DATE: 20050729

DOCKET: C42953 and C42954

COURT OF APPEAL FOR ONTARIO

CRONK, GILLESE and MACFARLAND JJ.A.

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF VELTRI METAL PRODUCTS COMPANY

B E T W E E N :

AC METAL FABRICATING LIMITED

G. Ketcheson for the appellant, AC Metal Fabricating Limited

Appellant

• and -

COMERICA BANK and DAIMLERCHRYSLER CORPORATION

Richard B. Jones and Tiffany Little for the appellant, De Angelis Construction Inc.

Respondents

A N D B E T W E E N :

DE ANGELIS CONSTRUCTION INC.

F. Paul Morrison and Kenneth J. Morris for the respondent, Comerica Bank

Appellant

• and -

COMERICA BANK and DAIMLERCHRYSLER CORPORATION

John D. Marshall and Laura Pottie for the respondent, DaimlerChrysler Corporation

Respondents

Donald E. Short and Carole J. Hunter for Ernst & Young Inc.

Heard: May 2, 2005

On appeal from the order of Justice J. M. Farley of the Superior Court of Justice dated July 14, 2004, reported at [2004] O.J. No. 3211.

CRONK J.A.:

1. Introduction

[1] These appeals concern the validity of trust claims advanced by construction lien claimants under s. 7 and s. 9 of the Construction Lien Act, R.S.O. 1990, c. C.30 (the “Act”) in respect of the proceeds of a court-approved asset sale undertaken by a company involved in creditor protection proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”). The motions judge held that the sale proceeds in question do not constitute trust funds and that the lien claimants do not have a valid claim to the sale proceeds under either s. 7 or s. 9 of the Act. The lien claimants appeal that decision to this court.

[2] I conclude that the statutory prerequisites to the establishment of a trust under ss. 7(1), 7(2), 7(3) and 9(1) of the Act were not satisfied in this case. Accordingly, I would dismiss the appeals.

2. Background

(1) Lien Claims and CCAA Proceedings

[3] Veltri Metal Products Company (“Veltri”) carried on business as a parts supplier to manufacturers of automobiles. Its major customers included the respondent DaimlerChrysler Corporation (“DCC”). Its Canadian business was conducted from various plants in Ontario, including from premises located in Lakeshore, Ontario that were owned by Obolus Limited and leased by Veltri (the “Lakeshore Plant”).

[4] Veltri obtained credit facilities for its business through a syndicate of lenders. The respondent Comerica Bank (“Comerica”) was Veltri’s lead lender and the agent for the lenders’ syndicate. As of December 19, 2003, Veltri owed its lenders the sum of $67,556,527 (U.S.) under various credit facilities.

[5] Under purchase orders dating from mid-May 2003, Veltri contracted with the appellant AC Metal Fabricating Limited (“AC Metal”) for various construction works at the Lakeshore Plant. On January 12, 2004, AC Metal registered a lien claim under the Act in the amount of $295,365.46 (Cdn.) in respect of work performed by it at the Lakeshore Plant. The lien claim was registered against title to the Lakeshore Plant, including Veltri’s leasehold interest therein.

[6] In addition, under purchase orders dating from October 16, 2003, Veltri contracted with the appellant De Angelis Construction Inc. (“De Angelis”) for the construction of several foundations and pits to permit the installation of heavy equipment at the Lakeshore Plant. In mid-December, 2003, De Angelis’ work was certified by Veltri’s project engineers as substantially complete. A certificate of substantial completion was issued on December 29, 2003.

[7] De Angelis was informed by a representative of Veltri that payment for its work would be made in early January 2004, upon the commencement of a planned new capital expenditure program for Veltri. However, on January 9, 2004, when payment was not forthcoming, De Angelis registered a lien claim under the Act in the amount of $733,529.36 (Cdn.). Like AC Metal’s lien registration, De Angelis’ lien claim was registered against title to the Lakeshore Plant, including Veltri’s leasehold interest therein.

[8] In mid-January 2004, Veltri sought creditor protection under the CCAA. No funds were advanced to it by its lenders after January 8, 2004.

[9] By order dated January 13, 2004 (the “Initial CCAA Order”), Spence J. of the Superior Court of Justice (Commercial List) appointed Ernst & Young Inc. as the monitor of Veltri (the “Monitor”). He also authorized Veltri to enter into a debtor-in-possession (“DIP”) financing agreement with GMAC Commercial Finance LLC (the “DIP Lender”) for the funding of Veltri’s ongoing operations and authorized capital expenditures, up to a maximum aggregate principal amount of $9.75 million (Cdn.) (the “DIP Loan”). DCC and various of Veltri’s other customers agreed to fund the DIP Loan and guaranteed repayment to the DIP Lender of all loans made pursuant to the DIP facility.

[10] The Initial CCAA Order also provided that:

3. [Veltri] shall remain in possession and control of all of its present and future properties, assets and undertakings and any proceeds thereof (collectively the “Property”), and shall continue to carry on its business (the “Business”) in a manner consistent with the preservation of the Property.

4. [Veltri’s] Property is hereby charged (the “DIP Charge”) in favour of the DIP Lender (which term shall include any permitted assignee) as provided for herein as security for the repayment of the DIP Loan, together with interest, fees, charges and other amounts payable in respect thereof and this Court orders that [Veltri] is hereby authorized to execute and deliver in favour of the DIP Lender all such security and ancilliary documents…as may be contemplated or required by the DIP Lender, charging all of [Veltri’s] existing and after-acquired assets, property and undertaking.

[11] Veltri’s assets were subject to various security interests granted prior to the date of the Initial CCAA Order. In particular, at the time of the Initial CCAA Order, Veltri owed Comerica, its primary secured lender, approximately $64 million (U.S.). This debt was secured by a general security interest in favour of Comerica in all of Veltri’s property.

[12] On January 16, 2004, three days after the Initial CCAA Order, De Angelis sued Veltri and others, seeking payment in full of its lien claim. In March 2004, AC Metal followed suit, commencing litigation against Veltri and others for payment in full of its lien claim.

(2) Sale of Veltri’s Assets

[13] By order dated April 28, 2004 (the “Sale Order”), Spence J. authorized the sale of substantially all of Veltri’s assets to Ventra Group Co. (“Ventra”) pursuant to an asset purchase agreement dated as of February 27, 2004 (the “Sale Agreement”). Paragraph 7 of the Sale Order read, in part:

7. THIS COURT ORDERS that, upon the filing with the Court by the Monitor of a certificate substantially in the form of Schedule “A” hereto confirming the payment of the purchase price to [Veltri] pursuant to Article II of the [Sale] Agreement (the “Cash Purchase Price”)…all right, title and interest of [Veltri] in and to the Acquired Assets including, without limitation, [Veltri’s] leasehold interests in [specified real properties]…is hereby vested in Ventra absolutely and forever, free and clear of and from any and all right, title and interest of [Veltri] and of, security interests, charges, estates, licenses, trusts, deemed trusts (whether contractual, statutory or otherwise) and [other encumbrances]…whether contrac-tual, statutory, by operation of law or otherwise, whether secured, unsecured or otherwise…

[14] In addition, paragraph 12 of the Sale Order provided:

12. THIS COURT ORDERS that the Cash Purchase Price, subject to (a) the holdbacks and adjustments, and (b) net of payment of those obligations and expenses required to be made by [Veltri] in each case, made pursuant to the [Sale] Agreement (“Net Proceeds of Sale”) shall stand in place and stead of the Acquired Assets without prejudice to any claim being advanced against them as could have been advanced against such assets and any such claim against the Net Proceeds of Sale as may be approved and valued by this Honourable Court in subsequent proceedings shall be subject to the same priorities as could have been claimed against the Acquired Assets.

[15] The Sale Order also required Veltri to deliver the “Net Proceeds of Sale”, as defined under the Sale Order, to the Monitor, following payment of stipulated expenditures as authorized by the Sale Order.

[16] On May 21, 2004, substantially all of Veltri’s assets, including its inventory, equipment and its leasehold interest in the Lakeshore Plant, were sold to Ventra for the sum of $48.077 million (U.S.), subject to adjustments. The proceeds of sale were paid to the Monitor in accordance with the Sale Order, pending further court order.

[17] The outstanding claims of Veltri’s secured creditors, including Comerica and the DIP Lender, exceed the aggregate proceeds of sale realized from the sale of Veltri’s assets to Ventra.

[18] Most of the sale proceeds have been distributed by the Monitor, with court approval. However, pursuant to a written acknowledgement dated May 21, 2004 in favour of Obolus Limited (the owner of the Lakeshore Plant), Veltri and the proposed purchaser of the Lakeshore Plant (the “Acknowledgement”), the Monitor agreed to hold in escrow the sum of $1,277,297.91 (Cdn.) out of the sale proceeds, together with any interest earned thereon, pending further court order or other disposition of various claims against the escrowed funds, including the lien claims of AC Metal and De Angelis.

3. Motions Judge’s Decision

[19] On April 23, 2004, prior to the closing of the sale of Veltri’s assets to Ventra, AC Metal and De Angelis brought motions seeking orders compelling payment of their lien claims from the proceeds to be realized on the asset sale. In support of their motions, they argued that they were beneficiaries of statutory trusts under ss. 7(1), 7(2), 7(3) and 9(1) of the Act.

[20] As relevant to the issues on these appeals, ss. 7 and 9 of the Act provide:

7.(1) All amounts received by an owner, other than the Crown or a municipality, that are to be used in the financing of the improvement, including any amount that is to be used in the payment of the purchase price of the land and the payment of prior encumbrances, constitute, subject to the payment of the purchase price of the land and prior encumbrances, a trust fund for the benefit of the contractor.

(2) Where amounts become payable under a contract to a contractor by the owner on a certificate of a payment certifier, an amount that is equal to an amount so certified that is in the owner’s hands or received by the owner at any time thereafter constitutes a trust fund for the benefit of the contractor.

(3) Where the substantial performance of a contract has been certified, or has been declared by the court, an amount that is equal to the unpaid price of the substantially performed portion of the contract that is in the owner’s hands or is received by the owner at any time thereafter constitutes a trust fund for the benefit of the contractor.

9. (1) Where the owner’s interest in a premises is sold by the owner, an amount equal to,

(a) the value of the consideration received by the owner as a result of the sale,

less,

(b) the reasonable expenses arising from the sale and the amount, if any, paid by the vendor to discharge any existing mortgage indebtedness on the premises,

constitutes a trust fund for the benefit of the contractor [emphasis added].

[21] The motions were heard by Farley J. of the Superior Court of Justice (Commercial List) on June 16, 2004. He held that the proceeds realized on the sale of Veltri’s assets to Ventra do not constitute trust funds pursuant to ss. 7 and 9 of the Act and that AC Metal and De Angelis do not have a valid claim to the sale proceeds under either of those sections of the Act.

4. Analysis

(1) Section 7(1) Trust Claims

[22] During oral argument before this court, De Angelis abandoned its trust claim under s. 7(1) of the Act. In contrast, AC Metal continued to press its claim under s. 7(1). In my view, that claim cannot succeed.

[23] A trust arises under s. 7(1) of the Act only where funds are “received by an owner” and those funds are “to be used in the financing of the improvement” of the owner’s property. The motions judge found that there was no evidence that any of the monies advanced by Comerica or the DIP Lender were to be used in the financing of the construction works carried out by the appellants in respect of the Lakeshore Plant leased by Veltri. On the record before this court, there is no basis upon which to interfere with this finding. Consequently, this factual finding, which attracts considerable deference from this court, is fatal to AC Metal’s trust claim under s. 7(1) of the Act.

(2) Sections 7(2) and (3) Trust Claims

[24] The appellants’ trust claims under ss. 7(2) and (3) of the Act are similarly flawed.

[25] Under ss. 7(2) and (3) of the Act: (i) a trust fund is created only “where amounts become payable under a contract to a contractor by the owner on a certificate of a payment certifier” (s. 7(2)) or “where the substantial performance of a contract has been certified, or has been declared by the court” (s. 7(3)); and (ii) the trust fund applies only to an amount that is equal to an amount so certified (s. 7(2)) or to the unpaid price of the substantially performed portion of the contract (s. 7(3)), that is “in the owner’s hands” or “received by the owner” at any time thereafter (ss. 7(2) and (3)).

[26] The motions judge rejected the appellants’ trust claims under ss. 7(2) and (3) of the Act on the basis that the sale proceeds were not “in [Veltri’s] hands” or “received” by Veltri, as required under both ss. 7(2) and (3). He stated:

It seems to me that on the record before me there is evidence, specifically in the provisions of the Sale Order that once the “Transactional Payments” had been made by Veltri, the Net Proceeds of Sale were to be handed over to the Monitor in what appears to be a holding in trust for determination of the security interests in and priority of such security interests in the assets sold to Ventra. Thus it would not appear to me that there were any monies of the nature contemplated by s. 7(2) or s. 7(3) in the hands of Veltri as owner as a result of the sale as approved by Spence J. [emphasis added].

[27] I agree. The statutory trusts created under both ss. 7(2) and (3) of the Act apply only to amounts “in the owner’s hands” or “received by the owner”. Neither of these prerequisites is satisfied here.

[28] Veltri’s lenders have a general security interest in all or substantially all of Veltri’s assets. Paragraph 12 of the Sale Order provided that the sale proceeds were to “stand in place and stead” of Veltri’s assets without prejudice to any claim being advanced against them as could have been advanced against the assets. Thus, the sale proceeds were substituted for Veltri’s assets and are subject to the claims of Veltri’s secured creditors. It is important to emphasize that the appellants have no claim to Veltri’s assets. Rather, their claims are trust claims under the Act in respect of the proceeds of the sale of Veltri’s assets. The sale proceeds, however, are insufficient to pay the claims of Veltri’s secured creditors in full and a significant shortfall will result (in excess of $10 million (U.S.) in the case of funds owed to Comerica).

[29] The court-approved sale of Veltri’s assets included the sale of Veltri’s leasehold interest in the Lakeshore Plant, the premises upon which the appellants’ work was performed. The asset sale to Ventra could not have taken place in the face of the claims of Veltri’s secured creditors without the consent of those creditors and court approval, and the sale was subject to the terms imposed by the court. Under these terms, the gross proceeds of sale were applied in payment of specific items and, thereafter, the net sale proceeds, which stood in substitution for Veltri’s fully secured assets, were paid to the Monitor. Thus, Veltri had no interest in or right to any of the net sale proceeds ultimately paid to and now held by the Monitor. At best, Veltri was a conduit for the receipt by the Monitor of the sale proceeds. Accordingly, the sale proceeds are not trust monies “in [Veltri’s] hands” or “received by [Veltri] as owner”, as is required to trigger the trust provisions of ss. 7(2) and 7(3) of the Act. This distinguishes this case from Structural Contractors Ltd. v. Westcola Holdings Inc. (2000), 2000 5740 (ON CA), 48 O.R. (3d) 417 (C.A.), leave to appeal to S.C.C. dismissed, [2000] S.C.C.A. No. 460 and similar cases.

[30] As well, in the case of AC Metal, its trust claim under ss. 7(2) and (3) of the Act fails on an additional ground. Payment or performance certification for the work carried out by AC Metal at the Lakeshore Plant was not forthcoming until June 2004. By that time, the closing of the sale of Veltri’s assets had taken place and the net sale proceeds were paid or payable to the court-appointed Monitor. Thus, when the sale proceeds were generated, AC Metal lacked the certification necessary to ground a trust claim under ss. 7(2) or 7(3) of the Act.

[31] The appellants argue that the funds now held in escrow by the Monitor pursuant to the Acknowledgement were intended to satisfy their claims and those of other lien claimants and that the Acknowledgement confirms Veltri’s control over the sale proceeds.

[32] I disagree. The Acknowledgement does not recognize or establish the validity of any lien or trust claim. It simply confirms that various construction lien claims were advanced against the Lakeshore Plant or Obolus Limited, the owner of that property. Nor does the Acknowledgement allocate the escrowed funds to Veltri’s leasehold interest in the Lakeshore Plant or otherwise value that leasehold interest. Instead, the Acknow-ledgement requires the Monitor to hold the escrowed funds pending further court order or other determination of the validity of the lien claims advanced.

[33] Accordingly, as the conditions precedent to the engagement of a statutory trust in favour of the appellants under ss. 7(2) and (3) have not been fully satisfied, I would reject the appellants’ trust claims under those sections of the Act.

(3) Section 9(1) Trust Claims

[34] The appellants’ trust claims under s. 9(1) of the Act are also unsustainable.

[35] Section 9(1)(a) of the Act provides that where an “owner’s interest in a premises” is sold by the owner, an amount equal to “the value of the consideration received by the owner as a result of the sale”, less enumerated deductions, constitutes a trust fund for the benefit of the claiming contractor. In this case, contrary to the requirements of s. 9(1)(a), there was no showing before the motions judge that Veltri’s leasehold interest in the Lakeshore Plant had any value; nor was an allocation of any part of the sale proceeds to that leasehold interest established. Moreover, as I have already stated, under the terms of the Sale Order the proceeds of sale realized on the asset sale to Ventra were not “received” by Veltri as owner of the property sold. Accordingly, the sale proceeds were not “consideration received by the owner as a result of the sale”, within the meaning of s. 9(1)(a) of the Act. These factors are a full answer to the appellants’ s. 9(1) trust claims.

(4) Nature of the Motions Judge’s Decision

[36] The appellants submit that the motions judge held that trusts established by ss. 7 and 9 of the Act were superseded by a trust created under the Sale Order in favour of Veltri’s secured creditors, having priority over the trusts created under the Act. In my view, this mischaracterizes the nature of the motions judge’s decision.

[37] The July 14, 2004 order of the motions judge granted a declaration that the sale proceeds do not constitute trust funds pursuant to ss. 7 and 9 of the Act and that the appellants, and certain other lien claimants, do not have a valid claim to the sale proceeds under those sections of the Act. It does not purport to recognize a “trust” in favour of any of Veltri’s secured creditors or to grant priority to one trust claim over another. Rather, the motions judge held that no trust exists in favour of the appellants under ss. 7 and 9 of the Act in respect of the sale proceeds in the circumstances of this case. I agree.

5. Disposition

[38] Accordingly, for the reasons given, I would dismiss the appeals. The respondents are entitled to their costs of the appeals, if sought, on a partial indemnity basis, fixed in the total amount of $10,000 in the case of Comerica and the total amount of $5,000 in the case of DCC, payable by the appellants in equal shares. As the Monitor did not directly participate in these appeals and advances no claim to costs, I would make no costs award in its favour.

RELEASED: July 29, 2005

E.A. Cronk J.A.

E.A.Cronk J.A.

I agree E.E. Gillese J.A.

I agree J MacFarland J.A.