Sirius Concrete Inc. (Re), 2022 ONCA 524

Court of Appeal for Ontario

Date: 20220713 Docket: C70020

Before: Benotto, Zarnett and Sossin JJ.A.

In the Matter of the Bankruptcy of Sirius Concrete Inc. of the City of Waterloo, in the Province of Ontario

Counsel: Scott Turton, for the appellant Ayerswood Development Corporation Melinda Vine and Jason DiFruscia, for the respondent BDO Canada Limited, as Trustee for the Estate of Sirius Concrete Inc.

Heard: June 14, 2022

On appeal from the order of Justice Jonathon C. George of the Superior Court of Justice, dated December 14, 2020, with reasons at 2020 ONSC 7733.

Reasons for Decision

Introduction

1The appellant, Ayerswood Development Corporation (“Ayerswood”), appeals the order of the bankruptcy judge, made on a motion for directions brought by the respondent, BDO Canada Limited, as trustee in bankruptcy of Sirius Concrete Inc. (“Sirius”). In particular, Ayerswood appeals from those parts of the order by which the bankruptcy judge directed that the amount of $381,578.40 (the “funds”) that Ayerswood paid to Sirius on March 1, 2019, one business day before Sirius made an assignment into bankruptcy on March 4, 2019, forms part of the bankrupt estate of Sirius and is to be distributed to its creditors.

2The bankruptcy judge rejected Ayerswood’s position that it had a claim to a remedial or constructive trust over the funds, such that the funds were not property of Sirius that became available for distribution to creditors upon its bankruptcy, and that adjudicating this claim required a fuller evidentiary record. Ayerswood contended that payment of the funds had been induced by Sirius’s deceit and constituted an unjust enrichment, and Ayerswood provided evidence about the circumstances of the payment that the bankruptcy judge described as raising a “live question as to whether Ayerswood was manipulated and duped” into paying the funds. However, the bankruptcy judge held that even accepting that evidence as true, “none of … [it] could possibly lead to the imposition of a trust.”

3In our view, the bankruptcy judge erred, and the appeal must be allowed. Below, we explain our reasons for coming to this conclusion.

Ayerswood’s Evidence

4On the motion before the bankruptcy judge, only Ayerswood’s representative, Mr. Camara, filed an affidavit. There was no cross-examination on it, nor was there any evidence that directly contradicted it. The affidavit was the only evidence about the precise circumstances of the payment of the funds in issue.

5Mr. Camara explained that Ayerswood was the general contractor on an apartment building project in Guelph, Ontario. Sirius, a concrete forming company, was hired by Ayerswood in 2018 to provide the labour, equipment, and materials to construct the concrete structure of the three underground parking levels, the twelve above ground levels, the roof slab, and the penthouse of the project.

6Mr. Camara went on to describe how Sirius’s performance was marked by delays and deficiencies. He stated that while Ayerswood had been paying Sirius’s periodic invoices to incentivize Sirius to get its work done, Ayerswood decided to take a different tack with an invoice that Sirius rendered in January 2019 in the amount of the funds, namely $381,578.40. It decided not to pay the invoice until Sirius demonstrated progress in rectifying the problems and getting the project back on track.

7Mr. Camara described the circumstances that led to the ultimate payment of the funds. A site meeting was planned for March 1, 2019, at which Sirius was to present a detailed plan that would address the problems with its deficiencies and delays, but Sirius failed to attend. A Sirius representative, Mr. Waite, then called Mr. Camara to apologize, and asked for the meeting to be delayed until March 5, 2019 because Sirius was discussing its plan to get back on track with its work at the project and needed a bit more time. Mr. Waite asked for a cheque for the January invoice, and when Mr. Camara expressed reluctance to pay without a satisfactory plan from Sirius, Mr. Waite assured Mr. Camara that his providing a cheque would ensure that Sirius would push things along to get its work done. Mr. Camara believed this representation and provided a cheque. However, Sirius in fact had no intention of doing any further work. It completed a statement of affairs for its bankruptcy filing on the very same day as these representations were being made to Mr. Camara, March 1, 2019. Sirius made an assignment into bankruptcy on the next business day, March 4, 2019. In short, Ayerswood claims that it was “lied to”, and it was in reliance on those lies that the funds were paid over when they otherwise would not have been.

8As Mr. Camara stated in his affidavit:

So when Sirius wrote to me on 1 March 2019 – “Tobin and myself will be making more site appearances to get things on track. Please be patient with us as we work through the issues.” – Ayerswood was being lied to.

Exhibit E to this affidavit is a copy of the Statement of Affairs of Sirius. While it shows a date of 1 March 2019, the amount of information in that form was self-evidently not compiled only after 12:44 p.m. that day [the time of the above quoted email]. Sirius knew they would not be returning to site and deceived me.

I, and hence Ayerswood, was assured by Sirius that if the payment of their January invoice was given to them they would come to the meeting on 5 March 2019 with a concrete plan to solve the problems and would move their work ahead promptly. This was pure deception with the object of getting Ayerswood to release the cheque. I, and hence Ayerswood, believed these lies, and in the belief that Sirius would be not just continuing their work to completion, but promptly to completion, I relented on the decision to withhold the cheque and released to Sirius the cheque of 1 March 2019 for $381,578.40.

If Sirius had told me the truth on March first 2019 that they had already been working with BDO Canada Limited (“the Trustee”) and were going to assign Sirius into bankruptcy and abandon their contract for the Building I never would have released the $381,578.40 cheque to them; Ayerswood would not have made that payment. The value of the work by Sirius, coupled with the deficiencies in it, and the delay of the completion of the Building that they caused, meant that they had been overpaid for the work they had done. Sirius was not owed $381,578.40, or any part of that money, and it only received that cheque due to their deceit as I have outlined above.

Analysis

9The parties argued about both the process followed and also the correctness of the disposition made.

10As to process, the parties agree that, on a motion for directions in an insolvency matter, the supervising court may determine an issue of entitlement to assets or funds as between the insolvent estate and a third party by following a summary procedure modelled on that used on a motion for summary judgment, or may order a trial to determine the dispute where there is a genuine issue requiring one: Ontario Securities Commission v. Money Gate Mortgage Investment Corporation, 2020 ONCA 812, 153 O.R. (3d) 225, at paras. 10, 32-35 and 40. Although Money Gate dealt with a receivership, the same analysis can apply in a bankruptcy.

11It is unnecessary to consider the argument that the record was not appropriate for final factual determinations to be made because, in our view, that is not how the bankruptcy judge proceeded. He proceeded on the basis that taking Ayerswood’s evidence as true, as a matter of law no trust claim could possibly succeed.

12A motion for directions with a summary procedure would be appropriate to resolve the issue of entitlement to the funds as between the bankrupt estate and Ayerswood if it could have been determined, as a matter of law, that taking Ayerswood’s allegations as true, Ayerswood could not possibly establish a proprietary entitlement to the funds.

13As to the correctness of the disposition, however, the bankruptcy judge did not cite any authority for his conclusion that Ayerswood’s evidence, taken as true, could not possibly establish a trust, and in our respectful view it was incorrect.

14Property of the bankrupt divisible among creditors does not include property that the bankrupt holds in trust for any other person: Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”), s. 67(1)(a). It is well established that unjust enrichment, arising from certain types of debtor misconduct prior to bankruptcy, may impress funds with a constructive trust in favour of a third party and that the successful assertion of a constructive trust means that the property subject to it does not form part of the property of the bankrupt that vests in the trustee under s. 71 of the BIA: Credifinance Securities Limited v. DSLC Capital Corp., 2011 ONCA 160, 277 O.A.C. 377, at paras. 33-37.

15According to Lloyd W. Houlden, Geoffrey B. Morawetz and Janis P. Sarra, Bankruptcy and Insolvency Law of Canada, loose-leaf (2022-Rel. 6), 4th ed. (Toronto: Thomson Reuters, 2009), at para. 5-17:

Constructive trusts may apply in bankruptcy. If, in a bankrupt estate, the requirements for a constructive trust are met, the beneficiary of the trust will receive payment out of a fund that would otherwise form part of the assets of the bankrupt estate: Barnabe v. Touhey (1995), 37 C.B.R. (3d) 73, 26 O.R. (3d) 477, 10 E.T.R. (2d) 68, 1995 CarswellOnt 167 (C.A.).

16Similarly, in 306440 Ontario Ltd. v. 782127 Ontario Ltd. (Alrange Container Services), 2014 ONCA 548, 384 D.L.R. (4th) 278, at para. 24, this court stated:

Because a constructive trust is a proprietary remedy, it carries with it certain benefits that do not attach to personal remedies. Those benefits include the removal of the property from the estate of the bankrupt, effectively trumping the priority scheme under the bankruptcy legislation: Peter D. Maddaugh and John D. McCamus, The Law of Restitution, loose-leaf edition (Toronto: Canada Law Book, 2013), at para. 5:200.

17We see no reason why, in law, the facts asserted by Ayerswood could not give rise to a constructive trust as a remedy for unjust enrichment.

18To establish unjust enrichment, a claimant must show an enrichment, a corresponding deprivation, and the absence of a juristic reason: Moore v. Sweet, 2018 SCC 52, [2018] 3 S.C.R. 303, at para. 37. The payment to Sirius by Ayerswood on March 1, 2019 would meet the requirements of a benefit and a corresponding deprivation. It is not clear that the existence of a contract would constitute a juristic reason, given that on Ayerswood’s evidence, the payment was procured by deceit and a breach of the duty of honest performance, and the amount paid was not owing.

19Where an unjust enrichment is established, a court may award a proprietary remedy in the form of a constructive trust where a personal remedy is inadequate and the plaintiff’s contribution is linked to the property over which the trust is claimed: Moore, at paras. 90-91. Here, a court may view a personal remedy as inadequate given the bankruptcy, and the funds paid by Ayerswood on the eve of bankruptcy may be traceable into the funds in the trustee’s hands.

20We do not accept the argument that policy reasons necessarily preclude the finding of a constructive trust since giving effect to one would allow money paid to the bankrupt to be clawed back by the payor instead of being shared rateably among all creditors. Parliament has answered this policy question by exempting property that the bankrupt holds in trust from property of the bankrupt that is divisible among creditors.

21Nor do we accept the argument that nothing in the evidence distinguishes the March 1, 2019 payment made by Ayerswood from any of the prior payments it made to Sirius. On Ayerswood’s uncontradicted evidence, it decided to treat that payment differently and would not have turned the funds over but for being lied to.

22Since, accepting the evidence of Ayerswood as true, a trust was a legally viable potential remedy, the decision of the bankruptcy judge, rendered on the basis that it was not a viable potential remedy, cannot stand.

23We do not accept the respondent’s submission that the bankruptcy judge was going beyond a determination of the legal possibility of a trust claim and was exercising his discretion not to impose a constructive trust in these circumstances. He did not say he was doing so, nor did he refer to the factors that inform the exercise of that discretion.

Disposition

24Ayerswood did not argue below that its claim to a constructive trust should be finally determined in its favour. Instead, it asked for a process to allow that determination, fairly recognizing that in that process, its evidence might be challenged by cross-examination, or contradicted by other evidence that it in turn would have the opportunity to respond to or challenge.

25We therefore allow the appeal, set aside the determination of the bankruptcy judge that the funds form part of the bankrupt estate of Sirius and are to be distributed to its creditors, and direct that the matter return to bankruptcy court for directions on the procedure to be followed for a determination of the issue of entitlement to the funds paid by Ayerswood to Sirius on March 1, 2019.

26Ayerswood is entitled to its costs of the appeal in the sum of $12,000, inclusive of disbursements and applicable taxes.