Canada: The Guarantee Company Of North America v. Royal Bank Of Canada (Aka A-1 Asphalt) – Return (Or Revenge?) Of The Statutory Lien Trust

In the Star Wars movies, there are points where the Jedi seem to have wiped out the Sith (or vice versa) only to find out that the other has come back to life. Stakeholders, lawyers and insolvency professionals who had seen, or hoped for, the end of the statutory construction lien trust after bankruptcy might be forgiven for feeling like that right now after the January 14, 2019 decision of the Court of Appeal for Ontario in The Guarantee Company of North America v. Royal Bank of Canada, which arose out of the receivership and bankruptcy of A-1 Asphalt Maintenance Ltd.

This decision, by a unanimous five judge panel, has upended what had been a line of three trial level cases over 4+ years in Ontario (Atlas Block, Kappeler Masonry and A-1 Asphalt at the trial level) holding that this statutory trust in what is (now renamed) the Ontario Construction Act was not effective after a bankruptcy. Notably, the reasoning in those three cases, while not uniform, clashed with other trial level decisions from BC. Nova Scotia, and with the Alberta Court of Appeal decision in Iona Contractors.

The Court of Appeal's decision firmly establishes that these trusts can be effective after bankruptcy. Irrespective of whether one regards that as good or bad, a positive takeaway is that this brings Ontario into line with the other common law jurisdictions in Canada on this point, including the other appellate level decision in Iona Contractors. Stakeholders and practitioners will therefore be able to address this issue somewhat more uniformly.

The Court of Appeal's decision comprehensively addressed many of the arguments made why such trusts should not survive bankruptcy. For example:

  1. the statutory trust is invalid because it was intended to apply to bankruptcy, which is in federal jurisdiction – the fact that this was one of its objectives does not mean that the province is legislating in bankruptcy;
  2. the statutory trust is invalid because it conflicts with the Bankruptcy and Insolvency Act – no conflict arises because the Supreme Court held in Henfrey that the provinces could deem a statutory trust to arise (for the Crown or for third parties, like lien claimants here) and there is no conflict with the policy of the BIA. Further, deeming a particular class of funds to be a trust is different than other after-the-fact deeming provisions (such as in employment or pension benefits areas upon a deficit arising);
  3. as noted at the trial level, there was no trust on the payor of the funds – the fact that the municipalities that had paid the trustee of A-1 Asphalt were not treating those funds as under a trust is not relevant to whether the province can deem those funds to a trust in the hands of A-1 Asphalt (or its trustee) as the recipient; and
  4. the funds in question were not kept strictly apart from any other funds – ordinary rules of treating other types of trust funds still apply, so if the funds are identifiable, as they were in this case, then they are traceable.

The commentary about identifying and tracing lien trust funds will be particularly important for Ontario practitioners to pay attention to in the future. The Court of Appeal in GCNA/A-1 Asphalt held that simply receiving funds and putting them together with other funds did not deprive them of their trust quality (or at least not right away). While in that case the receiver/trustee was under a court ordered obligation to keep one account for all the funds said to be trust funds, the important issue for practitioners going forward is what happens if a receiver or trustee does not treat such fund separately in the future? It does not take much of a stretch to foresee arguments of personal liability for court officers if they do not do so.

A corollary to that identification and tracing of funds point is worth mentioning. This decision (and for that matter those in other provinces) only stands for the proposition that a lien trust can be valid after bankruptcy. A critical part of that is being able to identify which funds are deemed to be trust funds. When dealing with funds on hand at a bankruptcy, that is not always possible (and if so, is certainly not easy). All that this decision means is that the lien trust needs to be taken into account again, not that it will prevail in all cases.

Is this really the last word on this, though? Just like how the Star Wars saga seems to depend on finding new Sith and Jedi conflicts, the answer is likely no, for at least two reasons:

  1. the bank in GCNA/A-1 Asphalt can attempt seek leave to the Supreme Court of Canada, and while the fact that this case brings Ontario into line with the sole other recent appellate authority in Iona Contractors as well as the other trial decisions won't help that attempt, others have made the mistake of treating a decision as the last word while appeal rights remain; and
  2. the bank was not permitted to make one argument by the Court of Appeal in GCNA/A-1 Asphalt, which would have questioned whether the bank's security nonetheless applied over a statutory deemed trust (as in Sparrow Electric). The Court of Appeal refused to consider that argument, because (among other things) it had not been made at the trial level. What happens if that sort of argument is properly made is, therefore, for another day.

Subject to those open issues, the statutory construction lien trust is now applicable again in Ontario after bankruptcy when funds can be identified and traced (while it never seems to have been inapplicable in BC, Nova Scotia and Alberta).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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