"NON-GOVERNMENTAL STATUTORY TRUSTS

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1 "NON-GOVERNMENTAL STATUTORY TRUSTS IN BANKRUPTCY PROCEEDINGS IN CANADA" A PAPER PRESENTED AT THE CANADIAN BAR ASSOCIATION 11 TH ANNUAL PAN CANADIAN INSOLVENCY AND RESTRUCTURING LAW CONFERENCE PRESENTED SEPTEMBER 11, 2015 KYLE D. KASHUBA PARTNER, NORTON ROSE FULBRIGHT CANADA LLP ISABEL LANGLOIS ARTICLING STUDENT, NORTON ROSE FULBRIGHT CANADA LLP 1

2 Introduction Statutory trusts in the context of bankruptcy proceedings have received various treatment by provincial appellate courts in recent years. In broad terms, the issue created by statutory trusts is relatively simple; can a statutory trust arising pursuant to provincial lien legislation survive bankruptcy? If the funds subject to a statutory trust constitute property held by the bankrupt in trust for any other person, the funds are to be remitted to the lien claimants, as beneficiaries. If they do not, the funds become part of the bankrupt estate and are to be distributed according to the scheme of distribution provided by bankruptcy legislation. The jurisprudence in this area of law is presently in a state of flux and this creates uncertainty for both secured creditors and lien claimants. This paper focuses on the interaction between statutory trusts created by provincial lien legislation and federal bankruptcy legislation. The purpose of this paper is to review and analyze the applicable case law to understand how the legislation has been interpreted and applied by the courts across the country. The better view, it is submitted, is that statutory trusts created by provincial lien legislation do not survive bankruptcy unless the purported trusts have all of the elements of duly constituted and valid common law trusts. To hold otherwise would be contrary to the scheme of distribution specified by bankruptcy legislation. Only an amendment to the applicable bankruptcy legislation will allow statutory trusts to survive bankruptcy without having all of the elements of valid common law trusts. Provincial Lien Legislation At common law, sub-contractors have no claim against the owner of property that they improve, because there is no privity of contract between them. The provinces have provided a partial remedy to this situation by enacting construction lien legislation. The various statutes across Canada allow an unpaid sub-contractor to file a lien against the owner s property, and potentially force a sale of the owner s property to satisfy its claim. The owner can post security in substitution for the lien, in which case the subcontractor s rights are transferred to the security. Construction lien legislation falls under provincial jurisdiction because it relates to the domain of property and civil law rights. Several Canadian provinces have enacted lien legislation. For instance, in the Province of Alberta, the Builders Lien Act (BLA) provides that a construction lien is available to a person who does or causes to be done any work on or in respect of an improvement, or furnishes any material to be used in or in respect of an improvement, for an owner, contractor or subcontractor, and constitutes a lien on the estate or interest of the owner in the land in respect of which the improvement is being made. 1 Section 22 of the BLA, further provides that under specific situations a person who receives a payment made by the owner holds that money in trust for the benefit of the persons who provided work or finished materials on the construction project: 1 Builders Lien Act, RSA 2000, c B-7, s. 6 2

3 Money held in trust 22(1) Where (a) a certificate of substantial performance is issued, and (b) a payment is made by the owner after a certificate of substantial performance is issued the person who receives the payment, to the extent that the person owes money to persons who provided work or furnished materials for the work or materials in respect of which the certificate was issued, holds that money in trust for the benefit of those persons. [ ] Bankruptcy Legislation The Bankruptcy and Insolvency Act (BIA) is, however, under the jurisdiction of the federal Parliament. 2 The BIA governs the orderly distribution of the estates of bankrupt persons, and in particular s. 136 specifies the priority in which competing claims will be paid. Section 67 of the BIA provides that certain property held by the bankrupt do not form part of the bankrupt estate for purposes of the distribution of the estate. For our purposes, s. 67(1)(a) excludes from the bankrupt s estate property held by the bankrupt in trust for any other person. 3 The Doctrine of Paramountcy The doctrine of paramountcy provides that when there is a conflict between provincial legislation and federal legislation, the federal legislation prevails. As such, when a validly enacted provincial statute overlaps on a federal statute, the provincial statute remains valid but is inoperative to the extent of the inconsistency. To address the potential conflicts between the application of the BIA and other provincial legislation, s. 72(1) of the BIA provides that provincial legislation relating to property and civil rights apply in the bankruptcy context provided that there is no conflict with the provisions of the BIA. 4 The Jurisprudence The Quartet Statutory trusts are creatures of statute enacted with a view to protecting the interests of private parties (or the Crown) that otherwise would have little or no protection. The Supreme Court of Canada has had 2 RSC 1985, c B-3 3 Ibid, s. 67(1) 4 Ibid, s. 72(1) Application of other substantive law 72. (1) The provisions of this Act shall not be deemed to abrogate or supersede the substantive provisions of any other law or statute relating to property and civil rights that are not in conflict with this Act, and the trustee is entitled to avail himself of all rights and remedies provided by that law or statute as supplementary to and in addition to the rights and remedies provided by this Act. 3

4 occasion to consider whether statutory trusts constitute valid trusts for the purpose of the BIA. 5 British Columbia v Henfrey Samson Belair Ltd. (Henfrey) 6 was the last case in a series of four cases where the Supreme Court of Canada considered the interaction between statutory trusts and the BIA. These four cases became known as the Quartet of Supreme Court Bankruptcy Decisions: Deputy Minister of Revenue v Rainville, [1980] 1 SCR 35; Deloitte Haskins & Sells v Workers Compensation Board, [1985] 1 SCR 785; Federal Business Development Bank v Quebec (CSST), [1988] 1 SCR In Henfrey, the Supreme Court of Canada was called upon to determine whether a statutory trust created by the Social Service Tax Act 7 constituted property held in trust by the bankrupt for the benefit of Her Majesty in right of British Columbia. In this case, a corporation collected provincial sales tax in the course of its business operations as required by the Social Service Tax Act. The Social Service Tax Act provided that the corporation was deemed to hold the provincial sales tax in trust for Her Majesty in right of British Columbia and that the funds were deemed to be held separate from the assets and estate of the corporation, whether or not the funds had in fact been kept separate from other funds. The corporation failed to remit the tax collected and mingled it with other funds. The corporation was later assigned into bankruptcy. The Province of British Columbia argued that it had a valid statutory trust over the assets of the corporation equal to the amount of the sales tax collected but not remitted. Justice McLachlin for the majority of the Supreme Court of Canada held that the phrase property held by the bankrupt in trust for any other person pursuant to s. 47(a) (now s. 67(1)(a)) of the BIA could only include property which could be identified as being held under a valid common law trust. McLachlin CJC found that, at the moment of collection of the tax, there was a valid statutory trust in favour of the Province of British Columbia. At that moment, the trust was identifiable and had all of the elements required of a valid trust at common law. However, once the tax funds became mixed with other funds, the trust could no longer be identified and it was not a valid trust for the purposes of s. 67(1)(a) of the BIA. Although the Social Service Tax Act deemed that all tax collected was be held separate from the collector s other funds, assets or estate, the Court found that in reality the statutory trust bore little resemblance to a common law trust after conversion of the property. It is trite law that the requirements for a valid trust under the common law include certainty of intention, certainty of subject matter, and certainty of object. In the case at bar, the majority found that certainty of subject matter had been negated when the funds collected as sales tax were mixed with other funds and could no longer be traced. Consequently, at the time of bankruptcy, there was no property that could be identified with certainty as being subject to the trust. For that reason, it was held that the tax collected by 5 Per Paperny JA, 2015 ABCA 240 at para 95 6 [1989] 2 SCR 24 7 RSBC 1979, c 388, s 18 4

5 the corporation formed part of the bankrupt estate and was subject to the scheme of distribution established by the BIA. Finally, the majority stated that there was no conflict between the Social Service Tax Act and the BIA. The Court held that extending s. 67(1)(a) of the BIA to include provincially created statutory trusts would permit the provinces to create their own priorities and circumvent the application of the BIA. However, while provinces are not permitted to re-order priorities specified by the BIA, the Court stated that it is possible for the provinces to create statutory trusts that will survive bankruptcy, but only if the statutory trusts have all the elements required for a valid trust at common law. In Husky Oil Operations Ltd. v Minister of National Revenue (Husky), the Supreme Court of Canada was again asked to consider the effect of provincial legislation intruding into the federal sphere of bankruptcy. 8 Husky Oil Operations Ltd. made an assignment into bankruptcy and owed unremitted employee payroll contributions to the Workers Compensation Board pursuant to s. 133 of the Workers Compensation Act. 9 The majority of the Supreme Court of Canada held that the application of the Workers Compensation Act had the effect of re-ordering the scheme of priorities specified in s. 136 of the BIA. In reaching its conclusion, the majority undertook a broad review of the Quartet and set out six propositions: 1. provinces cannot create priorities between creditors or change the scheme of distribution on bankruptcy under s. 136(1) of the Bankruptcy Act; 2. while provincial legislation may validly affect priorities in a non-bankruptcy situation, once bankruptcy has occurred s. 136(1) of the Bankruptcy Act determines the status and priority of the claims specifically dealt with in that section; 3. if the provinces could create their own priorities or affect priorities under the Bankruptcy Act this would invite a different scheme of distribution on bankruptcy from province to province, which would result in an unacceptable situation; 4. the definition of terms such as secured creditor, if deemed under the Bankruptcy Act, must be interpreted in bankruptcy cases as defined by the federal Parliament, not the provincial legislatures. Provinces cannot affect how such terms are defined for the purposes of the Bankruptcy Act; 5. in determining the relationship between provincial legislation and the Bankruptcy Act, the form of provincial interest created must not be allowed to triumph over its substance. The provinces are not entitled to do indirectly what they are prohibited from doing directly; and 6. there need not be any provincial intention to intrude into the exclusive federal sphere of bankruptcy and to conflict with the order of priorities of the Bankruptcy Act in order to 8 [1995] 3 SCR SS 1979, c W

6 render the provincial law inapplicable. It is sufficient that the effect of provincial legislation is to do so. 10 None of the above mentioned cases dealt with statutory trusts created under provincial lien legislation. For instance, the deemed statutory trust in Henfrey was created under the Social Service Tax Act and was intended to benefit the Crown. Later decisions, however, have concluded that the principles set out in the Quartet apply to other statutory trusts, regardless of the nature of the deemed beneficiary. 11 The Saskatchewan Three The Saskatchewan Courts were among the first to consider and apply what had been said in the Quartet to statutory trusts created by provincial lien legislation. In Duraco Windows Industries (Sask.) Ltd. v Factory Window & Door Ltd. (Trustee of) (Duraco) 12, the bankrupt contractor, Factory Window & Door Ltd. (Factory) had installed windows supplied by Duraco Window Industries (Sask.) Ltd. (Duraco Window) on a number of construction projects. Prior to its bankruptcy, Factory had deposited payments that it had received from various clients into one operating account. Factory failed to pay Duraco Window and the Saskatchewan Court of Queen s Bench was called upon to determine whether the payments deposited by Factory constituted a valid trust for the benefit of Duraco Window. The Court followed Henfrey and held that statutory trusts lacking the elements of valid trusts at common law did not qualify as trust property pursuant to s. 67(1) of the BIA. In this case, the Court found that the statutory provisions of the Saskatchewan Builders Lien Act (Sask. BLA) did not create certainty of intention and therefore no statutory trusts could ever survive bankruptcy. Similarly, in Roscoe Enterprises Ltd. v Wasscon Construction Inc. (Roscoe), the Saskatchewan Court of Queen s Bench held that the purported trust did not qualify as trust property under s. 67(1)(a) of the BIA. 13 In this case, a sub-contractor registered a lien in the amount of $74, against the owner s property and the contractor posted security of $93, (lien claim plus 25% security for costs) into court. The lien was subsequently discharged and the sub-contractor commenced an action to enforce its lien claim. In the following months, other lien claimants registered liens and joined the lien action. Later, the contractor was petitioned into bankruptcy by its bank and a trustee in bankruptcy was appointed. The Court had to determine whether the trustee in bankruptcy or the lien claimants were entitled to the funds paid into court. Zarzeczny J also interpreted Henfrey as invalidating all statutory trusts and held that the trustee in bankruptcy was entitled to the funds. Zarzeczny J found that property held by the bankrupt in trust for any other person applied only to trust as defined by the common law and not to statutory trusts created 10 Husky, supra at paras 33 and ABCA 240 at para 107, per Paperny JA CarswellSask CarswellSask 463 6

7 by the provinces. According to His Lordship, statutory trusts arising pursuant to provincial lien legislation were an attempt by the provinces to circumvent the scheme of priority distribution of the BIA. The manner in which the Saskatchewan Court of Queen s Bench interpreted Henfrey in Duraco and in Roscoe meant that no statutory trust could ever qualify as a trust arising under general principles of law. This is inconsistent with what has been said in Henfrey. Henfrey did not suggest that provincial lien legislation was in direct conflict with the scheme of distribution of the BIA. The better interpretation of Henfrey is that of D & K Horizontal Drilling (1998) Ltd. (Trustee of) v Alliance Pipeline Ltd. (D & K), 14 namely that provincial lien legislation is not in direct conflict with the BIA; however, for a statutory trust to survive bankruptcy, it must have all elements required of a valid trust at common law. In D & K, the contractor, D & K Horizontal Drilling (1998) Ltd. (D & K Horizontal Drilling) entered into a contract to perform pipeline work for the project owner, Alliance Pipeline Ltd. (Alliance). Several subcontractors filed liens against Alliance and Alliance paid certain funds into court to discharge the liens registered. D & K Horizontal Drilling was later petitioned into bankruptcy and the trustee in bankruptcy argued that the funds paid into court continued to be part of the bankrupt estate of D & K Horizontal Drilling. In this case, the Saskatchewan Court of Queen s Bench disagreed with the proposition that statutory trusts could never qualify as a trust arising under general principles of law. The Court relied on the 1962 Supreme Court of Canada decision in John M.M. Troup Ltd. v Royal Bank (Troup) for the proposition that provincial lien legislation was constitutional, competent provincial legislation and did not conflict with federal bankruptcy legislation. 15 Here, the Court was able to find that a trust had been validly created and ordered that the funds paid into court be remitted to the sub-contractors. The Court found that the rights of the lien claimants against the owner Alliance, the land or the money paid into court, were not affected by the bankruptcy of D & K Horizontal Drilling. The Court stated that since the funds paid into court stood in substitution for the land and that a lien claimant could claim against the land without involving the bankruptcy, the funds paid into court were never the property of the bankrupt and the trustee had no right in them. The Court found that it was not necessary to rely on the trust provisions of the Sask. BLA to decide this case. The Court distinguished Duraco and Roscoe on the fact that, in this case, the funds in question had been paid into court to discharge the liens. On appeal, the Saskatchewan Court of Appeal affirmed the decision of the Court of Queen s Bench CarswellSask 86, aff d 2002 SKCA [1962] SCR 487 7

8 Recent decisions More recently, in Royal Bank of Canada v Altas Block Co. (Atlas), the Ontario Superior Court of Justice (Commercial List) had to determine if a supplier had a valid trust claim pursuant to s. 8 of the Ontario Construction Lien Act (CLA) and, if so, whether the trust had survived bankruptcy. 16 In this case, Atlas Block Co. Ltd. (Atlas Block) manufactured and sold concrete blocks and other related products to large retailers and to contractors directly. Atlas Block did not segregate the funds that it received from construction projects from other sales revenues. Holcim (Canada) Inc. (Holcim) supplied bags of cement powder to Atlas Block to manufacture the concrete blocks. A receiver was appointed over all of Atlas Block s assets, undertaking and property. Later, Atlas Block made an assignment into bankruptcy and a trustee was appointed. At the time of the receiver s appointment, Atlas Block had approximately 440 accounts receivable. Holcim argued that it had a valid trust claim for monies owed to it with respect to Atlas Block s products containing Holcim s cement powder that was supplied to certain large construction projects. While Holcim conceded that its cement powder could not be traced through Atlas Block to specific construction projects, Holcim argued that all of Atlas Block s cement products sold to construction projects contained Holcim cement powder. Atlas Block s receiver brought an application seeking directions as to whether Holcim had a valid trust claim pursuant to s. 8 of the CLA and, if so, whether the trust survived Atlas Block s bankruptcy. Justice Penny found that even if Holcim had a valid trust pursuant to s. 8 of the CLA, the trust did not survive Atlas Block s bankruptcy because of the application of s. 67(1)(a) of the BIA. In this case, Penny J found that the alleged trust lacked the elements required of a valid trust at common law. Certainty of subject matter could not be established because Atlas Block, and subsequently the receiver, did not segregate payments they received from construction projects from other revenues. Consequently, Penny J held that the funds in question formed part of the bankrupt estate and were to be divided pursuant to the scheme of distribution in the BIA. At paragraphs 34-35, Penny J stated as follows: [34] Paragraph 67(1)(a) of the BIA excludes from estate property divisible among the creditors of the bankrupt "any property held by the bankrupt in trust for any other person." According to a long line of Supreme Court of Canada decisions, however, para. 67(1)(a) does not extend to assets subject to a deemed trust created by provincial statute where such deemed trust does not otherwise have all the attributes of a valid trust at common law. [35] These Supreme Court cases were summarized by the Ontario Court of Appeal in GMAC Commercial Credit Corp. - Canada v. TCT Logistics Inc. (2005), 7 C.B.R. (5th) 202 (Ont. C.A.), at para. 15: A consistent series of cases from the Supreme Court of Canada has addressed the effect of provincial statutory deemed trusts in a bankruptcy ONSC 3062; RSO 1990, c C-30 8

9 These cases hold that because bankruptcy is a matter under federal jurisdiction, provincial statutory deemed trusts that do not conform to general trust principles cannot operate to reorder the priorities in a bankruptcy. Therefore, although such deemed trusts are effective in accordance with the provincial legislation when a person or business is solvent and operating... Upon bankruptcy the funds that are subject to a deemed trust, but are not held in accordance with general trust principles, will not be excluded from the property of the bankrupt under 67(1)(a) of the BIA and will be distributed in the priority prescribed by the BIA. As an additional argument, Holcim argued that the receiver, as an officer of the Court, had a positive obligation to keep the funds subject to s. 8 of the CLA separate and apart from the company s other funds. Penny J held that the CLA did not create a positive obligation on a Court-appointed receiver to segregate receivership accounts receivable into various trusts that would survive a debtor s subsequent bankruptcy. In B.C. Ltd., Re ( B.C. Ltd.), 17 s. 10(1) of the British Columbia Builders Lien Act (B.C. BLA) was at issue. 18 Here, the bankrupt was a construction company involved primarily in building new single-family homes and in undertaking residential renovations. At the time of its assignment into bankruptcy, some 17 home building projects and a number of renovation projects were underway. The owners of the projects had made initial cash balance payments to the contractor. The initial cash balance paid in respect of the various projects, which totaled $527,506.22, was deposited into one operating account. The contractor also used monies collected on particular projects to pay expenses owing on other projects. The trustee in bankruptcy received trust and lien claims from 102 individual suppliers across all projects that exceeded $2,965, The suppliers argued that the initial cash balance was impressed with a trust arising pursuant to the B.C. BLA and did not form part of the bankrupt estate. At the second hearing, Justice Grauer for Supreme Court of British Columbia reviewed the jurisprudence and concluded that none of the propositions set out in Husky rendered s. 10(1) of the B.C. BLA ineffective in creating a trust that is exempt under s. 67(1)(a) of the BIA so long as the purported trust had all of the elements required of a valid trust at common law. 19 Grauer J stated that his finding was consistent with Troup, which has never been expressly overruled, and with the decision in Henfrey, as approved in Husky. 20 Grauer J stated that certainty of intention and certainty of object were implied by the wording of the B.C. BLA and he was satisfied that these two certainties had been established. As for certainty of subject BCSC 1196 (first Reasons); 2015 BCSC 561 (second Reasons); 2015 BCSC 1221 (third Reasons) 18 SBC 1997, c B.C. Ltd. (second Reasons), supra 20 Ibid at para 18 9

10 matter, Grauer J stated that the evidence did not allow him to determine if there was certainty of subject matter and requested further evidence. At the third hearing, Grauer J found that the funds paid by the owners of the various projects were funds that, prior to bankruptcy, were impressed with a trust and constituted a valid trust fund pursuant to s. 10 of the B.C. BLA. Grauer J treated all of the initial cash balance as one pool of money and held that the B.C. BLA did not require the contactor to keep the trust funds separate on a project by project basis. Certainty of subject matter was not lost because the contractor mixed the funds from various construction projects. All of the funds in this case were subject to the statutory trust. Grauer J held, however, that certainty of subject matter would be lost if the funds subject to the statutory trust had been mixed with funds from other sources. Grauer J distinguished Altas on the fact that in Altas, the funds subject to the statutory trust had been mixed with funds from other sources. For this reason, Grauer J concluded that there was a valid trust over the initial cash balance and ordered the funds to be distributed pro rata to all trust and lien claimants. Finally and most recently, Iona Contractors Ltd. v Guarantee Company of North America (Iona) was a decision that was considered and dealt with by the Alberta Courts. 21 Iona Contractors Ltd. (Iona Contractors) constructed a runway for the Calgary Airport Authority (Airport). Pursuant to the terms of their contract (the Contract), Iona Contractors was required to obtain and deliver a Performance Bond and a Labour and Material Payment Bond to the Airport (together, the Bonds). The Guarantee Company of North America (GCNA) issued the Bonds to Iona Contractors. The Airport held back amounts payable to Iona Contractors pursuant to the terms of the Contract. The Airport issued a Certificate of Partial Substantial Performance to Iona Contractors, in which the Airport and Iona Contractors acknowledged that the Contract was substantially performed. Subsequently, it was made known to the Airport that many of Iona Contractors sub-contractors had not been paid and the Airport called upon GCNA to pay the sub-contractors under the terms of the Bonds. Later, Iona Contractors made an assignment into bankruptcy and a trustee in bankruptcy was appointed. After Iona Contractors was petitioned into bankruptcy, the Airport filed an Interpleader Application and paid into court the sum of $997, that it had withheld from Iona Contractors pursuant to the terms of the Contract. The trustee in bankruptcy brought an application claiming entitlement to the holdback funds paid into court for distribution in accordance with the scheme of distribution specified in the BIA. GCNA claimed that by virtue of the Bonds, it was entitled to the holdback funds in priority to the trustee as subrogee of the sub-contractors. GCNA argued that the holdback funds: ABQB 347, reversed on appeal, 2015 ABCA

11 1) did not represent a debt owing to Iona; and/or in the alternative 2) if the holdback funds did represent a debt owing to Iona, the holdback funds were impressed by a statutory trust by virtue of s. 22 of the BLA, for the benefit of Iona Constructor s sub-contractors. For the Alberta Court of Queen s Bench, Justice Eidsvik held that the funds withheld by the Airport under the terms of the Contract were owed to Iona Contractors and should be remitted to the trustee in bankruptcy. Eidsvik J further held that the funds in question were not subject to a statutory trust and that even if the funds were subject to a statutory trust, the trust did not possess all of the elements required of a valid trust at common law. GCNA appealed the decision of Eidsvik J and argued the same two issues on the appeal. The decision of the Court of Appeal was released on July 16, 2015, and the Court of Appeal by a 2-1 margin, with a decision in dissent, allowed the appeal. The Court of Appeal was unanimous with respect to the first issue. The Court of Queen s Bench had found that the holdback funds did represent a debt owed to Iona Contractors and the three Justices of the Court of Appeal agreed with the Court of Queen s Bench on that issue. With respect to the second issue, namely, whether or not the holdback funds owed to Iona Contractors were impressed with a statutory trust, two of the three Court of Appeal Justices disagreed with the Court of Queen s Bench decision. Justice Slatter and Justice Yamauchi found that the holdback funds were impressed by a statutory trust and consequently should be remitted to GCNA, as subrogee of the subcontractors. In a strong dissent, Justice Paperny found that the holdback funds were not impressed by a statutory trust. Consistent with the findings of the lower Court, Slatter JA writing for the majority stated that statutory trusts could qualify under s. 67(1)(a) of the BIA and be excluded from the bankrupt s estate if the statutory trusts had the necessary characteristics of valid trusts at common law. The majority held that certainty of intention and certainty of object were normally satisfied by the language of the legislation. The majority also found that the statutory trust in question had certainty of subject matter, which arose the moment the sub-contractors performed work in connection with the Contract and not when the Airport made a payment to Iona Contractors. Since the statutory trust arose the minute the sub-contractors performed the work, the statutory trust attached only to the funds paid by the Airport and not to all of the assets of the bankrupt. Consequently and in the view of the majority, because the statutory trust attached only to the funds paid by the Airport, the funds never commingled with other funds and there was certainty of subject matter, thereby creating a valid trust under the common law. While the dissenting Appellate Justice Paperny agreed with the majority that statutory trusts could qualify under s. 67(1)(a) of the BIA and be excluded from the bankrupt s estate if the statutory trusts had the 11

12 characteristics of valid trusts at common law, Her Ladyship disagreed with the majority on several other points. Most importantly, the dissenting Appellate Justice found, contrary to the majority, that a trust did not come into existence the moment the sub-contractors performed work in connection with the Contract. According to Paperny JA, the wording of s. 22 of the BLA is clear and a statutory trust comes into existence only after a payment is made by the owner (Airport) to the contractor (Iona Contractors), or others. In this case, the dissenting JA found that at the time of Iona Contractors bankruptcy, the holdback funds were in still in the hands of the Airport and therefore no statutory trust ever came into existence. In any event, even if the Airport had paid the funds to Iona and a statutory trust had come into existence, the dissenting Justice stated that the funds would have been mixed with other funds held by Iona Contractors and certainty of subject matter would have been lost. Paperny JA further held that the statutory trust provisions of the BLA do not impose a positive duty on the bankrupt contractor to keep the funds separate and apart from other funds. The reasoning of the majority appears flawed. In Iona, no statutory trust ever came into existence because at the time of Iona Contractors bankruptcy, the funds were still held by the owner of the project, the Airport. While, other provincial lien legislation may differ on this issue, s. 22 of the BLA is clear that to have a valid statutory trust, 1) a certificate of substantial performance must be issued, and 2) a payment must be made by the owner after the certificate of substantial performance is issued. Here, no payment had been made by the owner. In any event, even if a statutory trust arose in favour of the sub-contractors the minute the sub-contractors performed work in connection with the Contract, the funds subject to the statutory trust lacked certainty of subject matter because, in the normal course, the funds would have been mixed by the Airport with funds from other sources. This was made clear in Henfrey. Even if a valid statutory trust arises, if the funds are later co-mingled such that it is impossible for the funds to be traced and identified, there is no certainty of subject matter and no valid trust at common law. In Atlas, the funds subject to the statutory trusts had been co-mingled with funds from other sources and it is for this reason that Penny J was unable to establish certainty of subject matter. In B.C. Ltd., the funds subject to the statutory trusts had not been co-mingled with funds from other sources. Grauer J held that the funds subject to the statutory trusts had all of the elements required for valid trust at common law and ordered the funds to be distributed among the sub-contractors, pro rata. In Iona, the funds held back by the Airport had been comingled with funds from other sources and it was impossible to identify the funds that were subject to the statutory trust. The fact that the funds subject to the statutory trust lacked certainty of subject matter was completely disregarded by the majority of the Court of Appeal What was said in B.C. Ltd. s third Reasons was most likely not considered by the Court of Appeal of Alberta in Iona. The third Reasons, which explored in great detail certainty of subject matter, were released on July 16, 2015, the same day as the decision of the Court of Appeal was released in Iona. 12

13 Conclusion As demonstrated above, it is difficult to reconcile the recent jurisprudence in the area of nongovernmental statutory trusts in bankruptcy. With various positions being advanced, advocated and ruled upon, the better view is that statutory trusts created by provincial lien legislation do not survive bankruptcy unless the purported trusts have all of the elements of a valid common law trust. The correct approach is to examine the facts of each case to assess whether the three certainties required to establish a valid trust at common law are present. It is contrary to the scheme of distribution as specified in the BIA for the courts to allow statutory trusts lacking the elements of valid trust at common law to survive bankruptcy. To allow statutory trusts arising pursuant to provincial lien legislation to survive bankruptcy, the BIA would have to be amended. By way of an example, s. 67(2) and (3) of the BIA specifically provide that certain deemed statutory trusts may survive bankruptcy, and these sections state as follows: (2) Subject to subsection (3), notwithstanding any provision in federal or provincial legislation that has the effect of deeming property to be held in trust for Her Majesty, property of a bankrupt shall not be regarded as held in trust for Her Majesty for the purpose of paragraph (1)(a) unless it would be so regarded in the absence of that statutory provision. (3) Subsection (2) does not apply in respect of amounts deemed to be held in trust under subsection 227(4) or (4.1) of the Income Tax Act, subsection 23(3) or (4) of the Canada Pension Plan or subsection 86(2) or (2.1) of the Employment Insurance Act (each of which is in this subsection referred to as a federal provision ) nor in respect of amounts deemed to be held in trust under any law of a province that creates a deemed trust the sole purpose of which is to ensure remittance to Her Majesty in right of the province of amounts deducted or withheld under a law of the province where (a) that law of the province imposes a tax similar in nature to the tax imposed under the Income Tax Act and the amounts deducted or withheld under that law of the province are of the same nature as the amounts referred to in subsection 227(4) or (4.1) of the Income Tax Act, or (b) the province is a province providing a comprehensive pension plan as defined in subsection 3(1) of the Canada Pension Plan, that law of the province establishes a provincial pension plan as defined in that subsection and the amounts deducted or withheld under that law of the province are of the same nature as amounts referred to in subsection 23(3) or (4) of the Canada Pension Plan, and for the purpose of this subsection, any provision of a law of a province that creates a deemed trust is, notwithstanding any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor, however secured, as the corresponding federal provision. Section 67(3) is not limited to deemed statutory trusts arising pursuant to federal legislation. Section 67(3) also provides that certain deemed statutory trusts arising pursuant to provincial legislation may survive 13

14 bankruptcy. If the intention of the BIA was to have statutory trusts arising pursuant to provincial lien legislation to survive bankruptcy, it would have expressly stated as such in the BIA. The provinces have the requisite jurisdiction, pursuant to their property and civil rights powers, to create priorities which supersede the priorities of secured creditors. In bankruptcy situations, however, this jurisdiction passes to the federal Parliament and the BIA prevails. Unless the BIA is amended such that the property of the bankrupt does not include property held by the bankrupt in a trust created by any provincial lien legislation, the better view is that statutory trusts created by provincial lien legislation are subject to s. 67(1)(a) of the BIA. Statutory trusts do not survive bankruptcy unless the purported trusts have all of the elements of a valid common law trust. 14