In previous posts[1], we discussed the concept of how “trusts” created under the Construction Act and how trusts could be used as a method of recovering unsecured debt in bankruptcies. Recently, the Superior Court of Justice in Ontario was posed with a unique case in Tremblar v. 1839563 Ontario[2], where the creditor of a bankrupt entity attempted to seek a declaration of trust between itself and the payer of the bankrupt – meaning it tried to skip the middleman and go straight to the source.
In arriving at his decision, the Honourable Justice King considered the importance of establishing a direct connection/chain between the party claiming a trust relationship and the party against whom trust obligations are imparted.
The Facts
This matter involved a series of claims arising out of a commercial construction project in Windsor, Ontario. The Owner, The Lighting Boutique Incorporated (“TLB”) entered into a contract with 1839563 Ontario Limited, operating as Keystone General Contractors (“Keystone”) for various renovations to its property. Keystone, in turn, hired the Plaintiff, Tremblar Building Supplies Ltd. (“Tremblar”), for the supply of various materials.
Before the project was complete, Keystone made an assignment in bankruptcy – leaving Tremblar unpaid. As such, Tremblar commenced an Action against Keystone and TLB. Since Keystone was bankrupt, Tremblar focused its efforts on pursuing a claim against TLB, wherein it sought 1) a declaration that TLB owed Tremblar trust obligations; or alternatively 2) that TLB was unjustly enriched due to Tremblar’s supply of materials.
In November 2018, TLB brought a summary judgment Motion dismissing the Action against it on the basis that there could not be any trust relationship between TLB, an Owner, and Tremblar, a subcontractor. Particulary, TLB argued that a privity of contract, meaning a direct contractual relationship, was necessary between parties as a precondition of finding a breach of trust.[3] Tremblar countered with an argument focusing on the policy reasons behind the Section 8 trust in ensuring payment for suppliers in the construction industry.
Following the Motion, Tremblar provided the Court with the decision found in Great Northern Insulation Services Ltd. v. King Road Paving and Landscaping Inc., 2019 ONSC 3671 (“King Road”), where the Honourable Justice Corbett determined that subcontractors had a priority to payment of monies paid by an Owner to a general contractor. The Court in King Road made clear that all funds owed to the contractor, by the owner, under a contract for work, were impressed with a trust for all the beneficiaries of that trust, until satisfied.[4]
Justice King distinguished the within case with King Road on the basis that, although a trust was imparted on any monies received by a contractor from an Owner, it did not indicate that the “tentacles of those trust provisions” extended back to an Owner. The Court further outlined that, in Robert Nicholson Construction Company Limited v. Edgecon Construction Inc., 2016 ONSC 3107, the Divisional Court held that a trust relationship could not exist by mere payment between one corporation and another, where no other contractual relationship existed.[5] On that basis, Justice King granted TLB’s summary judgment Motion dismissing the within Action against TLB.[6]
Take-Aways
This case has bigger implications for subcontractors and materials suppliers facing a contractor-bankruptcy situation. Within the last two years, the Courts have taken a liberal approach in imparting trusts and having those trusts survive bankruptcy, such as in the A-1 Paving[7] and the Urbancorp Cumberland[8] cases.
The driving force behind these cases was the creation of a policy allowing innocent subcontractors/materials suppliers to recover monies they were otherwise owed, which were unpaid at no fault of their own. The Tremblar case pumps its breaks on this policy – even where the Owner may not have paid the bankrupt contractor, a subcontractor may not jump past its non-contracting relationship to declare a trust.
Practically speaking, however, the Court did not cover one significant possibility in recovery for this matter – being the remedies available under the Bankruptcy and Insolvency Act (the “BIA”). Section 38 of the BIA holds that:
Where a creditor requests the trustee to take any proceeding that in his opinion would be for the benefit of the estate of a bankrupt and the trustee refuses or neglects to take the proceeding, the creditor may obtain from the court an order authorizing him to take the proceeding in his own name and at his own expense and risk, on notice being given the other creditors of the contemplated proceeding, and on such other terms and conditions as the court may direct.[9]
This means that, where an insolvent estate is owed money but does not have its own means to pursue a claim, a creditor can step in the shoes of the bankrupt and pursue the bankrupt’s claim on its own behalf. This allows a creditor to keep any monies recovered by the creditor on behalf of the bankrupt. In the context of Tremblar, if Keystone was truly owed money by TLB, then Tremblar could have brought a Motion pursuant to Section 38 allowing it to pursue a breach of contract/breach of trust claim directly against TLB on behalf of Keystone.
In conclusion, while the Court in Tremblar held that there must be a contractual relationship in order to establish a statutory trust, there are still mechanisms available to bypass this result and hold Owners accountable where monies are truly owed to a bankrupt contractor and – subsequently – to innocent subcontractors.
The foregoing is for informational purposes only and should in no way be relied upon as legal advice. If you have any further questions, or would like to schedule an appointment for legal advice tailored to your circumstances and business, please contact me at dan@fridmar.com.
[1] https://fridmar.wpenginepowered.com/2020/05/bankruptcy-and-construction-trusts/
[2] Tremblar v. 1839563 Ontario, 2020 ONSC 1316
[3] Tremblar, supra note 2 at para. 27.
[4] Tremblar, supra note 2 at para 37.
[5] Tremblar, supra note 2 at paras. 27 and 45.
[6] Tremblar, supra note 2 at para. 47.
[7] The Guarantee Company of North America v. Royal Bank of Canada, 2019 ONCA 9.
[8] Urbancorp Cumberland 2 GP Inc. (Re), 2020 ONCA 197.
[9] Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 38.
