Court rules CLA trust claims cannot count on trust provision protection if owner goes bankrupt

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Bruce Reynolds discusses his Construction Lien Act review recommendations.

A recent court judgement indicates that Ontario subcontractors and suppliers should not count on Construction Lien Act (CLA) trust protections if a property owner goes bankrupt.

The Sept. 19 judgement by Justice Conway of the Ontario Superior Court of Justice (Bank of Montreal v. Kappeler Masonry Corporation, et. al.), confirmed that commingling of construction project receipts in a receiver’s estate account is fatal to a CLA trust claim in the face of a debtor’s bankruptcy, Sam Babe of Aird & Berlis LLP writes in a commentary.

“Conway J. followed the Court’s earlier decision in Royal Bank of Canada v. Atlas Block Co. Limited and, in particular, Atlas Block’s application of the general principles regarding provincial deemed trusts set out by the Ontario Court of Appeal in GMAC Commercial Credit Corp. Canada v. TCT Logistics Inc. TCT held that provincial deemed trusts that do not bear all characteristics of a common law trust cannot be effective in bankruptcy to alter the priority scheme set out in the Bankruptcy and Insolvency Act (Canada).

“Conway J. found that neither the CLA nor the receivership order required the receiver to segregate CLA trust funds and that the receiver had commingled the funds in its general estate account along with funds from all other sources. Pursuant to Atlas Block and TCT, such commingling was fatal to the trust asserted by the construction supplier because the commingling destroyed certainty of subject matter (the property subject to the trust), leaving the trust without all the characteristics of a common law trust.

“Most importantly, Conway J. held that the traceability of funds in the estate account was not relevant because the funds were not initially received into a true trust (independent of the CLA deeming provisions).”

“Kappeler Masonry and Atlas Block are the only Ontario cases where secured creditors have successfully challenged the priority of deemed construction trust claims in bankruptcy,” Babe writes. “They also bookend a series of contrary decisions from other provinces that have upheld the priority of construction trust claims in bankruptcy.”

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