Trades the winners in 5 panel decision of the Court of Appeal confirming Section 9 Trusts survive insolvency

14 avril 2020 | Kevin D. Sherkin

( Disponible en anglais seulement )

The author would like to acknowledge the contributions of Joshua Sherkin.

On March 11, 2020, the Court of Appeal for Ontario released its decision in Urbancorp Cumberland 2 GP Inc. (Re) 2020 ONCA 197 (“Urbancorp”), stating that a s.9(1) trust under Ontario’s Construction Act R.S.O. 1990, c. C.30 (“CA” or the “Act”) can be effective in insolvency proceedings under the federal Companies’ Creditors Arrangement Act R.S.C. 1085, c. C-36 (“CCAA”).

Ontario’s CA provides protections for contractors to collect outstanding payments owed to them via the creation of a statutory trust. Section 9(1) of the Act states that when an owner sells a property and contractors have not been paid, the funds received by the owner (less fees required to discharge any existing  mortgage on the property) are held in trust for the contractors until those amounts owed are paid in full. The rationale behind this trust provision is that the trades should have priority to all creditors’ claims (except mortgage lender claims) against an insolvent owner as they create additional value while working on the units and thus have created equity in the units.  Yet despite this  protective provision, since the Court of Appeal’s decision in Re Veltri Metal Products Co. (2005), 48 C.L.R. (3d) 161, trade contractors have been turned away when trying to collect funds owed to them where the owner enters into insolvency proceedings – until now.

In Urbancorp, three contractors (Toro Aluminum, Speedy Electric Contractors Ltd., and Dolvin Mechanical Contractors Ltd.) were owed close to $4 million for work they had completed on unsold condominium units in Urbancorp’s (the developer) project. In 2016 the members of The Cumberland Group (including Urbancorp) were granted insolvency protection under the CCAA.

The condo units were later sold as part of the insolvency proceedings and these contractors attempted to collect the amounts owed to them, but their trust claims were rejected by a motion judge in the Superior Court. The court’s reason for rejecting the claim was that it was bound by the appellate decision in Re Veltri Metal Products Co. (2005)  48 C.L.R. (3d) 161 (Ont. C.A.) (“Veltri”). The motion judge in Urbancorp found that in Veltri the court held a s. 9(1) trust did not apply because the funds were not received by the owners but by a monitor appointed under the federal CCAA and therefore rejected the trust claims on this basis.

Toro, Speedy and Dolvin were granted leave to appeal the superior court’s judgment and on appeal the motion judge’s decision was reversed.

Minneapolis-Honeywell Regulator Co. v Empire Brass Manufacturing Co is Alive and Well in Ontario

The Lawyers for the appellants, Miller Thomson lawyers Kevin Sherkin and Jeremy Sacks contended that the monitor involved in controlling the sale and receiving the proceeds merely served as an agent for Urbancorp, the debtor. Moreover, they cited the Supreme Court of Canada’s decision regarding Minneapolis-Honeywell Regulator Co. v Empire Brass Manufacturing Co., [1955] S.C.R. 694 in which the court sets out the “deemed receipt rule.” “Deemed receipt” sets out that in determining whether a trust arises pursuant to legislation (such as the CA), the receipt of funds by an assignee or other representative of the person (such as a monitor) is required to be held in trust in the same way as if the person had itself received the funds.

The panel of 5 Judges of the Court of Appeal held that s. 9(1) of the Act does not conflict with the CCAA, and thus a trust claim under s. 9(1) is not defeated by reason of federal paramountcy and continues in an insolvency. The section could only be replaced by the doctrine of federal paramountcy if it conflicted with a specific priority created under the CCAA. In other words, a provincial trust can lose its effect under the CCAA insofar as the doctrine of paramountcy requires that result.

Implications Going Forward

Prior to the Urbancorp decision, it was widely accepted in Ontario that where a developer filed for insolvency under the CCAA or the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) and there was unsold real estate that was improved by a trade in the project, the proceeds from the sale under court order during the insolvency proceedings did not constitute a s. 9(1) trust fund for the benefit of the contractors or trades. Now that the Court of Appeal has clarified the situation and distinguished the Veltri decision, trades can breathe a sigh of relief that in most cases in real estate insolvencies funds owed to them will be given priority.

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