Construction Summer
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MILLER THOMSON LLP Barristers & Solicitors, Patent & Trade-Mark Agents CONSTRUCTION LAW NEWSLETTER Summer 2005 CAN A TRUST CLAIM UNDER THE CONSTRUCTION LIEN ACT BE A publication of Miller MAINTAINED AGAINST A DISCHARGED Thomson LLP’s BANKRUPT? Construction Law Group Craig Mills Toronto 416.595.8596 [email protected] The Ontario Court of Appeal has held that in certain circumstances, lien claims under the Construction Lien Act (Ontario) ("CLA") can survive bankruptcy. In Commdoor Aluminum v. Solar Sunrooms Inc., the Court of Appeal dismissed an appeal of a trial decision which held that a breach of trust claim under section 8 of the CLA can be maintained despite the bankruptcy of the defendant contractor. In this case, Solar Sunrooms Inc. ("Solar") had successfully bid on several commercial projects for the supply of glass and aluminum components. It subsequently ordered various glass and aluminum components from Commdoor Aluminum ("Commdoor"). Over time, Solar ran into financial difficulties, largely due to having grossly underbid on most of its commercial jobs. Although it struggled to make some payments to Commdoor (and, in fact, did make some payments), it was unable to clear the balance owing to Commdoor. As a direct result of its difficulties, both Solar and its principal, Demarco, made assignments into bankruptcy. Inside Demarco was discharged from bankruptcy. Commdoor subsequently commenced an action against Solar and Demarco for approximately $79,000, claiming that Can a Trust Claim Under the Construction Lien Act be both breached the trust provisions contained in section 8 of the CLA by failing to Maintained Against a account for monies received on each job and failing to ensure that the persons Discharged Bankrupt? supplying the materials and services were paid. Security for Costs Motion Can Be “Necessary” in Lien Actions With respect to Demarco, Solar's sole shareholder, director and officer, Commdoor claimed that he was personally liable for any breach of Solar's trust obligations pursuant to section 13 of the CLA. It took the position that the trust claim can be maintained against Demarco as his discharge from bankruptcy did not release him from liabilities arising out of ". fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity" pursuant to s. 178(1)(d) of the Bankruptcy and Insolvency Act. At trial, Solar admitted that it had received payment in full for the majority of its jobs (including those for which Commdoor supplied materials). Further, Solar and Demarco were unable to account for the amounts received by Solar or demonstrate that the monies received were properly paid to the beneficiary sub- contractors or suppliers. As a result, the court found that the trust provisions of the CLA applied. Although Demarco had been previously discharged from bankruptcy, the court accepted Commdoor's argument and held that the discharge did not release him from his personal obligations as trustee to account for the trust funds. Therefore, the court awarded judgment as against Demarco and Solar for the balance owing on the Commdoor accounts. On appeal, the Ontario Court of Appeal agreed with the trial judge and dismissed the appeal. It supported the finding that Demarco's failure to discharge his onus as trustee to account for the trust funds was sufficient to activate the provisions of s. 178(1)(d). The ramifications of this decision for unpaid suppliers and contractors are clear. Rather than writing off unpaid accounts in the face of the bankruptcy of a contractor and its directors, they may wish to consider pursuing the directors and officers personally under section 13 of the CLA provided that they can establish that the director failed to discharge his or her obligations as a trustee to account for trust funds. If successful in establishing liability in such a claim, suppliers and contractors would have enhanced enforcement options such as the ability to trace trust funds into property purchased with those funds. SECURITY FOR COSTS MOTION CAN BE "NECESSARY" IN LIEN ACTIONS Anthony Scane Toronto 416.595.2661 [email protected] Under Ontario's Construction Lien Act, parties are not entitled to bring the usual kinds of motions brought in regular actions unless they can first demonstrate that the Court should grant them "consent" to bring the motion in the first place. In order to obtain consent, the moving party must first demonstrate, with evidence, that the motion will either resolve issues and speed up the process, or that it is "necessary". Since Master Sandler's decision in Biotechnik v. O'Shanter Developments in 2003, Construction Lien Masters in Toronto have entertained motions for security for costs, granting the order in some cases and declining it in others. However, Master Sandler's application of the "level playing field" concept (discussed below) had not received the "seal of approval" from a Judge until the May 17, 2005 decision of Justice DiTomaso in Arcon Group Inc. v. Kenaidan Contracting Ltd. An attempt to appeal this decision was dismissed by the Ontario Divisional Court, so now two non-Toronto area judges have expressly accepted that motions for security for costs can, in proper circumstances, be brought in Construction Lien Act actions, and have adopted Master Sandler's "level playing field" approach to procedural justice. This is important because of an earlier Judge's decision in the 2000 case of Global Design & Building that stated that motions for security for costs can never be "necessary". This older decision can now be sidestepped since both judges in the Arcon v. Kenaidan motions approved of and therefore adopted the rationale developed by Master Sandler in Biotechnik as a proper application of the rules of practice to Construction Lien Act cases. In many construction lien cases, the defendant will have paid security into court to remove the lien from title, and the amount paid into court will typically include an amount to secure at least part of the plaintiff's costs. So, if the plaintiff's costs are protected to some degree, and the plaintiff is a shell company with no assets seeking to enforce a claim for lien, is a defendant to be denied its entitlement to security for its costs? In Arcon Group v. Kenaidan Contracting Ltd., Justice DiTomaso ruled that the motion was “necessary” because Arcon Group had few assets and had ceased operating, but was still advancing a lien claim against Kenaidan. Kenaidan, which has a counterclaim, was fully exposed for its costs should Arcon Group’s lien claim fail. Since Kenaidan had posted security that included security for Arcon Group’s costs, justice required that the playing field be leveled with an order that Kenaidan’s costs be secured. The term "necessary" as it is used in the Ontario Construction Lien Act might appear to be subjective, and therefore difficult to apply: to whom is the motion necessary, and on what basis? Following Biotechnik (as approved in Arcon Group v. Kenaidan Contracting), the application of this term now has practical guidance. "Necessary" under the Construction Lien Act means necessary to do justice to a party's procedural or substantive rights. The right in Ontario construction lien actions to a level playing field securing costs is now enshrined as a part of Ontario’s construction lien law. 2 In construction or builder's lien actions where a defendant is being pursued by a plaintiff that has no assets, that defendant should consider whether it is permitted under its provincial lien legislation to bring a motion for security for costs in order to "level the playing field" and protect its very important entitlement to costs, should the plaintiff's claim be dismissed. MILLER THOMSON LLP CONSTRUCTION LAW GROUP In Toronto / Markham E. Sigurd Ruud 403.298.2459 Drazen F. Bulat 416.595.8613 [email protected] [email protected] Stephanie Rohling 403.298.2407 Lloyd D. Cadsby, Q.C. 416.595.8639 [email protected] [email protected] E. Jane Sidnell 403.298.2435 Patricia M. Conway 416.595.8507 [email protected] [email protected] Nicole T. Taylor-Smith 403.298.2453 Peter K. Foulds 416.596.2112 [email protected] [email protected] William M. Pigott 416.595.8179 In Edmonton [email protected] Kent H. Davidson 780.429.9790 [email protected] Franklin T. Richmond 416.595.8180 [email protected] Scott J. Hammel 780.429.9726 [email protected] Anthony D. Scane 416.595.2661 [email protected] Darin J. Hannaford 780.429.9714 [email protected] Michael L. Shell 905.415.6709 [email protected] Sandra L. Hawes 780.429.9787 [email protected] Michael T. Tamblyn 416.595.2660 [email protected] William J. Kenny, Q.C. 780.429.9784 [email protected] Thomas R. Whitby 416.595.8561 [email protected] Daniel C.P. Stachnik, Q.C. 780.429.9761 [email protected] In Vancouver Donald V. Tomkins, P.Eng. 780.429.9744 Wendy A. Baker 604.643.1285 [email protected] [email protected] Charles W. Bois 604.643.1224 In Waterloo-Wellington [email protected] F. Stephen Finch, Q.C. 519.579.3660 [email protected] Terrance A. Kowalchuk 604.643.1222 [email protected] In Whitehorse Owen D. Pawson 604.643.1254 Murray J. Leitch 867.456.3301 [email protected] [email protected] Michael J. Percival 604.643.1230 [email protected] Brian T. Ross 604.643.1216 Note: [email protected] Miller Thomson LLP’s Construction Law newsletter is Stephen R. Ross 604.643.1205 provided as an information service to clients and is a [email protected] summary of current legal issues of concern to Donald J. Sorochan, Q.C. 604.643.1214 business persons and their advisors. These articles [email protected] are not meant as legal opinions and readers are Paul Verriour 604.643.1223 cautioned not to act on the information provided [email protected] without seeking specific legal advice with respect to Mari A.