In its recent decision of Iona Contractors Ltd. v Guarantee Company of North America,[1] a divided (2:1) Court of Appeal held that a payment obligation of an owner to a bankrupt general contractor was subject to a valid trust under the provincial Builders’ Lien Act.[2]
Under the approach adopted by the Court of Appeal, the statutory Builders’ Lien Act trust had to satisfy the three certainties of a common law trust to remain operative after the general contractor became bankrupt. The majority satisfied itself that two of the certainties (intent, object) were present by referring to the statutory language of the Builders’ Lien Act. The analysis of the third certainty (subject matter) appears to be more fact-dependent.
Factual Background
In 2009, the Airport Authority [the “Airport”] hired Iona Contractors Ltd [“Iona”] to build improvements on its airport lands.[3] The total value of the contract was $15 million.[4]
Iona Contractors hired a number of subcontractors to work on the project. As a condition of the contract, Iona provided the Airport with a labour and material payment bond. Under the terms of the bond, if Iona failed to pay its subcontractors, then the surety of the bond, Guarantee Company of North America [“Guarantee Co”] would be responsible for paying the subcontractors.
Iona substantially completed the project in October 2010. Iona was not paying its subcontractors. The Airport withheld further payment to Iona. Some of the withheld payment was used to rectify deficiencies in the work completed by Iona. The remaining balance of ~$998,000 [the “Funds”] was paid into Guarantee Co’s solicitor’s trust account, pending resolution of who was entitled to the Funds.[5]
Guarantee Co paid out $1.48 million to Iona’s subcontractors.[6]
In December 2010, Iona applied for an Initial Order under the Companies’ Creditors Arrangement Act.[7] In December 2010, Alberta Treasury Branches - a secured lender - privately appointed Ernst & Young as receiver manager.[8] On March 18, 2011, Iona made an assignment into bankruptcy.[9] Ernst & Young was appointed as trustee.
The Issues
The trustee and Guarantee Co each claimed the Funds.
The trustee argued that the money was owing to Iona under the contract, and was included in Iona’s property, which vested with the trustee at the time of Iona’s bankruptcy.
Guarantee Co argued that the money was owing to the subcontractors, and that it had been subrogated to the subcontractors' rights when it paid out their claims.[10] Guarantee argued that there were two grounds upon which the subcontractors could claim the Funds:
(1) Iona breached its contract with the Airport by not paying the subcontractors, and the contract entitled the Airport to cure Iona’s breach by paying the Funds to the subcontractors.
(2) The Funds were held in trust for the benefit of the subcontractors due to the operation of the provincial Builders’ Lien Act. The trust remained valid in bankruptcy. As property held in trust, the Funds did not form part of the debtor’s divisible property for the purposes of the Bankruptcy and Insolvency Act [“BIA”],[11]but rather should be paid to the beneficiaries of the trust, i.e., the subcontractors.
The Queen’s Bench Decision
The motions judge rejected both of Guarantee Co’s arguments and held that the money should be paid to the trustee.[12]
The Court of Appeal’s Decision
The majority, in reasons authored by Mr. Justice Slatter, held that the money should be paid to Guarantee Co. It rejected Guarantee Co’s first (contractual) argument, but held that the funds were impressed with a valid trust under the Builders’ Lien Act.
The dissent, in reasons authored by Madam Justice Paperny, rejected both of Guarantee Co’s arguments and concluded that the money should be paid to the trustee.
The Court of Appeal’s Analysis of the Contractual Argument
The Relevant Contractual Provisions
The contract between the Airport and Iona provided that if Iona did not complete “the Work” (a defined term under the contract), the Airport could undertake the Work itself. Any amount the Airport spent on completing the Work could then be deducted from the amount it owed to Iona under the contract. The definition of “the Work” in the contract included “everything that is necessary to be done, furnished or delivered by the Contractor to perform the Contract.”[13] Iona was contractually obliged to pay its subcontractors.[14]
Guarantee Co’s Interpretation of the Contract
Guarantee Co argued that paying subcontractors was part of the Work. Consequently the Airport could pay the subcontractors in Iona’s stead, and set off the amount of such payments against the amount owing to Iona under the contract.
The Majority & Dissent’s Analysis
The majority and the dissent analyzed how different contractual clauses interact with the BIA:
- A clause that allows an owner to complete work itself, and set-off the cost of doing so from any amounts owing to a general contractor will be operative in bankruptcy because the BIA preserves the right of set-off.[15]
- A clause that places an obligation on an owner to pay subcontractors, and then allows the owner to set-off that amount from any amounts owing to a general contractor would also be operative in bankruptcy.[16]
- A clause that gives the owner the discretion to pay subcontractors and then set-off that amount from any amounts owing to a general contractor is inoperative in bankruptcy, because it would enable the owner to make payments without regard to the priorities provided for in the BIA.[17]
Under the terms of the contract between the Airport and Iona, the Airport did not have an obligation to pay the subcontractors. It was unnecessary to determine whether or not the Airport had the discretion to pay the subcontractors, because such a contractual clause would be inoperative in bankruptcy.[18]
The Court of Appeal’s Analysis of the Trust Argument
The Builders’ Lien Act Trust
The Builders’ Lien Act impresses a trust on payments made by an owner after a certificate of substantial completion is issued on a construction project, if the recipient of the payment is indebted to any persons for providing work or furnishing materials on the same project.[19] The recipient will usually be the general contractor, and it will be indebted to its subcontractors. The general contractor will hold payments received after substantial completion in trust for the subcontractors.
Trust Property in Bankruptcy
When a person makes an assignment into bankruptcy, a trustee realizes on most of the person’s property, and distributes the proceeds amongst the person’s creditors according to the priority scheme set out in the BIA. Property that the bankrupt holds in trust for another person is excluded from the property that is divisible amongst the bankrupt’s creditors.[20] Instead, the beneficiary under the trust is entitled to the trust property.
Statutory Trusts under the BIA
The Court of Appeal considered whether there was an operational conflict between the trust provisions of the Builders’ Lien Act and the BIA, rendering the former inoperative. The majority and dissent agreed that statutory trusts will not be given effect in bankruptcy unless they would be trusts under common law trust principles.[21] To hold otherwise, would allow provinces to reorder bankruptcy priorities by deeming some creditors to be the beneficiaries of statutory trusts.
In deciding that there was not an operational conflict between the BIA and the Builders’ Lien Act, the majority placed importance on the fact that the trust was “part of a larger statutory scheme designed to create new civil rights for unpaid subcontractors”, and not an effort by the provincial government to reorder the bankruptcy priority scheme.[22]
Analyzing the Builders’ Lien Act Trust as a Common Law Trust
Both the majority and the dissent analyzed whether or not the Builders' Lien Act trust satisfied the common law test for a trust. For a trust to be valid at common law it must satisfy three certainties:
1. A certainty of intent. The majority and the dissent agreed the intention to establish a trust was set out in the Builders’ Lien Act.[23]
2. A certainty of object. The majority and the dissent agreed the Builders’ Lien Act specified that the object of the trust was the group of unpaid subcontractors.[24]
3.A certainty of subject matter. The majority and dissent disagreed on this point.
- The majority held that the trust impressed an identifiable asset – the payment obligation of the owner. The majority characterized this payment obligation as a chose in action.[25] It contrasted the narrow subject matter of the trust created by the Builders’ Lien Act, with the broader trust considered by the Supreme Court of Canada in Henfrey Samson Belair, which purported to attach to all the property of the debtor.[26] The SCC held that the trust in Henfrey was inoperative in bankruptcy.
- The dissent described certainty of subject matter as a fact-dependent question.[27] The dissent noted that certainty of subject matter would be made out where the court could “point to a specific, identifiable res that formed the subject matter of the trust” such as when an owner had paid money into court to remove liens from the property.[28] Certainty of intent would not be made out where the funds subject to the trust had been commingled with other funds in an account.[29] The motions judge held that a common law trust could not be made out because, “in the normal course [the Funds] would be mixed between payments due by the contractor to subcontractors, any other bills due and its profit.[30] The dissent characterized the motion’s judge’s finding as “a matter of mixed fact and law” that was entitled to deference.[31] Consequently, because the funds would have been “immediately commingled with funds from other sources” had they been paid to Iona, they lacked sufficient certainty of subject matter to satisfy the common law test for a trust.[32]
The majority’s and dissent’s analyses, read together, raise a question. Would the result have been the same if the money had been paid into an account and commingled with other funds? Recall that the Funds were being held in the trust account of Guarantee Co’s solicitor. The likelihood that commingling would have occurred was sufficient for the dissent to find that there was no certainty of subject matter. The majority did not analyze how commingling – actual or potential – would impact its holding that there was certainty of subject matter. I think it would be difficult to argue that the certainty of subject matter was retained once actual commingling had occurred, if as a result the funds were no longer identifiable or traceable. Consequently, the validity of Builders’ Lien Act trusts in bankruptcy may end up being very fact-dependent.
[1] Iona Contractors Ltd. v Guarantee Company of North America, 2015 ABCA 240 [the “Appeal Decision”].
[3] The Appeal Decision at para 2.
[4] Re Iona Contractors Ltd, 2014 ABQB 347 at para 4 [the “Trial Decision”].
[5] The Appeal Decision at para 6; The Trial Decision at para 10.
[6] The Appeal Decision at para 3.
[8] The Trial Decision at para 2.
[9] The Appeal Decision at para 4.
[10] The Appeal Decision at para 5. The trial judge characterized Guarantee Co’s entitlement under its contractual claim as resulting from it being the subrogree of the Airport, not the subcontractors, see The Trial Decision at para 6. The dissent considered and rejected Guarantee Co’s arguments on this point, see the Appeal Decision at paras 87-88.
[12] The Trial Decision at paras 20, 37-38; The Appeal Decision at para 7-8.
[13] The Appeal Decision at para 12.
[14] The Appeal Decision at para 12.
[15] BIA, s 97(3), The Appeal Decision at paras 15, 68-69.
[16] The Appeal Decision at paras 17, 76.
[17] The Appeal Decision at paras 15-16, 76-81. Both the majority and the dissent relied on A.N. Bail Co. v Gingras, [1982] 2 SCR 475 and Greenview (Municipal District No. 16) v Bank of Nova Scotia, 2013 ABCA 302, 87 Alta LR (5th) 335 as authority for this proposition.
[18] The Appeal Decision at para 14.
[19] Builders Lien Act, s 22(1).
[20] BIA, s 67(1)(a).
[21] The Appeal Decision at paras 34-36, 95-96, Note that some statutory trusts in favour of the Crown for employee source deductions are specifically preserved in bankruptcy, see BIA, s 67(3).
[22] The Appeal Decision at para 33, see also para 37.
[23] The Appeal Decision at paras 37, 109.
[24] The Appeal Decision at paras 37, 110.
[25] The Appeal Decision at para 37.
[26] The Appeal Decision at para 38; Henfrey Samson Belair, [1989] 2 SCR 24.
[27] The Appeal Decision at para 111.
[28] The Appeal Decision at para 112.
[29] The Appeal Decision at para 115.
[30] The Trial Decision at para 35.
[31] The Appeal Decision at para 62.
[32] The Appeal Decision at para 116.
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