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Paramount

THE INTERACTION BETWEEN PARAMOUNTCY OF LEGISLATION AND THE CONSTRUCTION LIEN FRAMEWORK

In Canada, we have a concept called paramountcy; if federal legislation, enacted within constitutional jurisdiction, conflicts with provincial legislation, then the federal legislation governs because it is paramount. What happens when the federal Bankruptcy and Insolvency Act (BIA) bumps up against the deemed trust provisions in the Construction Lien Act (CLA)? We have had two recent cases attempting to answer this question: Royal Bank of Canada v. Atlas Block Co., a 2014 decision of the Ontario Superior Court of Justice and Iona Contractors Ltd. (Receiver of) v. Guarantee Co. of North America, a 2015 decision of the Alberta Court of Appeal.

Atlas

A concrete manufacturer (concrete blocks, paving stones, masonry, etc.) went into receivership and, ultimately, assigned into bankruptcy. It owed money to the supplier that provided cement for those concrete products. Manufacturer sold its products to construction customers and by retail to the general public.

Supplier claimed that manufacturer held its money in trust for supplier at the time that the receiver was appointed and that the receiver/trustee held money that it collected in trust for supplier. Supplier relied on the deemed trust provisions established under the CLA.

Supplier had two problems.

Tracing

To establish a trust, supplier had to demonstrate that its cement went into products that were then incorporated into construction sites. It would be unable to do this for concrete products that manufacturer sold to retail customers.

The motions judge, relying on an Ontario Court of Appeal decision, held that merely because manufacturer sold some of its products to retailers was not a bar to supplier’s trust claim. However, he noted that supplier still had the ultimate responsibility to prove what percentage of its products were delivered to construction sites and what percentage went to retail customers. This would be a difficult task, but supplier was entitled to try.

 

Queue Jump

By asserting a trust, supplier was attempting to leapfrog all of the normal unsecured and secured creditors and bypass the BIA rules for the orderly distribution of money in a bankruptcy.

The courts have recognised that a trust at common law does carve out the trust funds from a bankrupt’s estate. However, does a deemed trust, one that is imposed by legislation such as the CLA, have the same effect?

The motions judge held that, to be effective to bypass the BIA distribution rules, then, under paramountcy rules, the deemed trust had to fall within the established criteria for a common law trust. To do so, the trust had to have three certainties: of intention, object, and subject matter. There was no problem with the first two: the intention was to protect people who supplied goods and services to the construction project and the objects of that intention were the actual subcontractors and suppliers.

The real problem dealt with certainty of subject matter. Manufacturer did not segregate its construction receipts from its retail or any other receipts. Similarly, the receiver did not segregate the monies it received from manufacturer’s contractors; the money was all commingled. Supplier acknowledged that it could not trace the funds that manufacturer had deposited into one bank account, but argued that the receiver, being an officer of the court, ought to have put the construction receivables into a separate account. The judge disagreed. He held that the receiver stepped into the shoes of manufacturer and, if manufacturer had no responsibility to separate its receivables collected, neither did the receiver.

The trial judge therefore held that there was no certainty of subject matter, the monies were not subject to a common law trust, and supplier had to claim in the bankruptcy in the same manner as any other unsecured creditor.

GCNA

At about the same time that Atlas was being decided, GCNA was decided in the Alberta Queens Bench.

The general had posted a labour and material payment bond. It was assigned into bankruptcy leaving subs unpaid. The subs called upon the bond and the surety paid $1.5 million to the subs under the bond. The surety, who was subrogated to the rights of the subs, then claimed $1 million, the money that the owner still admitted was due to be paid to the general’s trustee in bankruptcy. The surety argued that the owner held the funds in trust, under provisions of the Alberta Builders’ Lien Act (BLA), for the subs the surety paid.

The motions judge held for the trustee, stating that the Alberta deemed trust conflicted with the provisions of the BIA and was therefore inoperative. The surety appealed.

Interaction

The Alberta Court of Appeal decided that a more nuanced view of paramountcy was preferred.

“The categorization of a claim for the purposes of relative priority is a matter of federal law. Thus, the provinces cannot define what is a “trust” or a “secured party” for the purposes of bankruptcy law; which claims are included in those various categories is a matter of federal law. This ensures the uniformity of bankruptcy law across Canada. But while uniformity of bankruptcy law is an important value, that does not mean that results will not vary from province to province. Since “property and civil rights” can vary depending on provincial law, a type of creditor in one province may be in a different position after bankruptcy than the same type of creditor in another province.”

The Court therefore decided that the determination of whether provincial legislation is in operational conflict with the BIA has to be determined by examining the purposes and effects of the provincial legislation.

The Court decided that the BLA trust provisions did not, either intentionally or primarily, affect the bankruptcy order of priorities. They were created as part of a larger statutory scheme to create civil rights for unpaid subs. It was not an attempt to use form to override substance.

Certainties

The certainties of intention and object were a given. As to the certainty of subject matter, the Court concluded that, since the monies were due to the general by virtue of a certificate of substantial performance and were, as yet, unpaid, there was certainty of subject matter. The Court therefore concluded that s. 22 of the BLA created certainty of subject matter. Since the Court decided that s. 22 had all of the attributes of a common law trust, there was no operational conflict between the BLA and the BIA.

Difference

We note that the BLA has very different trust provisions from the CLA. The CLA trust provisions apply to all money flowing down the construction ladder; the BLA trust provisions apply only to payment to be made after a certificate of substantial performance is issued.

What the Court did not do is differentiate Atlas‘ facts from those in GCNA. In Atlas, the funds had never been segregated. In GCNA, the funds were totally segregated. The owner was holding them in trust. We suggest that, had the facts been the same, the motions judge in Atlas would have held that there was a common law trust and would also have held that supplier had a valid trust claim.

 

Image courtesy of Flikr, Creative Commons.

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