Legal Blog

Advantage

A trust action has a number of advantages over a regular breach of contract action. An obvious advantage is the ability to claim against directors and officers of a corporate trustee. A more subtle advantage was brought to the fore in One-Way Drywall Inc. v. Lomax Management Inc., a 2016 decision of the Ontario Superior Court of Justice.

Action

A sub brought an action against a general for breach of contract and breach of trust and joined its two directors to the trust action. During the course of the action, the plaintiff amended its statement of claim to increase the amount claimed from $260,000 to $280,000.

The action moved along at a snail’s pace for over 4 years, mostly because of the defendants’ delay tactics. They finally attended at a discovery, but refused to answer any questions dealing with the project’s finances and the financial relationship between the owner and the general. In short, they stonewalled.

The general paid $260,000 to its lawyer in trust to the credit of the action to be payable if the sub succeeded on its contract claim. The two directors also offered to guarantee payment of any amount due to the sub to a maximum of $260,000.

The general and the two directors then brought a motion to have the trust portion of the action dismissed, resulting in the entire action being dismissed against the directors personally. They argued that, given the money paid to their lawyer and their offer of a guarantee, the trust aspect of the claim was pointless.

Reaction

The moving parties would have known that they had a problem when the reasons for decision opened with “This is a chutzpah summary judgment motion.” Chutzpah, when translated liberally, means “you have a lot of gall.”

If the general and its directors had been able to ensure that the sub was placed in the same position without the trust claim as it would have been with it, the general and directors would have been successful. But the positions were not the same. With regard to the money paid to the lawyer:

• it was $20,000 short of the amount claimed
• it was not paid into court and the plaintiff had no control over what the lawyer did with the money
• it did not include anything for costs of the action

More importantly, the judge noted that a trust claim gives one major advantage that monies held in trust do not give: protection against a possible bankruptcy. The judge stated:

The “elephant in the room” or to be more precise the “elephant in the courtroom” is that One-Way’s breach of contract claim will be discharged if Lomax goes bankrupt, a not uncommon phenomenon in the construction industry, but One-Way’s breach of trust claim would likely survive the bankruptcy of Lomax, Mr. Jeffrey, or Ms. Danilko because of s. 178(1)(d) of the Bankruptcy and Insolvency Act, …, which provides that: “an order of discharge does not release the bankrupt from any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity.” A breach of the statutory trust under the Construction Lien Act may qualify as a liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity.

That was enough for the judge to dismiss the motion with costs on a substantial indemnity basis fixed at $33,400.

Image courtesy of hotblack.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.