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In the Three Certainties We Trust: The status of Builders’ Lien Act trust claims in bankruptcy

By Jennifer Taylor

Introduction

There is now a Nova Scotia decision on the interplay between the provincial Builders’ Lien Act and the federal Bankruptcy and Insolvency Act (“BIA”) in the interesting context of trusts. In Re Kel-Greg Homes Inc, Justice Rosinski found that monies found to be impressed with a trust under the Builders’ Lien Act can also be considered trust property under the BIA—and therefore exempt from the property of the bankrupt that may be distributed to creditors—if they meet the traditional “three certainties” of intention, object, and subject-matter. When the three certainties are present, the effect is that these monies will remain available for distribution among unpaid contractors and subcontractors on a construction project, and will not be subsumed in a bankrupt owner’s or general contractor’s estate.

Facts

There were four key facts about Kel-Greg: It (1) was the general contractor for several residential construction projects; (2) owed money to multiple contractors who had worked on those projects; (3) went bankrupt on August 2, 2013; and (4) only kept one bank account.

The dispute was whether certain funds in that account, amounting to around $60,000 (the “Collected Funds”), constituted trust property and were therefore exempt from distribution on bankruptcy (paras 1-3). The Trustee in Bankruptcy argued unsuccessfully for the funds to be included in the bankrupt’s estate.

Statutory context

The trust provisions are contained in sections 44A-44G of the Nova Scotia Builders’ Lien Act. Section 44B was at issue in Kel-Greg. That provision obliges the general contractor to hold all monies received for the project in trust until the subs on the lower rungs of the construction ladder are paid. (As the Supreme Court recently confirmed in Stuart Olson Dominion Construction Ltd v Structal Heavy Steel, 2015 SCC 43, referred to in Kel-Greg at para 55, these trusts serve different protective purposes than the lien provisions.)

On the federal side of things, the BIA excludes trust property from the “property of a bankrupt”: Section 67(1)(a).

Analysis

There has been a wealth of case law from across Canada considering whether it is constitutionally permissible for a provincial statutory deemed trust, like the trusts created under lien legislation, to count as “property held by the bankrupt in trust for any other person” under the federal BIA (which the ABCA recently and helpfully summarized in Iona Contractors, infra at paras 28; 38-43). This is important, because if the prospective trust property is excluded from distribution on bankruptcy, it is available for the intended beneficiaries of the lien statute’s trust, without requiring them to file claims in bankruptcy and hope for the best.

But Justice Rosinski did not really decide this case on constitutional grounds. Instead, he found that the Supreme Court decision in British Columbia v Henfrey Samson Belair Limited, [1989] 2 SCR 24 stood for the proposition that a trust fund created pursuant to a provincial statute will be exempt from the BIA if it meets the three certainties test (para 49).

The Alberta Court of Appeal recently reached a similar conclusion on the Alberta Builders’ Lien Act, in Iona Contractors Ltd v Guarantee Company of North America, 2015 ABCA 240 at paras 33-38, 43, 49 (application for leave to appeal to SCC filed).

On the facts of Kel-Greg, the analysis came down to whether there was sufficient certainty of subject-matter in the contents of Kel-Greg’s bank account, even though the alleged trust monies were “commingled” with other funds (paras 26, 50, 59). According to Justice Rosinski:

[8] As a matter of law, the mere co-mingling of trust monies with other, trust or non-trust, monies does not necessarily result in there no longer being “certainty of subject matter” regarding the original trust monies.

Justice Rosinski then turned to tracing, and the principle in the old case of Re Hallett’s Estate:

[14] I rely on the principle in Re Hallett’s Estate, (1880) 13 Ch. D. 696 (CA) that Kel-Greg, as a trustee, may be presumed to have expended all its bank account’s non-trust monies before expending any trust monies, and that the onus is on the trustee to rebut such presumption by identifying its own funds.

He concluded that the Collected Funds were all traceable, as trust money, back to a deposit of $82,796.38 by the purchasers of one of the properties (paras 11-16), applying the presumption from Hallett’s Estate:

[75] I am bound to follow this long established principle. I must presume, in the absence of evidence to the contrary, that Kel-Greg spent its own money before any of the BLA trust monies that had been deposited. Therefore, as I said in paras. 13 – 16, if Kel-Greg spent $23,926.15 of its own money first towards the $56,238.57 in expenses, then all the monies remaining in Kel-Greg’s account on August 2, 2013, are presumed to be trust monies under the BLA.

Takeaways

When it comes to trusts, case law on the proper interaction of the BIA and provincial lien legislation will likely remain in flux for some time, especially if the Supreme Court decides to take on an appeal from Iona Contractors. But after Kel-Greg, the law in Nova Scotia is supportive for unpaid subcontractors, who can argue that money in their bankrupt contractor’s account belongs to them and not to the trustee in bankruptcy. The challenge will be evidentiary: Proving the three certainties of a trust, especially the certainty of subject-matter, where the trust funds may be intermingled with the contractor’s other monies.

The foregoing is intended for general information only and should not be relied upon as legal advice. If you have any questions about how this might apply to you, please contact one of our lawyers.

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