Ontario Court Of Appeal Summaries (January 14 – 18, 2019)

Following are our summaries of the civil decisions of the Court of Appeal for Ontario this past week. The Court released a number of decisions this week, including an important pronouncement on Construction Act trusts, and the ability of the provincial legislature to establish trust certainties, in The Guarantee Company of Canada v Royal Bank of Canada, 2019 ONCA 9.

In this decision, the Ontario Court of Appeal considered whether the funds owing to, or received by, a bankrupt contractor and impressed with a statutory trust created by s. 8(1) of the Construction Lien Act, RSO 1990, c C. 30 ("CLA"), as it was formerly named, were excluded from distribution to the contractor's creditors pursuant to s. 67(1)(a) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 ("BIA"). This involved a detailed review of the Supreme Court of Canada's decision in British Columbia v Henfrey Samson Belair Ltd, [1989] 2 SCR 24. The Court of Appeal found that a statutory deeming provision can give rise to certainty of intention, and that provision s. 8(1) of the CLA is constitutionally valid because the s. 8(1) trust is a matter that is the proper subject of property and civil rights in the province, and there is no operational conflict between s. 8(1) of the CLA and the BIA that would make the doctrine of paramountcy operative. The Court of Appeal also found that amounts owed were debts and were accordingly choses in action capable of meeting the requirement for certainty of subject matter, and that certainty of subject matter was made out because, despite the funds being commingled, it was possible to identify the funds in question. This decision runs contrary to the general understanding in the construction insolvency bar that Ontario CLA trust claims will generally not succeed when challenged by secured creditors in BIA proceedings.

In Apotex Inc v Nordion (Canada) Inc, 2019 ONCA 23 the Court of Appeal upheld a finding of breach of contract and negligence in respect of a contract for the provision of clinical research services, as well as the resultant damages award. The Court clarified the operation of section 5(1)(a) of the Limitations Act, 2002, observing that a claim only becomes discoverable once all the elements of s. 5(1)(a) are met.

In Almalki v Canada (Attorney General), 2019 ONCA 26 the Court of Appeal confirmed that a carefully worded contingency fee agreement does not necessarily run afoul of the Solicitors Act even where it entitles counsel to a percentage of any amounts paid to the client for legal fees (which is prohibited save for in certain circumstances). Such agreements are acceptable so long as they conform with section 28.1(8) of the Solicitors Act, as the Court found to be the case here.

Other topics covered this week included forbearance agreements, seniority in the collective bargaining context, agreements of purchase and sale and a provincial offences decision which examined sentencing principles.

CIVIL DECISIONS

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

[Hoy A.C.J.O., Doherty, Sharpe, Roberts and Fairburn JJ.A.]

Counsel:

J. Hunter and H. Pitcher, for the appellant, The Attorney General of Ontario

M. B. Lerner and S. M.J. Rollwagen, for the appellant, The Guarantee Company of North America

S. Babe and M. Spence, for the respondent, Royal Bank of Canada

R. M. Slattery, for the respondent, A-1 Asphalt Maintenance Ltd. (Receiver of)

P. Cavalluzzo and A. St. John, for the intervener, LIUNA Local 183

Keywords: Bankruptcy and Insolvency, Construction Law, Priorities, Statutory Deemed Trusts, Trust, Three Certainties, Certainty of Intention, Certainty of Subject Matter, Commingling, Tracing, Constitutional Law, Paramountcy, Bankruptcy and Insolvency Act, RSC 1985, c B-3, ss 67(1)(a), Construction Lien Act, RSO 1990, c C. 30, ss 8(1)(a), 8(1)(b), Constitution Act, 1867, ss 91(21), Income Tax Act, RSC 1985, c 1 (5th Supp), ss 227(4) and (5), Bank Act, SC 1991, c 46, Personal Property Security Act, SA 1988, c P-4.05, British Columbia v Henfrey Samson Belair Ltd, [1989] 2 SCR 24, Minneapolis-Honeywell Regulator Co v Empire Brass Manufacturing Co, [1955] SCR 694, John MM Troup Ltd et al v Royal Bank of Canada, [1962] SCR 487, Alberta (Attorney General) v Moloney, 2015 SCC 51, Husky Oil Operations Ltd v Minister of National Revenue, [1995] 3 SCR 453, Saskatchewan (Attorney General) v Lemare Lake Logging Ltd, 2015 SCC 53, Québec (Deputy Minister of Revenue) c Rainville, [1980] 1 SCR 35, Federal Business Development Bank v Québec (Commission de la santé et de la sécurité du travail), [1988] 1 SCR 1061, Deloitte Haskins and Sells Limited v Workers' Compensation Board, [1985] 1 SCR 785, Québec (Revenue) v Caisse populaire Desjardins de Montmagny, 2009 SCC 49, Citadel General Assurance Co v Lloyds Bank Canada, [1997] 3 SCR 805, BMP Global Distribution Inc v Bank of Nova Scotia, 2009 SCC 15, Royal Bank of Canada v Sparrow Electric Corp, [1997] 1 SCR 411, R v Perka, [1984] 2 SCR 232, GMAC Commercial Credit Corporation - Canada v TCT Logistics Inc (2005), 74 OR (3d) 382 (CA)

Facts:

This appeal arises from a priority dispute between certain creditors and employees of a bankrupt company, A-1 Asphalt Maintenance Ltd. ("A-1"). The issue was whether the funds owing to, or received by, a bankrupt contractor and impressed with a statutory trust created by s. 8(1) of the Construction Lien Act, RSO 1990, c C. 30 ("CLA"), were excluded from distribution to the contractor's creditors, pursuant to s. 67(1)(a) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 ("BIA"). The motion judge concluded that the funds were not excluded from A-1's estate and were available for distribution to creditors.

A-1, an Ontario corporation engaged in the paving business, filed a Notice of Intention to make a proposal under the BIA. It subsequently failed to file a proposal and was deemed bankrupt. At the time of its bankruptcy, it had four major ongoing paving projects (the "Four Projects") which had outstanding accounts receivable for work performed by A-1. The bankruptcy judge directed the Receiver to establish a "Paving Projects Account", in which all receipts from the Four Projects were to be deposited into, and a general post-receivership account. The order also provided that the segregation of receipts by the Receiver between the two Post Receivership Accounts would be without prejudice to the existing rights of any party and would not create any new rights in favour of any party. A subsequent order provided that funds from other projects would be deposited into the Paving Projects Account.

Funds for the Four Projects (the "Funds") were paid to the Receiver, who deposited them into the Paving Projects Account. That amount represented debts owing to A-1 stemming from the Four Projects when A-1 filed its Notice of Intention to make a proposal. While the Receiver commingled the trust funds received from A-1's various paving projects into the Paving Projects Account, the allocation of the funds in the Paving Projects Account to each specific project was identifiable because of the Receiver's accounting.

A priority dispute arose between: Royal Bank of Canada ("RBC") as a secured creditor of A-1 pursuant to a general security agreement; Guarantee Company of North America ("GCNA") as a bond company and secured creditor of A-1 that paid out twenty CLA Lien claims to certain suppliers and subcontractors of A-1 and was subrogated to those claims; and, certain employees represented by unions. RBC took the position that the Funds formed part of A-1's estate available to creditors. GCNA and the unions took the position that the Funds were s. 8(1) CLA trust funds that must be excluded from A-1's property on bankruptcy, pursuant to s. 67(1)(a) of the BIA. All parties agreed that to qualify as a "trust" that is excluded from A-1'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 have satisfied the general principles of trust law per British Columbia v Henfrey Samson Belair Ltd, [1989] 2 SCR 24 ("Henfrey").

IssueS:

(1) Can a statutory deeming provision give rise to certainty of intention?

(a) Is s. 8(1) of the CLA constitutionally valid?

(b) Does the doctrine of paramountcy apply?

(2) Were the debts from the Four Projects choses in action that supplied the required certainty of subject matter for a trust?

(3) Did commingling the Funds mean that the required certainty of subject matter was not present?

(4) Does RBC's security interest have priority even if the trust created by s. 8(1) of the CLA survives bankruptcy?

Holding:

Appeal allowed.

Reasoning:

(1) Yes. Henfrey contemplated that a provincial statute can supply the required element of certainty of intention for a statutory trust, and the trust created by the CLA, s. 8(1) did not give rise to an operational conflict with the BIA, s. 67(1)(a). The motion judge did not deal with the issue of certainty of intention in her reasons and appeared to have assumed it was created by s. 8(1). However, RBC argued that it was necessary to prove that the settlor had the subjective intention to create a trust, and this argument appeared to rest on a broad proposition that the three certainties must be established on facts independent of any statutory deeming provisions.

(a) Yes. The Court of Appeal found that s. 8(1) was constitutionally valid. The Court found that there was no issue that the CLA, as a whole, was valid provincial legislation in relation to property and civil rights in the province. The s. 8(1) trust must be seen as an integral part of the scheme of holdbacks, liens and trusts, designed to protect the rights and interests of those engaged in the construction industry and to avoid the unjust enrichment of those higher up on the construction pyramid. That purpose exists outside the bankruptcy context. Accordingly, the s. 8(1) trust was a matter that was the proper subject of...