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Justice Brown

Welcome to all our readers who have been coming looking for quotes by SCC J. Brown. Look around and stick for other excellent commentary by our current authors.

You may have go far back in the archives to find his stuff, as he stopped being an active blogger back in 2008-ish. I suspect Causation and other mundane matters of tort law (ok - that was me being snarky) occupied his time after then.

Congratulations SCC Justice Brown

My former colleague has had a truly meteoric rise, from assistant professor to associate professor to full professor to Justice of the Court of Queen's Bench to the Alberta Court of Appeal and now:

The Supreme Court of Canada!

Congratulations!!!

More on this as the news develops.

Alberta Court of Appeal finds Builders’ Lien Act trust valid in bankruptcy

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”].

[2] Builders’ Lien Act, RSA 2000, c B-7.

[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.

[7] Companies' Creditors Arrangement Act, RSC 1985, c C-36.

[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.

[11] Bankruptcy and Insolvency Act, RSC 1985 c B-3.

[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. 

Fifteen Minutes on Ghomeshi, Sexual Assault, Consent & Bodily Harm

In this video blog, I address the question of how sexual assault can be committed between two "consenting" adults, where bodily harm is intended and caused by one of the parties. In short, the Blog suggests that the relationship between BH and consent is not as clear cut as many media reports have made it out to be. It is far from clear that intending and causing bodily harm does or should vitiate consent.

 

Ontario Court of Appeal comments on investigative receiverships in Akagi v. Synergy Group - Implications for Judgment Creditors in Alberta

Receivers are commonly appointed to realize upon a debtor’s assets and, in many cases, to operate the debtor’s business for the benefit of one or more creditors. By comparison, an investigative receiver is granted powers to gather information about the financial affairs of a debtor to aid a creditor’s debt recovery efforts.  In the recent case of Akagi v. Synergy Group (2000) Inc., the Ontario Court of Appeal endorsed the use of an investigative receiver by a judgment creditor, but only if (i) necessary to alleviate a risk to the creditor’s right of recovery, and (ii) the receivers’ powers are subject to appropriate limits.[1]

Factual Background

Synergy Group (2000) Inc (“Synergy”) marketed a program to Mr. Akagi that was supposed to provide him with tax benefits. Mr. Akagi invested money into the program.  The program did not operate as promised.  Mr. Akagi lost his investment, and the CRA reassessed him, resulting in a significant tax liability.  A number of other individuals were in a similar position, at one point the CRA estimated that 3815 individuals had lost money because of their involvement in the program.[2]

Procedural History

Mr. Akagi sued Synergy and four related individuals for fraud. After some procedural wrangling, he received judgment for $182,000 against Synergy, and two of the individual defendants.[3] 

After receiving judgment, but before making any efforts to enforce it, Mr. Akagi applied to have a receiver appointed over the assets, property and undertakings of Synergy and a related company, which had not been a party to the lawsuit.  The Court granted the application pursuant to section 101 of Ontario’s Courts of Justice Act.[4]  

At a number of subsequent applications, the Court expanded the receivers’ powers, and the parties subject to the receivership [the “Subject Parties”].  The subsequent orders:

• Authorized the receiver to collect information about the Subject Parties from their financial institutions.[5]
• Enjoined the Subject Parties from dealing with their assets, located anywhere in the world, and enjoined the Subject Parties’ financial institutions from dealing with any funds in the Subject Parties’ accounts.[6]
• Authorized the receiver to register certificates of lis pendens against property belonging to the Subject Parties.[7] 
• Granted the receiver a $500,000 borrowing charge against the frozen assets.[8] 
• First expanded the scope of the order to apply to 12 additional individuals and entities, and then subsequently to an additional 43 named individuals and entities, as well as a number of unnamed individuals and entities, who were related to the named parties.[9]

After receiving notice of receivership, some of the Subject Parties applied under the come back clause to have the order set aside.[10]  They were unsuccessful at the first instance, and appealed the matter to the Ontario Court of Appeal.

The Ontario Court of Appeal’s Decision & Analysis

The Court of Appeal set aside the initial order appointing the receiver, and the subsequent orders expanding its powers.[11] The Court based its decision on the substantive shortcomings of the receivership order, but indicated it had procedural concerns as well.

Procedural Shortcomings

The Court of Appeal was concerned by the repeated use of ex parte applications (with borderline-insufficient disclosure of material facts), and the “relaxed” approach to normal court processes: a number of the subsequent motions were brought without a notice of motion or application, and in the absence of further evidence, other than the receiver’s reports.[12]

Substantive Shortcomings

The Court of Appeal held that the necessary evidentiary foundation was lacking for an investigative receivership order to be granted, and the scope of the receivership order was too broad.

The Missing Evidentiary Foundation

When a judgment creditor seeks to appoint a receiver in aid of execution, it must establish that the order is “needed to protect [the creditor’s] ability to recover on the debt”, i.e., that otherwise the creditor’s ability to recover would be in “serious jeopardy.”[13] Evidence that would establish such jeopardy could include a large disparity between the amount of the judgment and the value of a debtor’s known assets, or that less intrusive enforcement steps have been unsuccessful.[14] There was no such evidence to show that Mr Akagi’s ability to recover was in jeopardy.[15]

The Problem of Overreach

The Court of Appeal characterized the receivership order as overreaching in three distinct ways:

1. Who benefitted. The investigative receivership was primarily undertaken for the benefit of the 3800 alleged victims of the tax program, and not to help the appointing creditor recover on his judgment.[16]
2. Who was subject to the order. The receiver was granted powers to investigate the affairs of a large number of people, many of whom where only indirectly related to the defendants in Mr. Akagis’ action.[17]
3. What the receiver could do. The receiver was granted powers beyond merely investigating the affairs of the subject parties: the receiver could freeze their assets.[18]   

Judgment Creditors Appointing Investigative Receivers in Alberta

The Ontario Court of Appeal cited a number of cases where it had been proper for an investigative receiver to be appointed, including the Alberta case of Romspen Investment Corp. Hargate Properties Inc.[19]  In that case the investigative receiver was appointed by a secured creditor.  An Alberta judgment creditor could rely on a number of different legislative provisions in an application to appoint an investigative receiver, including section 13(2) of the Judicature Act,[20] section 99 of the Business Corporations Act,[21] and section 85 of the Civil Enforcement Act.[22]  When making such an application, a judgment creditor should ensure that it has convincing evidence to show that it needs the receivership order, and that the receivership order is tailored to minimize unnecessary intrusions into the debtor’s affairs.

---

[1] Akagi v. Synergy Group (2000) Inc., 2015 ONCA 368 [“Akagi”]. The Court of Appeal noted that there was divided authority on whether or not an applicant must demonstrate fraud.  Fraud was established in this case, and the Court did not need to consider this question, see FN2 of the decision.

[2] Ibid at para 35.

[3] Ibid at para 22.  The judgment comprised ~$116,000 in compensatory damages, $30,000 in punitive damages, and $36,000 in costs.  $60,000 of the judgment was satisfied by funds the defendants had paid into court earlier in the litigation.

[4] Courts of Justice Act, RSO 1990, c C-43.

[5] Akagi, supra note 1 at paras 33, 37.

[6] Ibid at para 43.

[7] Ibid at para 43.

[8] Ibid at para 43.

[9] Ibid at para 43.

[10] Ontario uses a template Receivership Order (available here), which includes a come back clause, enabling any interested party to apply to court to vary or amend the Order.  Alberta also uses a template Receivership Order, which includes similar language (available here).

[11] Akagi, supra note 1 at para 114.

[12] Ibid at paras 94-99.

[13] Ibid at paras 101, 106.

[14] Ibid at paras 80, 107.

[15] Ibid at paras 80, 107.

[16] Ibid at para 100.

[17] Ibid at para 100.

[18] Ibid at para 100.

[19] Romspen Investment Corp. Hargate Properties Inc., 2011 ABQB 759.

[20] Judicature Act, RSA 2000, c J-2.

[21] Business Corporations Act, RSA 2000, c B-9.

[22] Civil Enforcement Act, RSA 2000, c C-15. 

Anti-Corruption: Two Kinds

I've been thinking a lot lately about anti-corruption. It's a hot topic these days, and for good reason. But there's an even stronger argument for the ascension of anti-corruption that is far less trumpeted.

Some background: the first form of corruption I'm talking about is the one most of us are familiar with: bribery, money laundering, extortion. Mike Duffy-like allegations, or as Lawrence Lessig puts it, the actions of bad souls acting badly. This is the kind of corruption targeted by the federal government's anti-corruption rules applicable to companies that want to do business with the government, rules which the federal government has just "relaxed"; see the Globe and Mail's take here. More on that in a moment.

This kind of corruption, and the measures designed to combat it, are undoubtedly important. But there's an even broader, far more insidious and egregious form of corruption that warrants greater attention: namely, systemic corruption, and its close cousin, regulatory capture.

I've been thinking a lot about these broader concepts because I'm at work on a paper about what I call the root problem of Canadian environmental law - the systematic diversion of regulation away from the public interest in robust environmental protection toward the special interests of various industries. Having surveyed a large and representative swath of the diagnoses of Canada's infirm environmental laws (the weaknesses typically diagnosed include excessive discretion, absent laws, the failure to keep up with science, inadequate implementation and enforcement, insufficient opportunities for meaningful public participation, and an unduly narrow range of legal tools and policy options), regulatory capture appears to be at the root of each of these infirmities, and law reforms that do not attend to the root problem of regulatory capture are bound to fall short. Regulatory capture, in the popular parlance of governance studies, is "sticky." Once in place, it's difficult to root out.

What's more, I think most of us know this perfectly well, and are aware that this is a problem of general application and fundamental importance. As Lessig describes the U.S. Congress in his fascinating Ted Book The USA is Lesterland:

Our Congress is corrupt.

It is obvious.

Yet we ignore the obvious.

We ignore it the way we ignore death. Or taxes. Or the end of the world. We ignore it because changing it just seems impossible. The very idea of motivating a political movement to rise up and make this system different seems beyond the power of any of us. So we turn instead to the problems that seem possible....

For example, corruption of the alleged Mike Duffy variety.

Even though Lessig's remarks above pertain to the U.S. Congress, his framing of the problem could equally apply to Canada's Parliament, most of its provincial legislatures, and a great many of its administrative agencies.

Which is why today's news of the federal government's move to relax its anti-corruption rules is such a useful news story - it neatly brings together these two kinds of corruption.

As the Globe reports: "The move comes after intense lobbying from industry, which warned of spreading economic damage because of the regulations introduced just 16 months ago."

Evidence of this spreading economic damage? The Globe's report is silent on this front, perhaps because there isn't any.

According to the Globe, the Canadian Manufacturers and Exporters, the Canadian Council of Chief Executives, and the Information Technology Association of Canada (lobby groups all) jointly wrote to Public Works Minister Diane Finlay in February claiming that the newly proposed integrity in procurement rules were "significantly out of step with Canada's trading partners" (which has a kind of "race to the bottom" appeal) and "negatively affecting investment in Canada now" (which has an economic catastrophe appeal, especially when unaccompanied by hard empirical evidence of harm).

Now, if anyone doubts that federal government procurement needs to be cleaned up, read these judgments of the Federal Court and the Federal Court of Appeal (here, and here) in which an American company desirous of doing business with the federal government had to launch a time-consuming and costly application for judicial review in order to be fairly considered in the applicable government agency's (CATSA's) tendering process. Of course, judicial review is the flip side of the legislative and executive anti-corruption coin.

The Globe's anti-corruption story, then, is really two anti-corruption stories for the price of one - an examination of broad, systemic corruption via the capture and diversion of regulation in the public interest toward the special and specific industry interest in limiting the consequences of bribery, money laundering, and extortion (to name just the biggies) in the context of doing business with the federal government.

As Lessig convincingly argues, this kind of systemic corruption is the most important public policy issue around, because it's at the root of every other public interest issue that you happen to care about.

So the next time you read about the Mike Duffy trial, ask yourself whether his Senate activities and expenses related to this broader form of corruption, and then ask yourself why that isn't more of an issue.

 

WestJet Bomb Threats: Are They Terrorist Acts?

If you are following the news, you've probably noticed that five WestJet flights have been forced to land because of bomb threats in the past week or so. While a lot remains unknown about the perpetrator, we do know that none of the threats eventuated into any actual harm.  To put it another way, there were no bombs. What does that mean for the perpetrator? Well, if he/she is caught, they're still facing some substantial liability.  In this video blog, I look at the potential charges an offender could face.