Constructive Trust 1 vs. Secured Creditor 0

Many secured creditors see their position in absolute terms. They rely on their general security and aggressively assert their priority over unsecured creditors, such as trade creditors. However, a recent decision of the Ontario Court of Appeal(306440 Ontario Ltd. v. 782127 Ontario Ltd. (Alrange Container Services), 2014 ONCA 548) demonstrates that creative arguments by trade creditors may allow them to take priority over even secured creditors in certain circumstances, by using trust principles to remove assets from the estate.

In this case, a lender held general security over a borrower for advances made on an operating loan. The borrower carried on business storing, repairing and selling shipping containers for its customers, including a major international container lessor. Pursuant to a depot agreement (the "Depot Agreement") with this customer, the borrower stored and repaired the customer's containers. From time to time, the borrower also refurbished and sold the customer's containers to third parties. The customer then invoiced the borrower for the containers that had been sold. Nothing in the Depot Agreement gave the customer any security over the sale proceeds collected by the borrower or required such proceeds to be held in trust.

By early 2013, the borrower was insolvent and the lender applied for and obtained an order pursuant to section 243 of the Bankruptcy and Insolvency Act (Canada) and section 101 of the Courts of Justice Act (Ontario) appointing a receiver over all of the property, assets and undertaking of the borrower (the "Receiver"). Cassels Brock acted as counsel to the Receiver but took no position regarding priority.

By that point, all of the customer's containers had been sold, although not all sale proceeds had been received. After the Receiver liquidated the remaining assets of the borrower, the customer claimed a priority to a portion of the total proceeds. The customer claimed that the borrower had breached the Depot Agreement by selling many containers without the consent of the customer. Although such claim would normally have been advanced as an unsecured claim for damages for conversion of the containers or for breach of the Depot Agreement, the customer instead asserted a constructive trust over the proceeds in the Receiver's hands.

The customer's claim for priority over the lender based on constructive trust was unsuccessful at first instance. The Ontario Superior Court of Justice concluded that any...