Does the involvement of a CCAA monitor in a sale process negate a resulting trust over the sale proceeds in favour of unpaid suppliers?
This case concerns the scope and effectiveness of s. 9(1) of the Construction Lien Act (the “CLA“) in an insolvency proceeding. This provision provides for a trust over sale proceeds of property in favour of unpaid contractors.
The Cumberland Group, a residential condominium developer, was granted insolvency protection under the Bankruptcy and Insolvency Act (the “BIA“) and continued under the Companies’ Creditors Arrangement Act (the “CCAA“). It owned unsold condominium units in a project it constructed. The appellants had supplied work and material to these units. They were owed significant unpaid sums. The condominium units were ultimately sold during the insolvency proceedings.
As a result of the sale, the appellants claimed that a trust arose over the proceeds to the extent of the amounts owing to them, which would give them an effective priority for these amounts. The motion judge rejected the trust claim because the sale proceeds were not received by the “owners” of the premises, but rather a CCAA Monitor.
The appellants obtained leave to appeal the motion judge’s decision. They argued that each condominium sale was a sale by the Cumberland Group as “the owner” because the sale agreements were entered into on its behalf by the Monitor as a representative. The respondents argued that the condominium sales were not made “by the owner” given the Monitor’s control over the Cumberland Group’s activities, especially with respect to the sales process.
Under the CLA, a s. 9(1) trust is triggered by the receipt of proceeds of a sale of premises that have been improved by a contractor’s labour or materials. The question of whether such a trust is effective in insolvency can therefore arise in two situations. The first is when the sale precedes the insolvency filing, but the proceeds remain in the insolvent’s possession when the filing occurs. The second situation, which is the one applicable here, is when the sale that triggers the assertion of a s. 9(1) trust takes place after the insolvency filing.
The effect of s. 9(1) may include the protection of trust beneficiaries on the insolvency of the trustee, but to the extent that it creates a trust under the general law of trusts, it may do so effectively without conflict with the BIA. If a s. 9(1) trust may be effective under the CLA when the insolvency is subject to the BIA, it follows that it may be effective when the insolvency is subject to the CCAA. The BIA and CCAA are both part of Parliament’s scheme for the regulation of insolvency, and to the extent possible, they should be interpreted to afford analogous entitlements to creditors.
A s. 9(1) trust only arises if the value of the consideration received by the owner from the sale of premises, which have been improved by the work or materials of the contractor, exceeds the amount of mortgage indebtedness. No trust arises if the value of the consideration is zero, or if the mortgage debt is equal to or greater than any sale proceeds.
This was a case where what was sold were exclusively units that were, within the meaning of the CLA, premises to which improvements had been made through the work and materials supplied by the appellants. The sales of the units that took place were sales “by the owner”. The agreements of purchase and sale were made by the Cumberland Group entities as represented by Fuller Landau, solely in its capacity as Proposal Trustee/Monitor of said entities. That the entities entered into the agreements through a representative does not detract from the fact that it was they who entered into the sale agreements as vendors. What was contracted to be sold were units registered in their names, that is, premises legally owned by them.
The sale by the owner was of the owner’s interest, notwithstanding that it occurred in an insolvency process. The value of the consideration received on the sale was attributable to the sale of premises to which the improvement had been made. The value of the consideration exceeded the mortgage debt. And the value of the consideration was received by the owner, as it was deposited into bank accounts that had been opened for Cumberland Group entities in accordance with their registered ownership of the units sold.
Neither the BIA Proposal proceedings nor the CCAA proceeding ended the existence of the Cumberland Group members, or vested their property in the Monitor. The issue under s. 9(1) of the CLA is simply whether the owner, regardless of who decides for it, had made a sale of its interest and received funds that exceeded mortgage indebtedness and the expenses of sale. Accordingly, the control the Monitor had over the process does not detract from the conclusion that the owner sold its interest and received consideration in excess of expenses and mortgage debt.
The Court of Appeal allowed the appeal, set aside the order of the motion judge, and substituted an order that a s. 9(1) trust under the CLA applies to the sum of $3,864,428.72 held in the accounts of Cumberland Group entities, for the benefit of the appellants, pro-rata in accordance with the amounts owing to each.
Counsel: Kevin Sherkin and Jeremy Sacks of Miller Thomson LLP, for the appellants, Toro Aluminum (A Partnership), Speedy Electrical Contractors Ltd., and Dolvin Mechanical Contractors Ltd., Kenneth Kraft and Neil Rabinovitch of Dentons Canada LLP, for the respondent, Guy Gissin, in his capacity as the Israeli Court Appointed Functionary Officer of Urbancorp Inc., Adam Slavens and Jonathan Silver of Torys LLP, for the respondent, Tarion Warranty Corporation, Robert Drake of Goldman, Sloan, Nash and Haber LLP for Fuller Landau Group Inc. and Hart Schwartz, for the intervener, the Attorney General of Ontario.
Judges: B. Zarnett J.A., S.E. Pepall J.A., P. Lauwers J.A., K. van Rensburg J.A. and Thorburn J.A.