Ontario Court of Appeal asserts priority to construction contractors in real estate insolvency funds

March 11, 2020

Urbancorp Cumberland 2 GP Inc. (Re), 2020 ONCA 197

In a March 11, 2020 decision, a five-judge panel (the “Panel”) of the Ontario Court of Appeal unanimously allowed an appeal which granted priority to construction contractors over the proceeds of a trust belonging to an insolvent real estate developer to the extent of the amount which were owed to them, a decision which significantly impacts construction lien principles in the event of insolvency.

The dispute arose as a result of the insolvency of a residential condominium developer and its related entities (the “Owner”), that owned unsold condominium units of a project it constructed. In 2016, the Owner was granted insolvency protection under the Bankruptcy and Insolvency Act (the “BIA“) and continued under the Companies’ Creditors Arrangement Act (the “CCAA“). At the time, the Owners owed several construction contractors (the “Appellants”) a significant amount for labour and materials for its project, worth nearly $4 million.

Pursuant to the order set out in the BIA Proposal, the condominium and remaining assets of the Owner were ultimately sold during CCAA proceedings. As a result of the sale, the Appellants claimed that a trust arose over the proceeds, with reference to the provisions set by s. 9(1) of the Construction Act (the “CLA”), thereby giving them effective priority to the extent of the amounts owed to them. The motion judge ruled that s.9(1) of the CLA did not apply because the sale proceeds were not received by the Owner, but rather a CCAA Monitor, with reference to case law Re Veltri Metal Products Co. (2005).

During the appeal, the Panel agreed with the Appellants that the sale by the Owner was of the Owner’s interest, notwithstanding that it occurred in an insolvency process. The Panel also found that the value of the proceeds of the sale was attributable to the sale of premises to which the improvement had been made, that the value of the consideration exceeded the mortgage debt, and the value of the proceeds was received by the Owner, as it was deposited into bank accounts that had been opened for the Owner’s 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 Owner, or vested its 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 proceeds in excess of expenses and mortgage debt.

In light of its findings, the Panel unanimously allowed the appeal, ruling that a s.9(1) trust under the CLA applies to the sum of $3.864,428.72 held in the accounts of the Owner’s entities, for the benefits of the Appellants.

Miller Thomson advised the successful Appellants in the proceedings with a team comprising of Kevin Sherkin and Jeremy Sacks (Restructuring & Insolvency; Construction Litigation).