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King of the Hill: A Priority Dispute between Lien Claimants and Secured Creditors in a Bankruptcy

In Royal Bank of Canada v. A-1 Asphalt Maintenance Ltd. the Court was asked to determine the priority of claims in a bankruptcy between Royal Bank of Canada (the "Bank"), a secured creditor of the bankrupt, A-1 Asphalt Maintenance Ltd. ("A-1") and The Guarantee Company of North America (the "GCNA") a bond company that paid out 20 lien claims and was subrogated to those rights under the Construction Lien Act ("CLA").

A-1 was an Ontario road paving business that worked on inter alia, four paving projects with the City of Hamilton and the Town of Halton Hills.

In 2014, A-1 delivered a Notice of Intention to Make a Proposal ("NOI") under the Bankruptcy and Insolvency Act. The Court ordered KPMG to act as a receiver for A-1, and ordered the Receiver to establish 2 accounts, a Paving Projects Account and a general post-receivership account. Receipts from all paving projects, including four projects with the City of Hamilton and the Town of Halton Hills were deposited in the Paving Projects Account.

The Bank and the GCNA disputed the priority of claimants in the bankruptcy. Accordingly, there were two issued before the Court:

  1. whether or not the funds in the Paving Projects Account were excluded from A-1's property upon bankruptcy, pursuant to section 67(1)(a) of the Bankruptcy and Insolvency Act, on the basis that they were property held by the bankrupt in trust for another person; and
  2. If the funds were not excluded, what share of the available money would be distributed to the GCNA.

GCNA argued that the funds paid by the City of Hamilton and the Town of Halton Hills were trust funds by virtue of section 8(1) of the CLA, which provides that all amounts owing to, or received by a contractor or subcontractor on account of the price of an improvement constitute a trust fund for the benefits of persons who have supplied services or materials to the improvement and who are owed amounts by the contractor or subcontractor.

The Court declined to determine on a categorical basis whether a trust under the CLA survives the bankruptcy. Instead, Justice Conway reiterated the Supreme Court's comments in British Columbia v. Henfrey Samson Blair Ltd.,[2] and held that in order for a provincially created statutory trust to survive a bankruptcy under the federal Bankruptcy and Insolvency Act, it must constitute a trust at common law. In order for a trust to be valid at common law, it must meet the certainties of intent, object and subject matter.

The Court found that, on the facts of this case, the trust did not survive the bankruptcy because it lacked certainty regarding the subject matter. Justice Conway stated that aside from the deeming language in section 8 of the CLA, there was no way to identify the funds owed to A-1 by the City of Hamilton and the Town of Halton Hills as they did not come from any specific account, and could have been paid from any of the municipalities' revenues or other sources of funds. Similarly, the Court held that in this case, there was no way to hold those funds separate and distinct from the other money that was paid into the Paving Projects Account, despite the use of modern computerized accounting systems.

As a result, Justice Conway determined that the GCNA would receive a pro rata share of the funds as a secured creditor.

[2] 1989 CanLII 43 (SCC).

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