is meant by “a trust”, yet the category of “trust” is recognized by the BIA’s scheme of priorities. As such, it is appropriate to look to provincial law to determine whether a trust satisfies the three certainties required for it to operate in bankruptcy. The Court of Appeal referenced British Columbia v. Henfrey Samson Belair Ltd. for the proposition that provinces can create trusts by statute that will survive bankruptcy by legislating the requirements for a trust under the general principles of trust law.

The Court also held that the trust created pursuant to s. 8(1) of the CLA did not give rise to an operational conflict with s. 67(1)(a) of the BIA. The purpose of the CLA trust is to create a “closed system” to protect suppliers and contractors down the construction pyramid and to prevent the unjust enrichment of those higher up in the construction pyramid. To allow s. 8(1) CLA trust funds to be distributed to creditors of a bankrupt contractor would provide an “unexpected and unfair windfall” to those creditors. Thus, excluding s. 8(1) CLA trust funds from distribution to the Debtor’s creditors is consistent with the objective of the BIA to provide for the equitable distribution of the bankrupt’s remaining assets.

The amounts owed by the City and the Town on account of the Projects were debts. A debt is a chose in action which can properly be the subject matter of a trust. Therefore, it did not matter that neither the City nor the Town had created segregated accounts or specifically earmarked the source of the funds they would use to pay the debts they owed for the Projects. The statutory trust attaches to the property of the contractor or subcontractor, namely the debt, not to the funds the debtor will use to pay that debt. At the moment of the Debtor’s bankruptcy, the trust created by s. 8(1) of the CLA was imposed on the debts owed by the City and the Town to the Debtor. Certainty of intention was, therefore, established.

The requisite certainty of subject was also made out. Commingling of trust money with other money can destroy the element of certainty of subject matter, but only where commingling makes it impossible to identify or trace the trust property. The funds paid for each paving project were readily ascertainable and identifiable. They were commingled only to the extent they had all been paid into the same account, but they had not been converted to other uses and they did not cease to be traceable to the specific project for which they had been paid.

The Court allowed the appeal, and ordered that by operation of s. 67(1)(a) of the BIA, the Funds satisfied the requirements for a trust at law, and so were not property of the Debtor available for distribution to the Debtor’s creditors.

CounselJosh Hunter and Hayley Pitcher for the appellant, The Attorney General of Ontario, Matthew Lerner and Scott Rollwagen of Lenczner Slaght for the appellant, The Guarantee Company of North America, Sam Babe and Miranda Spence of Aird & Berlis LLP, for the respondent, Royal Bank of Canada, Raymond Slattery of Minden Gross LLP, for the respondent, A-1 Asphalt Maintenance Ltd. (Receiver of), Paul Cavalluzzo and Alex St. John of Cavalluzzo LLP for the intervener, LIUNA Local 183.