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Supreme Court of Canada Appointments

Dear Sir or Madam,

Yesterday we  outlined the structure of Canada’s court system. Today we move on to Canada’s highest judicial authority, the Supreme Court of Canada (SCC).

Sections 4-6 of the federal Supreme Court Act specify the composition of the SCC. The Governor in Council (the governor general, on advice from the Prime Minister’s Cabinet) appoints an individual who has been a judge of a provincial superior court—the Court of Queen’s Bench of Alberta or Supreme Court of British Columbia for example—or who has been a lawyer for at least ten years standing at the bar of any province.[1] Three of the SCC judges must be from Quebec, which  is likely to ensure that the SCC bench is sufficiently experienced with Quebec’s civil law system. It is also customary to include judges from across Canada’s geographical regions: three from Ontario, one from British Columbia, one from the Prairie provinces, and one from the Maritimes.

In August this year, Prime Minister (PM) Justin Trudeau announced a new nomination process for selecting SCC judges in an attempt to ensure that the process is “transparent, inclusive, and accountable.”[2] Before the new selection process, the PM appointed SCC judges through a simpler but arguably less transparent process. Before August 2016, the Prime Minister’s Office could nominate any superior court judge or lawyer in accordance with the SCA and the Constitution Acts, 1867-1982.[3] Customarily, this included conferring with provincial Attorneys General and with the Chief Justice of the SCC. Usually, this process resulted in a bench comprised of Justices with similar political and social values to the sitting government’s views. The nominees will probably continue to be politically aligned with sitting governments, but PM Trudeau’s intention is to demonstrate to the public that the nominees are selected for more than their political views.

The new Independent Advisory Board for Supreme Court of Canada Judicial Appointments, chaired by Rt. Hon. Kim Campbell, convened to “provide non-binding, merit-based recommendations” to the PM.[4] By August 24, the Board had received 31 applications. It provided a short-list of 5 candidates to the PM, who nominated Hon. Malcolm Rowe. The Minister of Justice and Attorney General of Canada, Hon. Jody Wilson-Raybould, explained that the PM chose Rowe J. from the short-list “because of his legal and judicial acumen, public service background, ability to work in French, and ‘depth of understanding’ of Canada’s ‘diversity.’”[5] It also helped that Rowe J. fills retiring Justice Thomas Cromwell’s Atlantic region seat. As a result of this more transparent process, the public can review Justice Rowe’s application questionnaire here.

On October 25, 24 parliamentarians convened in Ottawa in a new question-and-answer session to determine Justice Rowe’s proficiency in French, his attention to diversity in Canada, and his commitment to access to justice. Inquirers included the leaders of the NDP, Green Party, and Bloc Quebecois, senators (including Hon. Murray Sinclair, first Manitoba Indigenous judge and former chair of the Indian Residential Schools Truth and Reconciliation Commission), and other members of the House of Commons Standing Committee on Justice and Human Rights and the Standing Senate Committee on Legal and Constitutional Affairs. You can view the question-and-answer session here.

Section 41 of the Constitution provides the standard procedure to amend the “composition of the Supreme Court of Canada”.[6] It is the same as amending the office of the Queen or the Governor General and Lieutenants General of the provinces. In 2014, former PM Harper nominated Justice Marc Nadon from the Federal Court of Appeal, the Governor General appointed him, and he was sworn in according to the SCA.

Unfortunately, despite Nadon J.’s experience, expertise, and suitability to sit as puisne justice of the SCC, he was ineligible to be appointed.[7] The SCC decided with a 6-1 majority in Reference re Supreme Court Act, ss. 5 and 6 that the correct interpretation of ss. 5 and 6 of the SCA excludes current judges of the Federal Court of Appeal from sitting on the SCC.[8]

The Supreme Court Act does not state that a Military Court judge, a Tax Court judge, Federal Court judge, or a Federal Court of Appeal judge can be appointed to the SCC. Other sections in the act do refer to judges of the Tax Court, Federal Court, and Federal Court of Appeal,[9] so it is unlikely to be an error in drafting.

The new process for selecting SCC judges does not change the ultimate appointment process, so it is not necessary to amend the SCA or the Constitution. It merely suggests appropriate candidates to the PM and, hopefully, would prevent an incident like that in 2014 because there are more experts reviewing the candidates.

Humble regards,

The Dominion

 

[1] RSC, 1985, c S-26 [SCA].

[2] Justin Trudeau, Prime Minister of Canada, “New process for judicial appointments to the Supreme Court of Canada”, News (Ottawa: 2 August 2016), online: <pm.gc.ca/eng/news/2016/08/02/new-process-judicial-appointments-supreme-court-canada>.

[3] 30 & 31 Victoria, c 3 (UK), s 41(d) [Constitution].

[4] “The Independent Advisory Board for Supreme Court of Canada Judicial Appointments”, Office of the Commissioner for Federal Judicial Affairs Canada (2 August 2016), online: <www.fja-cmf.gc.ca/scc-csc/index-eng.html>.

[5] Tonda Maccharles, “Supreme court nominee’s sex assault ruling no concern for Kim Campbell”, The Toronto Star, online: <https://www.thestar.com/news/canada/2016/10/24/supreme-court-nominees-sex-assault-ruling-no-concern-for-kim-campbell.html>.

[6] Constitution, supra note 3.

[7] Justice Thomas Cromwell, as quoted by Laura Stone and Sean Fine, “Nadon appointment rejected on technicality, Justice Cromwell says”, The Globe and Mail (Ottawa: 14 September 2014), online: <www.theglobeandmail.com/news/politics/nadon-appointment-rejected-on-technicality-justice-cromwell-says/article31891826/>. For more information see <www.cbc.ca/news/politics/marc-nadon-s-failed-journey-to-the-supreme-court-1.2636403>.

[8] 2014 SCC 21, [2014] 1 SCR 433 at para 4.

[9] See, for example, SCA, s 30.

A (veiled) hint at the future of Canadian corporate law jurisprudence?

Please check out my case comment on the SCC's recent decision in Chevron Corp. v. Yaiguaje in the Canadian Business Law Journal - you can read the decision here and the comment here. The Court's decision is primarily concerned with affirming and clarifying a liberal approach to the recognition and enforcement of foreign judgments pursuant to an equally liberal conceptualization of comity. But the Court's decision also offers an intriguing (if veiled) hint at the near future of Canadian corporate law jurisprudence, including the possibility of recognizing the principle of enterprise liability in respect of close corporate groups.

Limitation Periods in Section 38 Proceedings under the Bankruptcy and Insolvency Act: 681210 Alberta Ltd v 1335422 Alberta Ltd, 2015 ABQB 489

In 681210 Alberta Ltd v 1335422 Alberta Ltd,[1] Master Farrington, of the Alberta Court of Queen’s Bench tackled two issues that can arise when a creditor gets a section 38 order under the Bankruptcy and Insolvency Act [2](“BIA”) to pursue a bankrupt’s contractual claim against a third party:

1. Is the creditor bound by a mandatory arbitration agreement contained in the contract, upon which the creditor is suing?
2. When does the 2-year discoverability limitation period start running against the creditor?

The Court’s affirmative answer to the first question coheres with the logic of section 38 proceedings – the debtor’s contractual rights and obligations vest in the trustee, and are then assigned to the creditor.  The creditor cannot sue on the basis of the debtor’s contractual rights, without also being bound by its contractual obligations, including an agreement to arbitrate.  The Court’s analysis on this point is enlightening, but not surprising, and I will not discuss it in detail in this post.

Instead, I want to offer some initial reflections on the Court’s analysis of how limitation periods operate in section 38 proceedings.  In the 2010 case of Indcondo Building Corporation v. Sloan,[3] the Ontario Court of Appeal held that a creditor bringing a section 38 proceeding is a successor to the trustee, and the discoverability limitation period runs from the earlier of when either the creditor or the trustee had knowledge of the claim. Though it does not cite Indcondo, the Alberta Court’s decision is consistent with this precedent. Having regard for the type of claim at issue in the Alberta case, the Court could have gone further and found that both the creditor and the trustee were successors to the bankrupt corporation, and the discoverability period ran from the earliest of when the creditor, trustee or bankrupt corporation had knowledge of the claim; however, on the facts of this case, the outcome would likely have been the same. 

BACKGROUND

This decision is the most recent judicial pronouncement in a long running dispute over competing movie theatre businesses in Southern Alberta.  Starting in 1996, 681210 Alberta Ltd (“681”) operated a cinema in Okotoks, Alberta, a bedroom community south of Calgary.  Mr. Hunter was a director and officer of 681, as well as one of a number of shareholders. 

Unbeknownst to the other shareholders in 681, Mr. Hunter acquired a new company, Gnumedia Incorporated (“Gnumedia”), and in 2001 Gnumedia entered into a lease to operate a competing theatre in South Calgary.[4] 

In 2003, 681 sued Mr. Hunter and Gnumedia alleging breach of fiduciary duty and misappropriation of a business opportunity (the “Fiduciary Lawsuit”).  681 was successful at trial.  In reasons released in May 2011, the defendants were ordered to disgorge their profits, resulting in a judgment to 681 in the amount of almost $2.8 million plus prejudgment interest of over $500,000.[5]  In reasons released on March 14, 2012, the Court of Appeal dismissed the defendants’ appeal.[6]

In 2007, while the litigation with 681 was pending, Mr. Hunter and his wife separated.  Ms. Hunter owned 1335422 Alberta Ltd (“133”).  Around the same time, Gnumedia sold all of its assets to 133.  The Asset Sale Agreement between Gnumedia and 133 set out that any liability arising from the Fiduciary Lawsuit would be a joint liability between Gnumedia and 133.[7] 

The key events following the asset purchase are set out in the following chronology: 

• May 2011 – The trial court releases its reasons in the Fiduciary Lawsuit.
• November 25, 2011 - 681 started an action against Mr. Hunter, Ms Hunter, Gnumedia and 133 claiming that the transfer of assets from Gnumedia to 133 amounted to oppression under the Business Corporations Act, or a fraudulent preference (the “Oppression Lawsuit”).
• March 14, 2012 – The Court of Appeal dismissed the Fiduciary Lawsuit appeal.
• March 16, 2012 - Mr. Hunter made a personal assignment into bankruptcy. 
• March 26, 2013 - 681 applied for a bankruptcy order against Gnumedia
• April 9, 2013 - A bankruptcy order was granted against Gnumedia.
• May 2, 2014 - Gnumedia’s bankruptcy trustee filed a statement of claim against 133, seeking recovery on the basis of the joint liability clause contained in the Asset Purchase Agreement (the “Contractual Lawsuit”).
• January 7, 2014 - 681 was granted a section 38 order allowing it to take carriage of the Contractual Lawsuit.
• March 18, 2015 - 681 issued a Notice to Arbitrate to 133, without prejudice to its ability to continue the Contractual Lawsuit.

THE APPLICATION BEFORE THE COURT

133 applied to stay or dismiss the Contractual Lawsuit on the basis that:

(i) 681 was bound by the mandatory arbitration clause in the Asset Purchase Agreement, and,

(ii) The limitation period for starting an arbitration expired before 681 issued the Notice to Arbitrate.

THE COURT’S DECISION

The Court found that:

(i) 681 was bound by the mandatory arbitration clause in the Asset Purchase Agreement, and

(ii) The limitation period for starting an arbitration had elapsed before 681 issued the Notice to Arbitrate.

The Court dismissed the Contractual Lawsuit.

THE LAW

Section 38 Orders & a Bankrupt’s Lawsuits

When a party makes an assignment or is assigned into bankruptcy, his or her property automatically vests with the bankruptcy trustee, including many (though not all) lawsuits that a bankrupt could pursue prior to bankruptcy.[8]  Trustees may choose to pursue these lawsuits; however, if they opt not to, a creditor can apply for a section 38 order. The section 38 order allows the creditor to take carriage of the litigation.  The creditor does so at its own expense.  If it is successful, it is entitled to retain an amount equal to (i) the value of its claim against the bankrupt’s estate, and (ii) the expenses it incurred pursuing the litigation. Any amounts the creditor recovers in excess of this value is paid into the bankruptcy estate for distribution according to the priority scheme set out in the BIA.

Arbitration Agreements & Limitation Periods

If parties have contracted to settle their disputes by arbitration, the courts will generally hold them to that contract.  If a party brings court proceedings with respect to a matter subject to a mandatory arbitration agreement, the other parties to the arbitration agreement can apply under section 7 of the Arbitration Act[9] to have the court proceeding stayed. A court must stay the court proceeding, unless one of the exceptions in section 7(2) of the Arbitration Act applies, or the party bringing the stay application has attorned to the jurisdiction of the court.[10]

Instead of staying a court proceeding, a court will dismiss it if the limitation period for starting an arbitration has elapsed.  The limitation periods in the Limitations Act[11] apply to arbitrations, including the 2-year discoverability period and the 10-year ultimate limitation period.

LIMITATIONS ISSUE

The Court had to determine when the 2-year limitation period began to run against 681, and whether it had expired prior to the Notice to Arbitrate being issued on March 18, 2015.

ANALYSIS

The Court held that, at the latest, the 2-year discoverability limitation period began to run against 681 when the appeal from the Fiduciary Lawsuit was dismissed on March 14, 2012.[12]  The Notice to Arbitrate was issued more than 2 year later on March 18, 2015, and therefore 681 was out of time to start an arbitration.

681 argued that it was not able to advance its claim against 133 until it received the section 38 order.  The Court rejected this position.  There was evidence 681 knew about 133’s potential liability under the Asset Purchase Agreement as far back as 2010, and 681 made reference to this aspect of the Asset Purchase Agreement in pleadings filed in 2011. The Court noted that at all times 681 was the directing creditor: it had applied for the bankruptcy order, and its lawyer drafted the Statement of Claim filed by the trustee.  The Court reasoned that 681 could have applied for a bankruptcy order against Gnumedia once it received a judgment in the Fiduciary Lawsuit, or at least when the appeal was dismissed.  It noted that if the limitation period did not run until 681 was granted a section 38 order, 681 could “postpone the limitation period indefinitely” by waiting to apply for a bankruptcy order.[13]

681 advanced as an alternative argument that 133’s liability was a demand obligation which was not engaged until a demand was made at some point after the judgment was issued.  The Court held that the commencement of the Oppression Action in November 2011 amounted to a demand.[14]

DISCUSSION

The Court’s approach to the question of whose knowledge matters for determining when the discoverability limitation period started to run is consistent with the Ontario Court of Appeal’s decision in Indcondo, and it might be worthwhile to tease out this analysis.

In Indcondo, the Ontario Court of Appeal was asked to determine which limitation period applied to a creditor, who had been granted a section 38 order to pursue a fraudulent conveyance proceeding. The question of which limitation period applied was complicated because Ontario’s Limitations Act, 2002 came into force January 1, 2004.[15]  Under the old act, there was no limitation period for fraudulent conveyance proceedings. Under the new act, there was a 2-year discoverability period.  The old act applied to fraudulent conveyance claims discovered before January 1, 2004, and the new act applied to those discovered after that date. 

The creditor discovered the claim before January 1, 2004.  The trustee discovered the claim after that date.  The creditor’s claim would be statute barred if the limitation period was determined using the trustee’s date of discovery, but would not be if the limitation period was determined using the creditor’s date of discovery.

The Court held that a creditor pursuing a section 38 claim was the assignee of the trustee’s claim, and “step[ped] into the shoes of the trustee.”[16]  The date of discovery of the claim was governed by section 12 of the Limitations Act, 2002, which provided that when a person commencing a proceeding claims through a “predecessor in right, title or interest”, the person will deemed to have knowledge of the claim from the earlier of when the person or the predecessor had knowledge.  Consequently, the creditor’s claim was “discovered” when the creditor had knowledge of the claim, it was governed by the old limitations act, and was not statute barred.[17]

The reasons in 681210 Alberta Ltd v 1335422 Alberta Ltd do not reference Indcondo, but the Court’s analysis is at least partly aligned with the Ontario Court of Appeal’s approach.

 In Alberta, the discoverability of a claim brought by a successor is dealt with in section 3(2)(a) of the Limitations Act, which is similar to section 12 in the Ontario legislation.  The Alberta provision reads:

3(2)  The limitation period provided by subsection (1)(a) or (1.1)(a) begins:

(a)      against a successor owner of a claim when either a predecessor owner or the successor owner of the claim first acquired or ought to have acquired the knowledge prescribed in subsection (1)(a) or (1.1)(a) 

The Court held that, at the latest, the limitation period started to run from when the appeal of the Fiduciary Lawsuit was dismissed.   The Court characterized this as the day that 681 “knew, or ought to have known, of the circumstances giving rise to the claim” in the Contractual Lawsuit.[18]  This suggests that, like in Indcondo, the Court was prepared to find the 2-year limitation period ran from the earlier of when the creditor or the trustee discovered the claim.  Like in Indcondo, the creditor had discovered the claim first.

There is an important difference between Indcondo and 681210 Alberta Ltd., which relates to the types of claims being brought by each creditor.  In Indcondo, the creditor was bringing a fraudulent conveyance claim.  The trustee could bring the fraudulent conveyance claim, as could a creditor, but the debtor could not, even prior to its bankruptcy. A debtor cannot impeach its own transactions using the BIA or provincial legislation.  In 681210 Alberta Ltd., the creditor was pursuing a contractual lawsuit.  Had it not been assigned into bankruptcy, Gnumedia could have pursued the contractual claim itself.  681 could be characterized as being the assignee of the trustee and Gnumedia.  Pursuant to the analysis in Indcondo, it would have been open to the Court to find that the limitation period ran from when the Gnumedia, 681 or the trustee first had knowledge of the claim.  Such an approach would promote the purpose of limitation periods, which is to “eliminate harm to defendants of very belated litigation” by “preventing certain plaintiffs from suing on good causes of action.”[19]

Starting the limitation period from when the bankrupt discovered the claim would likely not change the outcome in 681210 Alberta Ltd.  The Court may have determined that Gnumedia did not discover its claim against 133 under the Asset Purchase Agreement until its liability in the Contractual Lawsuit was confirmed by the Court of Appeal, i.e., the same day that 681 knew or ought to have known about the claim.  And in any event, even if Gnumedia discovered the claim at an earlier date, the result would be the same: the limitation period had expired.  On a different set of facts, though, the outcome may turn on how the analysis in Indcondo should be applied when a creditor uses section 38 to pursue a claim that could have been pursued by the bankrupt. 

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[1] 681210 Alberta Ltd v 1335422 Alberta Ltd, 2015 ABQB 489, Farrington Master (“681210 Alberta Ltd”).

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

[3] Indcondo Building Corporation v. Sloan,  2010 ONCA 890, 103 OR (3d) 445 (“Indcondo”).

[4] 681210 Alberta Ltd. v. Hunter, 2012 ABCA 83 at paras 3-9 [2012] 7 WWR 698.

[5] 681210 Alberta Ltd. (Okotoks Cinemas) v. Hunter, 2011 ABQB 320 at paras 169-170, 508 AR 304, Hunt MacDonald J.

[6] See above FN 4.

[7] 681210 Alberta Ltd at paras 5-6.

[8] Some types of claims, including those resulting from a personal injury suffered by a bankrupt, do not vest in the trustee, see Roderick J Wood, Bankruptcy & Insolvency Law (Toronto: Irwin Law, 2009) at 88-91.

[9] Arbitration Act, RSA 2000, c A-43.

[10] 681210 Alberta Ltd atparas 17. 33.

[11] Limitations Act, RSA 2000, c L-12, s 3; Arbitration Act, s 51.

[12] 681210 Alberta Ltd at para 64.

[13] 681210 Alberta Ltd at para 59-65.

[14] 681210 Alberta Ltd at paras 66-67.

[15] Limitations Act, 2002, SO 2002, c 24.

[16] Indcondo at para 12.

[17] Indcondo at paras 22-23.

[18] 681210 Alberta Ltd at para 62.

[19] Bowes v. Edmonton, 2007 ABCA 347 at paras 118-119, 425 AR 123. 

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. 

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[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. 

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.

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[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.