Ontario Superior Court Clarifies when a Construction Lien Act Trust Claim Does Not Survive a Bankruptcy

Damon Stoddard

In Royal Bank of Canada v. Atlas Block Co. Ltd.^[1], the Ontario Superior Court of Justice (Commercial List) found that a material supplier’s Construction Lien Act^[2] (“CLA”) trust claim did not survive the bankruptcy of the contractor. The Court held that the alleged trust lacked the attributes of a common law trust, therefore the funds were not excluded from being divided amongst the bankrupt’s creditors under the Bankruptcy and Insolvency Act^[3] (“BIA”).The Court also held that the contractor’s receiver had no obligation to keep funds it received from construction projects separate from funds received from sales to others, such as wholesalers or
retailers.

The Parties and Facts
Atlas Block Co. Ltd. (“Atlas”) was a group of companies that manufactured and sold concrete blocks and other products, such as paving stones and masonry, to industrial contractors, residential builders, large retailers, and through a dealership network. Atlas did not keep its income from construction project sales separate from its income from non-construction project sales.

Holcim (Canada) Inc. (“Holcim”) supplied Atlas with bags of cement powder, which were incorporated into Atlas’ cement products. Holcim expected to be paid within 90 days after it delivered its cement powder and the payments were not tied to specific construction projects.

In December 2013 Atlas filed for bankruptcy and its receiver brought a motion for directions as to whether Holcim had a trust claim under section 8 of the CLA and, if so, whether the trust claim survived Atlas’ bankruptcy.

The Trust Claim
Section 8 of the CLA provides that all amounts owing to (or received by) a contractor or subcontractor, on account of a contract or subcontract price, constitute a trust fund for the benefit of the subcontractor (or supplier of services or materials to the improvement), who are owed money by that contractor or subcontractor.

Justice Penny found that to establish a s. 8 CLA trust, Holcim had to prove that:

1. Atlas was a contractor or subcontractor,
2. Holcim supplied materials to projects for which Atlas was a contractor or subcontractor,
3. Atlas received or was owed money for materials supplied to those projects, and
4. Atlas owed Holcim money in respect of those materials.

Holcim argued it had a trust claim for monies owed with respect to Atlas’ products containing Holcim’s materials (the cement powder) that were supplied to certain large, identified construction projects, since:

1. all Atlas cement blocks and cement sold to construction projects contained Holcim cement powder in amounts that could be determined, and
2. all sales of cement products to identified construction projects were known.

Subject to the bankruptcy issue, discussed below, Penny J. found that Holcim should at least be entitled to put its assertion to the test, in a reference [motion for directions], and to try to prove on a balance of probabilities that amounts owed by large, identified construction projects for Atlas’ cement products, were traceable to Holcim material.

Trust Claim Does Not Survive the Bankruptcy
Penny J. found, however, that the more fundamental issue was that, even if Holcim had a trust claim under s. 8 of the CLA, that trust claim did not survive Atlas’ bankruptcy, due to the operation of s. 67(1)(a) of the BIA and the paramountcy doctrine.

Section 67(1)(a) excludes from property divisible among the creditors of the bankrupt, “any property held by the bankrupt in trust for any other person”. However, Justice Penny confirmed that “according to a long line of Supreme Court of Canada decisions,. . . paragraph 67(1)(a)does not extend to assets subject to a deemed trust created by provincial statute where such deemed trust does not otherwise have all the attributes of a valid trust at common law.” In GMAC v. TCT Logistics Inc.^[4] the Ontario Court of Appeal summarized these cases:

The Court, therefore, had to determine whether the alleged CLA trust met the requirements of a common law trust, namely the existence of the three certainties: (i) certainty of intention, (ii) certainty of subject matter, and (iii) certainty of object.

Penny J. held that Holcim’s trust claim did not meet the certainty of subject matter requirement, as Atlas (and Atlas’ receiver after the receivership date) failed to segregate payments from construction projects for products containing Holcim’s material. Penny J. cited the TCT decision, where the Ontario Court of Appeal held that “[o]nce the purported trust funds are co-mingled with other funds, they can no longer by said to be ‘effectively segregated’ for the purpose of constituting a trust at common law”.^[6]

Holcim argued that Atlas’ receiver was an officer of the court and had a positive obligation to keep funds subject to the CLA trust separate. Penny J. rejected this argument and held that since Atlas had no obligation to keep CLA trust funds in a separate bank account, that Atlas’ receiver also had no obligation to keep funds recovered into Atlas’ estate in a separate bank account.

Thus, since the funds were co-mingled by the receiver, there was no certainty of subject matter in respect of those funds. Penny J. stated that even though “it might be possible to trace the funds for products incorporating Holcim materials to particular construction projects does not change this. Once
co-mingling has occurred, that is the end of the matter”.^[7]

Conclusion
Atlas confirms that the trust provisions in Ontario’s CLA do not survive in a BIA insolvency due to the paramountcy doctrine, unless the funds are proven to be common law trust funds, which are deemed to be exempt from the bankrupt’s estate.

A recent case in Alberta also reached a similar conclusion. In Iona Contractors Ltd. (Re),^[8] a surety that paid amounts owing by Iona to Iona’s unpaid subcontractors under labour & material payment bond claims asserted that amounts owing by the project owner to Iona were trust funds under s. 22 of Alberta’s Builder’s Lien Act.^[9]

The Alberta Court of Queen’s Bench disagreed and held that s. 22 trust claims did not survive the bankruptcy of Iona and that funds payable to Iona (and Iona’s trustee) by the owner, were:

“a contractual debt and in the normal course would be mixed between payments due by the contractor to subcontractors, and other bills due and its profit … The funds in the ordinary course would have been impressed by a statutory trust under the BLA, however that trust is not effective as against the secured creditor … because of the provisions of the BIA”.^[10]

The Atlas and Iona decisions confirm that deemed trusts created by provincial construction lien/ builder’s lien legislation do not survive the bankruptcy of the debtor/contractor unless the purported trust has all the elements of a common law trust. However, it is important to note that since Atlas also permits receivers and trustees to co-mingle trust funds received, and there is no statutory obligation for have separate bank accounts for funds received from individual projects, it will be difficult (barring legislative change) for CLA trust claims to be proven in bankruptcies or receiverships.