Priority of Receivership Charges Over Construction Trusts – Ontario Court Maintains the Status Quo

In an April 30, 2019 endorsement accompanying a receivership order made in the matter of Royal Bank of Canada and D.M. Robichaud Associates Ltd. (“D.M. Robichaud”), Justice Hainey of the Ontario Superior Court of Justice, Commercial List (the “Court”) held that the receiver’s charge and the receiver’s borrowings charge should have priority over deemed trusts under provincial construction legislation.¹

The debtor, D.M. Robichaud Associates Ltd. (“DMR”), provided sewer, pipeline and culvert repairs to municipal, industrial and commercial clients in Ontario and other provinces. A number of DMR’s projects were bonded either on a payment or performance basis.

Having previously obtained an interim receivership order, DMR’s secured lender, Royal Bank of Canada (the “Bank”), now sought a full receivership order pursuant to subsection 243(1) of the Bankruptcy and Insolvency Act (the “BIA”) and section 101 of the Courts of Justice Act (Ontario). As part of that receivership order, the Bank sought a receiver’s charge and a receiver’s borrowings charge over all DMR’s property, including accounts receivable, with priority over, among other things, any trust, statutory or otherwise. Such priority for the charges was consistent with the language of the Commercial List Model Receivership Order (the “Model Order”).²

One of DMR’s bonding companies (“Bondco”) objected to the priority of the charges over the deemed trusts created by section 8 of the Construction Act (Ontario) on the basis that funds on hand and receivables subject to the construction trust were trust property and, as such, did not form part of DMR’s estate. Bondco conceded that the Court had discretionary jurisdiction to make an order charging the trust property, but that such discretion should, in general, only be “sparingly exercised” and should not be exercised in this case.³

In response, the Bank argued successfully that: (i) the foundational purpose of the federal corporate bankruptcy regime is the equitable distribution of assets, which purpose is achieved through the single proceeding model; (ii) the single proceeding model also applies in a receivership; and (iii) the first-ranking priority of the receiver’s charge and receiver’s borrowings charge flows directly from the single proceeding model.

The authority for the first proposition cited by Justice Hainey was the decision of the Supreme Court of Canada (the “SCC”) in Alberta (Attorney General) v. Moloney, wherein Justice Gascon for the majority stated:

“33      The first purpose of bankruptcy, the equitable distribution of assets, is achieved through a single proceeding model. Under this model, creditors of the bankrupt wishing to enforce a claim provable in bankruptcy must participate in one collective proceeding. This ensures that the assets of the bankrupt are distributed fairly amongst the creditors. As a general rule, all creditors rank equally and share rateably in the bankrupt's assets: s. 141 of the BIA; Husky Oil, at para. 9. In Ted Leroy Trucking Ltd., Re, 2010 SCC 60, [2010] 3 S.C.R. 379 (S.C.C.), at para. 22, the majority of the Court, per Deschamps J., explained the underlying rationale for this model:

The single proceeding model avoids the inefficiency and chaos that would attend insolvency if each creditor initiated proceedings to recover its debt. Grouping all possible actions against the debtor into a single proceeding controlled in a single forum facilitates negotiation with creditors because it places them all on an equal footing, rather than exposing them to the risk that a more aggressive creditor will realize its claims against the debtor's limited assets while the other creditors attempt a compromise.

Avoiding inefficiencies and chaos, and favouring an orderly collective process, maximizes global recovery for all creditors: Husky Oil, at para. 7; R. J. Wood, Bankruptcy and Insolvency Law (2009), at p. 3.

34        For this model to be viable, creditors must not be allowed to enforce their provable claims individually, that is, outside the collective proceeding....”⁴

Trust claims are not an exception to the single proceeding model. In Ramgotra (Trustee of) v. North American Life Assurance Co. (“Ramgotra”), the SCC held that while paragraph 67(1)(a) of the BIA excludes trust property from the property of the bankrupt divisible among its creditors, it tells us nothing about what property does or does not vest in the trustee.⁵ Trust property still becomes part of the bankrupt’s estate subject to the trustee’s administration.⁶ Section 81 of the BIA is clear that any claim to an interest in property in the possession of the debtor must be made through the trustee, in the bankruptcy and not through any other proceeding.⁷ Although there are cases which hold that construction trust property does not form part of a bankrupt’s estate, some of which go as far as to hold that construction trust claimants need not even seek leave to pursue their claims against a bankrupt estate, those cases, in light of Ramgotra, must be considered incorrect.⁸

While Justice Hainey gives no specific authority in asserting the second proposition, that the single proceeding model also applies in a receivership, such authority can be found in the decision of the Ontario Court of Appeal (the “Ontario CA”) in Romspen Investment Corp. v. Courtice Auto Wreckers Ltd.⁹ and in Edmonton (City) v. Alvarez & Marsal Canada Inc. (“Edmonton v. Alvarez”), where the unanimous Alberta Court of Appeal (the “Alberta CA”) (per curiam) stated:

“23      The policy behind receiverships is that collective action is preferable to unilateral action. The receiver maximizes the returns for the benefit of all creditors and streamlines the process of liquidation. As was noted recently in Royal Bank of Canada v. Delta Logistics Transportation Inc., 2017 ONSC 368 (Ont. S.C.J.) at para 26:

The whole point of a court-appointed receivership is that one person . . . is appointed to deal with all of the assets of an insolvent debtor, realize upon them, and then distribute the proceeds of that realization to the creditors.”¹⁰

To get from the principle that the single proceeding model applies in a receivership to the conclusion that the receiver’s charge and receiver’s borrowings charge should attach to the trust property, it should first be noted that there is, necessarily, inherent discretion to charge trust property in a single proceeding model. In his concurring decision in Consortium Construction, Galligan J.A. held that where trust funds form part of the assets subject to a court-appointed receiver’s administration, the court has the inherent discretion to charge those assets to secure payment of the receiver’s proper expenditures and disbursements.¹¹ Since the single proceeding model applies in a BIA receivership such that trust property must be subject to the administration of the receiver, a BIA court has the inherent discretion to charge the trust property with the costs of such a receivership.

Both the Alberta CA and the Ontario CA have held that inherent discretion to charge trust property should be exercised where a court officer’s work is necessary to equitable distribution.¹² The phrase “work is necessary” means someone would have to do the work if the receiver did not, even if that someone was the trust claimant itself.¹³ Because, in a BIA receivership, the receivership is the manifestation of the single proceeding model, the receivership is, on that basis alone, necessary for equitable distribution. Charging trust property in such context should therefore be the rule, not the exception to the rule. In Ontario, at least, it is already the norm since every receivership order which has followed the language of the Model Order has primed all statutory trusts with the charges for receiver’s costs and borrowings.¹⁴

In concluding that the receiver’s charge and receiver’s borrowings charge should attach to the trust property in first priority, Justice Hainey emphasizes that the charges themselves visit no harm on the trust claimants. Whether and to what extent the trust claimants have to actually bear the burden of the costs of the receivership will only be determined once the receiver seeks the Court’s approval of its proposed allocation of costs and distribution of funds. This view of the impact of the charges is similar to that of Justice Morawetz, as he then was, in Comstock Canada Ltd., Re (“Comstock”), where he granted an interim receiver’s charge and interim receiver’s borrowing charge under the inherent jurisdiction of the Court.¹⁵ Justice Morawetz held, among other things, that borrowings charge in particular did “not have the effect of preferring a creditor or group of creditors” or have a material effect or obvious negative impact on construction lien and trust claimants.¹⁶

Other courts have focused on the harm that would be visited on other stakeholders in a receivership if any property subject to administration in the receivership was not charged. In his decision varied on another point by the Alberta CA in Edmonton v. Alvarez, Justice Graesser of the Alberta Court of Queen’s Bench focused on the equitable sharing of the risk of costs, holding that a creditor with a proprietary claim who might benefit from a receiver’s work is not entitled to a free ride, but rather should bear the costs of the receivership as they related to the creditor’s claim and the monetization of that claim, which costs might include general costs in addition to costs specifically tied to the claim.¹⁷ Like Justice Hainey, Justice Graesser emphasized that the actual determination of what costs trust claimants should bear is not an exercise that should or can be done at the outset of the proceeding.¹⁸As a result, Justice Graesser held that charges in respect of both the fees and borrowings of a BIA section 243 receiver should rank ahead of claims under, among other statutes, the Builders’ Lien Act (Alberta).¹⁹

Courts have also focused on the interests of the receiver itself. In the decision upheld on the point by the Ontario CA in Ontario (Securities Commission) v. Consortium Construction Inc., Justice Rosenberg subjected trust property to the receiver’s charge because it was not appropriate for the receiver to assume the risk of not being paid and because it allowed the receiver to act without any appearance of conflict in determining which of the funds were trust funds.²⁰ Similar policy concerns about asking a receiver to assume risk for costs of a proceeding were expressed by the Alberta CA in Edmonton v. Alvarez.²¹

Finally, by forcing all claimants to share the risk of bearing the costs of the administration, the Court incents all parties to behave in an efficient and cooperative manner when dealing with the receiver. The Alberta CA touched on this in Residential Warranty where it stated that the discretion to impose the costs of a proceeding (in that case a bankruptcy) on trust property should only be exercised where it is necessary “to further fairness and efficiency in legal process and to prevent abuse” and where it included the following in its list of factors to be considered:

“3.       The need to maintain the integrity of the bankruptcy process. The equitable distribution of the bankrupt estate must remain at the forefront. The court should recognize the expertise of the trustee in this regard and in effective management of bankruptcy: see GMAC [GMAC Commercial Credit Corp. - Canada v. TCT Logistics Inc., 2006 CarswellOnt 4621 (S.C.C.)] at para. 50. Also, the court should assess the extent to which the determination is necessary to administer the bankruptcy and discourage academic or potentially unrewarding litigation.”²² [Emphasis added]

Justice Hainey’s decision in D.M. Robichaud preserves the status quo regarding the conduct of receiverships in Ontario. Had he not granted the charges in their customary priority, secured creditors would likely have had to reevaluate not only how they pursue enforcement against construction companies, but also how they lend to such entities in the first place. The results of such reevaluation could have been harmful to the construction industry as a whole.

The Bank in D.M. Robichaud was represented by Aird & Berlis LLP partners Sanj Mitra and Sam Babe.