Builders' lien trusts in a bankruptcy - Iona Contractors Ltd v Guarantee Company of North America, 2015 ABCA 240

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Background

In 2009, the Calgary Airport Authority (CAA) entered into a construction agreement with Iona Contractors Ltd. for Iona to improve CAA’s north airfield. By October 2010, the work was substantially complete; however CAA withheld further payment to Iona on the basis that some of Iona’s subcontractors remained unpaid. Iona assigned into bankruptcy and a dispute arose over the entitlement to the withheld amounts (the Funds).

The appellant, Guarantee Co. of North America (GCNA), paid Iona’s unpaid subcontractors in its capacity as surety under a labour and material payment bond. GCNA claimed its subrogated rights to be paid the Funds in place of the subcontractors.

Issues

  1. Was Iona owed the Funds pursuant to the agreement?
  2. If the Funds were payable to Iona, were they impressed with a trust for the purposes of federal bankruptcy law, for the benefit of the unsecured, unpaid subcontractors?

Decision

The Alberta Court of Appeal allowed the appeal and ordered that the Funds be paid to GCNA. The Court unanimously held that Iona was owed the Funds pursuant to the agreement. The majority held that a BLA statutory trust recognized under bankruptcy law in favour of Iona’s subcontractors existed with respect to the Funds.

On April 14, 2016, the Supreme Court of Canada dismissed the application for leave to appeal this decision, with costs.

Arguments and reasons for decision

The respondent, Iona’s trustee in bankruptcy, argued that payments of the Funds by CAA directly to Iona’s subcontractors were not permitted under the agreement and any such payments would be impermissible upon the bankruptcy, pursuant to the Bankruptcy and Insolvency Act (BIA). The trustee also argued that, if the trust provisions under s. 22 of the Builder’s Lien Act (Alberta) (BLA) apply, they offend the priority regime under the BIA and are therefore inoperative.

GCNA argued that the agreement obligated Iona to pay its subcontractors, and in the event that Iona failed to do so, CAA would be entitled to pay the subcontractors directly and to deduct the amount of such payments from the total owing from CAA to Iona under the agreement. As Iona breached the agreement by failing to pay its subcontractors, it was not owed the Funds relating to work performed by its subcontractors.

The majority of the court determined that CAA was under no obligation to make payments to unpaid subcontractors, although it was given discretion to do so. However, upon bankruptcy, CAA could not rely on this contractually-granted discretion to pay Iona’s subcontractors directly, and in so doing, prefer them over Iona’s other creditors. As a result, the Funds were owed to Iona rather than its subcontractors. GCNA also argued that, when the agreement and the payment bond were read together, they disclosed an obligation on the part of CAA to mitigate the exposure of GCNA and to use the holdback the Funds to pay subcontractors directly. The majority stated:1

Even if the agreements, when read together, disclose some intention to minimize the exposure of the surety, the private arrangements between the owner, the contractor, and the bonding company cannot affect the rights of third parties like the Trustee in bankruptcy and the secured creditors. Whatever rights the appellant may have were not registered at the Personal Property Registry, and cannot displace the rights of the secured party.

Accordingly, the Court held that upon bankruptcy, Iona was owed the Funds pursuant to the agreement.

GCNA also argued that the Funds were subject to a statutory trust created for the benefit of the subcontractors pursuant to s. 22 of the BLA.

The majority of the Court noted that the constitutional doctrine of paramountcy requires that a federal legislative provision will prevail in the event of an operational conflict with provincial legislation.2 Although provinces can create statutory trusts for non-bankruptcy purposes, such statutory provisions do not define what a “trust” is in the context of bankruptcy law.3

In order for a statutory trust to be effective in a bankruptcy context, the three certainties necessary to form a trust at common law must also be present with respect to the statutory trust.4 These include certainty of: (1) intention, (2) objects and (3) subject matter. The majority found that the three certainties were met, and that s. 22 of the BLA did not operationally conflict with the provisions of the BIA.

The majority also considered and rejected the notion that a BLA s. 22 trust must be in effect prior to the bankruptcy in order to be effective after bankruptcy, noting that the trust provisions in the BIA impose no such requirement.5 To accept such a temporal limit would give rise to the commercially-unreasonable result that if Iona had deposited the Funds on the day before the bankruptcy, a trust would be in place, but would not be in place if the Funds had been deposited by Iona the day after the bankruptcy.

Takeaways

The following are seven key takeaways from this case:

  • A statutory trust under s. 22 the BLA only arises in relation to a payment made by the owner where a certificate of substantial performance has already been issued. This statutory trust will be effective whether it arises prior to or after the incurrence of a bankruptcy.
  • Although builders’ liens rights in Alberta do not apply with respect to federally-regulated land, subcontractors enjoy limited protection with respect to payments owing from contractors, pursuant to s. 22 of the BLA in circumstances where a certificate of substantial performance has been issued
  • Despite the language of s. 22 of the BLA, which suggests that the statutory trust does not arise until “a payment is made by the owner”, this case shows that the courts will recognize the existence of the trust even in cases where the bankruptcy occurs prior to actual payment by the owner to the contractor.
  • The case may be relevant in other provinces with similar language in their builders’ lien legislation.
  • Parties to a construction subcontract or contract cannot agree to waive their trust rights pursuant to s. 22 of the BLA.
  • If an owner is given the discretion under the construction contract to pay unpaid subcontractors amounts they are owed by the contractor under the subcontract, and then to deduct such payments from amounts owing by the owner to the contractor, this discretion cannot be exercised after the occurrence of the bankruptcy of the contractor.
  • Private agreements such as those found in bonding arrangements will not normally affect rights of third parties such as the secured parties or a trustee in bankruptcy.

References
1 Iona Contractors Ltd v Guarantee Company of North America, 2015 ABCA 240 at para 17.
2 Ibid at para 25.
3 Ibid at para 26.
4 Ibid at paras 34-35.
5 Ibid at paras 44-45.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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