Law Times

www.lawtimesnews.com LAW TIMES 2 COVERING ONTARIO'S LEGAL SCENE | JANUARY 21, 2019 The two governments paid $675,372.27 to A-1 Asphalt Maintenance Ltd., which went into a "paving projects account," the decision said. A dispute arose over which creditors or employees had pri- ority to receive the funds, if any, Sharpe wrote. In particular, the decision explored whether the funds were in a statutory trust created by Ontario's Construc- tion Lien Act, and if so, was that trust protected from creditors under the federal Bankruptcy and Insolvency Act. "It raised the question, 'Does the provincially created statu- tory trust continue to exist after a bankruptcy under federal leg- islation occurs?'" says Lerner. The Court of Appeal decided there was nothing in the federal Bankruptcy and Insolvency Act that conf licts with the province's construction rules, ordering that the $675,372.27 was not avail- able for distribution creditors. "Contractors are pretty cap- ital-intensive enterprises," says Scott Rollwagen, a partner at Lenczner Slaght who worked with Lerner on the case. "They have to make promises to those lenders . . . That's what they mean when they say to the people lower down the chain, 'No, this money belongs to you, it doesn't belong to the contrac- tor for the purposes of being dis- tributed to the creditors.'" Another issue addressed by the court was that of "co-min- gling," says Paul Cavalluzzo, a founder of Cavalluzzo LLP in Toronto, who acted for the inter- vener, LIUNA Local 183. The panel of judges wrote in the decision that it did not mat- ter to the validity of the trust that the payments for the mu- nicipalities were not in "segre- gated accounts or specifically earmarked." "In a bankruptcy situation, if the trust funds become part of the bankrupt [company]'s as- sets then they are distributed to the creditors in accordance with the priorities set out in bank- ruptcy legislation. What usu- ally happens is the banks scoop up everything and the work- ers are left with nothing," says Cavalluzzo. "There was some law in On- tario from the Ontario Supe- rior Court that suggested when funds from different creditors of the bankrupt are co-mingled — basically, not segregated — that money's not a valid trust, and therefore all of the trust monies would go to the bankrupt estate, to the prejudice of the workers. That line of cases has been, if not overruled, certainly it's clarified now. So long as the funds are traceable in the bankrupt's ac- count, then a valid trust has been created, in favour of the workers, and those monies are protected." The co-mingling of the funds came to the fore as the court analysed whether A-1 Asphalt Maintenance's statutory trust created by the Construction Lien Act met the "three certain- ties required for it to operate in bankruptcy," the decision said. In previous cases, trusts have been required to have certainty of intention, certainty of subject matter, and the certainty of ob- jects included. In British Columbia v. Hen- frey Samson Belair Ltd., 1989 CanLII 43 (SCC), a panel of judges wrote that in most cases, "the trust property soon ceases to be identifiable." "The tax money is mingled with other money in the hands of the merchant and converted to other property so that it can- not be traced. At this point it is no longer a trust under general principles of law," the 1989 deci- sion said. Raymond Slattery, managing partner at Minden Gross LLP in Toronto, says the decision shows co-mingling is not fatal so long as the monies have not been con- verted to another use. "It provides some certainty in an area where there was a lot of uncertainty, because differ- ent courts in different provinces had taken different positions," says Slattery, who acted for the receiver of A-1 Asphalt Main- tenance. The receiver of the company did not take a position on the matter of The Guaran- tee Company of Canada v. Royal Bank of Canada, 2019 ONCA 9. "There was some tension be- tween the insolvency practitio- ners who took the view that the BIA provides a complete code of how to deal with creditors' claims and the thinking was, 'Why should one group of credi- tors, i.e., construction suppliers and workers, be treated differ- ently from other creditors?'" says Slattery. "Whereas the construction bar has always strongly taken the position that they are a spe- cial group, provincial legisla- tion protects them and there's a scheme of holdbacks and liens and trusts that protect people who provide value to property. Basically, the latter prevailed. Both schemes can live together." Sam Babe, a partner at Aird & Berlis LLP and one of the lawyers that represented Royal Bank of Canada, declined to comment, as the client was still reviewing the decision, which is within the leave to appeal period. Brian Gray, a spokesman for the Ministry of the Attorney General of Ontario said in an email that the province could not comment further due to the appeal period. LT NEWS Continued from page 1 Conflicting views clarified for construction industry Well-known condominium authority Audrey Loeb brings you up to date on all the opportunities and challenges of the Condominium Act, 1998, as well as other complex issues arising in condominium law. This 5th edition fully updates the reader with the latest developments in condominium law and the Ontario Condominium Act, 1998, including the extensive changes introduced by the Protecting Condominium Owners Act, 2015. Written for lawyers, property managers, boards of directors and unit owners alike, here is the most convenient source of answers to the questions that arise on a daily basis. 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You can cancel your order at any time. Subscription coverage: you'll continue to receive ongoing updates until the next edition. Now also available as an eBook on Thomson Reuters ProView® Available risk-free for 30 days Online: store.thomsonreuters.ca | Call Toll-Free: 1-800-387-5164 | In Toronto: 416-609-3800 NEW "It provides some certainty in an area where there was a lot of uncertainty, because different courts in different provinces had taken different positions." Raymond Slattery

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