CITATION: Parkland Plumbing & Heating Ltd. v. Minaki Lodge Resort 2002 Inc., 2009 ONCA 256
DATE: 20090324
DOCKET: C48626
COURT OF APPEAL FOR ONTARIO
MacPherson, Cronk and Rouleau JJ.A.
BETWEEN
Parkland Plumbing & Heating Ltd.
Plaintiff (Appellant)
and
Minaki Lodge Resort 2002 Inc. and Celestine Mortgage Corporation and Philip David Archer and Carson Painting and Decorating Ltd. and Archer Group of Companies
Defendants (Respondents)
Glenn Grenier, for the appellant
Roderick W. Johansen, for the respondents
Heard: October 20, 2008
On appeal from the order of Justices Susan E. Greer, John R.R. Jennings and Anthony E. Cusinato of the Superior Court of Justice, sitting as the Divisional Court, dated August 1, 2007 and reported at 74 R.P.R. (4th) 296, reversing the judgment of Justice Peter G. Jarvis of the Superior Court of Justice, dated May 19, 2006 and reported at 54 C.L.R. (3d) 142.
Cronk J.A.:
[1] This dispute has its genesis in the failed redevelopment of a resort property in northern Ontario known as Minaki Lodge. The appellant, Parkland Plumbing & Heating Ltd. (“Parkland”), is one of 14 construction lien claimants who registered liens totalling approximately $875,000 under the Construction Lien Act, R.S.O. 1990, c. C.30 (the “Act”) in respect of services or materials provided to the improvement of the property during the redevelopment project. The sole issue on this appeal is whether the liens have priority under the Act over a $5 million mortgage on the property held by the respondent, Celestine Mortgage Corporation (“Celestine”). To resolve this priority competition, we are required to consider whether Celestine was an owner of the property within the meaning of that term under s. 1(1) and for the purpose of the priorities scheme established by s. 78 of the Act. If Celestine was an owner of the mortgaged property, and no statutory exception otherwise applies, the liens rank in priority ahead of Celestine’s mortgage by operation of the general priorities rule set out under s. 78(1) of the Act.
I. Relevant Statutory Provisions
[2] The full text of the statutory provisions relevant to the issues on appeal is set out in Schedule A to these reasons. The following provisions are particularly pertinent:
- (1) In this Act,
“interest in the premises” means an estate or interest of any nature, and includes a statutory right given or reserved to the Crown to enter any lands or premises belonging to any person or public authority for the purpose of doing any work, construction, repair or maintenance in, upon, through, over or under any lands or premises;
“owner” means any person, including the Crown, having an interest in a premises at whose request and,
(a) upon whose credit, or
(b) on whose behalf, or
(c) with whose privity or consent, or
(d) for whose direct benefit,
an improvement is made to the premises but does not include a home buyer;
(1) A person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien upon the interest of the owner in the premises improved for the price of those services or materials.
A person’s lien arises and takes effect when the person first supplies services or materials to the improvement.
(1) Except as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner’s interest in the premises.
(3) Subject to subsection (2), and without limiting the effect of subsection (4), all conveyances, mortgages or other agreements affecting the owner’s interest in the premises that were registered prior to the time when the first lien arose in respect of an improvement have priority over the liens arising from the improvement to the extent of the lesser of,
(a) the actual value of the premises at the time when the first lien arose; and
(b) the total of all amounts that prior to that time were,
(i) advanced in the case of a mortgage, and
(ii) advanced or secured in the case of a conveyance or other agreement.
II. Facts
(1) Land Assembly and Redevelopment Project
[3] The respondent, Philip David Archer (“Archer”), is the president and sole shareholder and director of Celestine. He is also the sole owner and director of Land Development Corporation (“LDC”) and the Archer Group of Companies (the “Archer Group”). In early 2002, Archer caused the respondent, Minaki Lodge Resort 2002 Inc. (“Minaki Inc.”), to be incorporated for the purpose of acquiring and redeveloping Minaki Lodge. Archer became the president, chief operating officer and a director, and his wife became the sole shareholder and a director, of Minaki Inc.
[4] On April 3, 2002, Minaki Inc. purchased Minaki Lodge for the sum of $1.95 million. On April 13, 2002 – the day of closing – a $1 million first mortgage in favour of Celestine was registered against title to Minaki Lodge (the “First Mortgage”). Two days later, Minaki Inc. acquired several adjoining lots (the “Adjoining Lots”) for $250,000. [^1]
[5] By its terms, the First Mortgage: (i) provided for its syndication to investors; (ii) permitted the substitution of a new mortgage for the First Mortgage; and (iii) required Minaki Inc. to obtain fire insurance on Minaki Lodge and authorized Celestine to obtain the requisite fire insurance if Minaki Inc. failed to do so.
[6] On the findings of the trial judge, the acquisition of the Mortgaged Premises was financed by Celestine with funds provided by LDC in exchange for a syndicated interest in the First Mortgage. None of the purchase monies was furnished directly by Celestine or Minaki Inc.
[7] As the redevelopment project proceeded, various trades became involved and additional financing was made available to Minaki Inc. by Celestine, LDC, the Archer Group and third parties. The first lien concerning improvements to the Mortgaged Premises arose on April 26, 2002, when the first services and materials were supplied for the redevelopment project.
[8] By early December 2002, about $3.305 million had been advanced to Minaki Inc., most of which was provided by LDC (approximately $2.58 million). Celestine’s direct contributions totalled $680,000, while the Archer Group advanced $40,000.
[9] On December 9, 2002, the First Mortgage was discharged and replaced by a new $5 million mortgage in favour of Celestine (the “Second Mortgage”). Like the First Mortgage, it required Minaki Inc. to obtain fire insurance on the Mortgaged Premises and authorized Celestine, on Minaki Inc.’s default of this obligation, to obtain the necessary insurance itself and to add the cost thereof to the indebtedness secured by the Second Mortgage.
[10] In December 2002 and January 2003, Minaki Inc. issued a series of promissory notes payable to LDC, Celestine, Archer and the Archer Group in respect of past advances. After the issuance of the promissory notes, LDC, Celestine, Archer and the Archer Group continued to advance further funds to Minaki Inc.
[11] No payments were made at any time by Minaki Inc. on either the First or Second Mortgages or under the promissory notes.
(2) Litigation and the Fire
[12] By early 2003, the redevelopment project appears to have been in considerable financial difficulty. The first lien was formally registered on May 8, 2003. The registration of numerous additional liens soon followed. Parkland’s lien for $176,252.02 was registered on June 27, 2003.
[13] On August 20, 2003, Parkland sued Minaki Inc. and Celestine for the recovery of the amount of its lien claim.
[14] Archer closed Minaki Lodge on Labour Day weekend in September 2003. About five weeks later, on October 13, 2003, the main building at Minaki Lodge was destroyed by fire. On the record before this court, the cause of the fire is unclear.
[15] No fire insurance coverage was in place at the time of the fire. Neither Archer nor any of the involved companies – including Minaki Inc. and Celestine – had obtained fire insurance on the Mortgaged Premises.
[16] In late November 2003, Celestine commenced power of sale proceedings under the Second Mortgage in respect of the Mortgaged Premises.
[17] Despite (a) the existence of numerous registered liens and pending lawsuits by various lienholders, (b) the property damage occasioned by the fire, and (c) Celestine’s power of sale proceedings, Celestine and the Archer Group continued to advance funds to Minaki Inc. and to make payments directly to Minaki Inc.’s creditors (other than the lien claimants) throughout late 2003. In the case of the Archer Group, these payments continued until the end of February 2004.
(3) Trial Proceedings
[18] By consent court order dated April 26, 2005, the various lienholders’ actions against Minaki Inc. and Celestine were consolidated and Parkland was granted carriage of the consolidated action. The trial proceeded before Jarvis J. in Kenora in August 2005. At trial, the parties agreed that the priority dispute was the preliminary question to be determined and that the adjudication of other issues would proceed separately. As a result, for the purpose of the trial, the respondents did not challenge the validity of the liens. Instead, the central issue was whether Celestine was an “owner” of the Mortgaged Premises within the meaning of s. 1(1) and the s. 78 priorities scheme of the Act.
[19] The trial judge made the following key findings of fact: (i) Archer was the directing mind of and had complete control over the redevelopment of the Mortgaged Premises; (ii) Archer’s dealings and those of his companies (including Celestine) with the redevelopment project were not at arm’s length but, rather, “were entirely under the control and whim of Archer”; (iii) Celestine and Minaki Inc. were indistinguishable; (iv) the Second Mortgage “subsumed” the First Mortgage; (v) the advances to Minaki Inc. by Archer and his companies “were done from time to time as participants in the mortgage and not formalized as a matter of convenience”; and (vi) the advances “were, in effect, from Celestine”.
[20] At an early point in his reasons, the trial judge also indicated that “Celestine has priority over the lien claimants to the extent of [the advances]”. However, he ultimately concluded:
[17] Archer has failed to act in a reasonable commercial fashion and in so doing, he has willingly compromised the interests of the plaintiffs. These acts and omissions clearly indicate that Celestine and Minaki [Inc.] were indistin-guishable. It is my finding and conclusion that Celestine’s failure in this regard was a decision of an “owner” and for that reason it has no priority over the lien claimants.
[21] Accordingly, by judgment dated May 19, 2006, the trial judge granted an order declaring that “[Celestine] is an owner as defined under section 1 of the [Act], and as such its Mortgage has no priority over the lien claimants represented by the Plaintiff.”
[22] Following the trial, the Mortgaged Premises were apparently sold by a court-appointed receiver for net proceeds in the approximate amount of $1.9 million.
(4) Divisional Court Decision
[23] Celestine’s and Minaki Inc.’s subsequent appeal to the Divisional Court was allowed and the trial judgment was set aside. Justices Greer and Jennings concluded that the trial judge made a number of errors in finding that Celestine was an owner within the meaning of the Act and that the lien claims had priority over the Second Mortgage. Based on its own review of the evidence and the applicable legal principles, the majority of the Divisional Court held that none of the requisite elements of the term “owner” as defined under s. 1(1) of the Act was made out in this case.
[24] Justice Cusinato dissented. He concluded that the majority of the Divisional Court had misapprehended the basis for the trial judge’s finding that Celestine was an owner under the Act, that the evidence at trial satisfied the prerequisites to a finding that Celestine was an owner of the Mortgaged Premises, and that the trial judge’s findings were entitled to deference.
[25] In the result, by order dated August 1, 2007, the Divisional Court declared that: (i) $2.2 million in advances by Celestine to secure the conveyance of the Mortgaged Premises “rank[ed] in priority to all lien claimants”; and (ii) liens that were preserved and perfected under the Act and registered after the advances of $2.2 million, together with any deficiency in holdbacks under the Act, “remain protected for lienholders”.
[26] Leave to appeal having been granted by this court on April 4, 2008, Parkland appeals from the Divisional Court’s decision.
III. Issues
[27] The parties raise three issues:
(1) Did the Divisional Court err by holding that Celestine was not an owner of the Mortgaged Premises for the purpose of the Act?
(2) In the alternative, if Celestine was not an owner of the Mortgaged Premises, did the Divisional Court nevertheless err by holding that the Second Mortgage has priority over the liens to the extent of the funds advanced to Minaki Inc. to acquire the Mortgaged Premises?
(3) Does s. 78(3) of the Act create an “owner’s priority” in favour of Celestine in respect of the Mortgaged Premises?
IV. Analysis
(1) Was Celestine an Owner of the Mortgaged Premises?
(i) General statutory priorities scheme
[28] The Act is remedial legislation. Kevin Patrick McGuinness, in Construction Lien Remedies in Ontario, 2nd ed. (Toronto: Carswell, 1997), at para. 1.8, suggests: “[The Act] was intended to correct a perceived deficiency in the protection afforded by the common law to construction suppliers by creating a scheme of rights in favour of those suppliers, and it provides a method for the assertion and enforcement of those rights.”
[29] Under s. 14(1) of the Act, a person who supplies services or materials to an improvement for an “owner” has a lien upon the “interest of the owner” in the premises improved for the price of the supplied services or materials. The lien arises and takes effect when the person first supplies services or materials to the improvement (s. 15(1)).
[30] Section 78(1) of the Act establishes a general priority in favour of lien claimants, as follows:
- (1) Except as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner’s interest in the premises.
Thus, under s. 78(1) and subject to any exception in s. 78, if Celestine was an owner of the Mortgaged Premises, the liens have priority over the Second Mortgage.
(ii) Concept of ownership under the Act
[31] The concept of an ‘ownership’ interest in the premises is integral to the statutory lien created under s. 14(1) and the priority right afforded to lien claimants under s. 78(1) of the Act. To be deemed an owner for the purpose of the Act, it is necessary that the person in question fit within the wording of the definition of “owner” under s. 1(1) of the Act:
“owner” means any person, including the Crown, having an interest in a premises at whose request and
(a) upon whose credit, or
(b) on whose behalf, or
(c) with whose privity or consent, or
(d) for whose direct benefit,
an improvement is made to the premises but does not include a home buyer;
[32] The scope of this statutory definition is broad and is not limited to the legal or registered owner of the property. Moreover, several persons may fall within the definition in respect of the same property: see Phoenix Assurance Company of Canada v. Bird Construction Company Limited; Yarwood v. Ownix Developments Limited, [1984] 2 S.C.R. 199, at p. 213; McGuinness, at paras. 5.56 and 5.59.
[33] The majority of the Divisional Court held that the trial judge erred by finding that Celestine was an owner of the Mortgaged Premises. As I read its reasons, this conclusion was based on the majority’s view that the trial judge erred: (i) by finding that Celestine became an owner for the purpose of the Act when it failed to insist that Minaki Inc. place fire insurance on the Mortgaged Premises; (ii) by ‘lifting’ Celestine’s ‘corporate veil’ to hold that Celestine and Minaki Inc. were indistinguishable; and (iii) by failing to analyze the statutory definition of “owner” under s. 1(1) of the Act and to relate the evidence in this case to the constituent elements of that definition.
[34] With respect, I do not agree that the trial judge erred as suggested by the majority of the Divisional Court. On the contrary, I conclude that the majority erred in its appreciation of the trial judge’s reasons and by failing to examine the substance of the overall arrangements among Archer, his companies and Minaki Inc. in light of the trial judge’s factual findings. I reach this conclusion for the following reasons.
(a) Failure to obtain fire insurance
[35] The majority of the Divisional Court accepted the respondents’ claim, repeated before this court, that the trial judge’s reasons reveal that his finding of ‘ownership’ by Celestine was based on Celestine’s failure “to insist that Minaki [Inc.] place insurance on the buildings as required by the mortgage”. The majority held that this was an error, reasoning that the question of insurance was “a matter between Celestine and Minaki [Inc.]” and that the covenant to insure was personal to Celestine and subject to a waiver of compliance by it.
[36] I agree that Celestine’s failure to compel Minaki Inc. to honour its contractual obligation to purchase fire insurance and Celestine’s own failure to obtain such coverage did not render Celestine an owner of the Mortgaged Premises for the purpose of the Act. No provision of the Act requires a secured creditor or an owner to insure premises that are the subject of construction improvements.
[37] However, I do not agree that the trial judge’s finding of Celestine’s ownership of the Mortgaged Premises rested solely or even primarily on this deficiency. In my view, properly read, the trial judge’s reasons indicate that his ownership finding was anchored on a constellation of factors including, but not limited to, the commercial unreasonableness of the failure to obtain fire insurance. Several factors support this interpretation of the trial judge’s reasons.
[38] First, the majority of the Divisional Court emphasized paragraph 17 of the trial judge’s reasons in concluding that the absence of fire insurance was regarded by the trial judge as dispositive of the question of Celestine’s ownership. In my view, paragraph 17 does not support this conclusion. For convenience, I again reproduce paragraph 17, with the relevant passages highlighted:
[17] Archer has failed to act in a reasonable commercial fashion and in so doing, he has willingly compromised the interests of the plaintiffs. These acts and omissions clearly indicate that Celestine and Minaki [Inc.] were indistinguish-able. It is my finding and conclusion that Celestine’s failure in this regard was a decision of an “owner” and for that reason it has no priority over the lien claimants. [Emphasis added.]
[39] Although these comments might have been expressed more clearly, paragraph 17 as a whole reveals that the trial judge’s finding of Celestine’s ownership was linked to the commercial unreasonableness of the overall course of conduct by Archer, Celestine and Minaki Inc. in respect of the redevelopment project. Celestine’s and Minaki Inc.’s failure to obtain fire insurance was only one aspect of the conduct scrutinized by the trial judge.
[40] Second, the trial judge’s comments regarding the absence of fire insurance must be understood in context and in light of the entirety of his reasons. Immediately before the impugned comments at paragraph 17 of his reasons, the trial judge stated:
[14] I accept the evidence of Herb LeGrange, who said that he had taken part in a discussion with Archer and an investor at the Lodge on Labour Day weekend, 2003. Archer said that the possibility of lien claimants was of no concern to him. The interests of lien claimants could easily be defeated by way of foreclosure by Celestine. Mr. LeGrange testified in a direct responsive manner. There is no doubt that he has his own issues with Archer but I found his evidence to be reasonable and consistent with Archer’s striking lack of concern for the lien claimants demonstrated in his own evidence. Mr. LeGrange was not cross-examined. In summary, I find that Archer cared nothing for the lien claimants and decided that they should bear the risk of fire loss by failing to have Celestine insist on the placement of insurance.
[15] Archer is a sophisticated businessman. He took a calculated risk regarding the fire insurance and can only have done so to avoid the cost. He believed his own interests were adequately protected by the value of the land. His own decision was a strategic one. When necessary he tried to place the insurance and had already done on leased equipment at the insistence of the lessors.
[16] No commercial lender would have advanced funds continuously to an owner who made no payments, principal or interest, nor would such a lender have advanced funds without having fire insurance in place. It is also important to note that Celestine made no subsearches of the title of Minaki [Inc.] before making advances.
[41] It is true that the trial judge mentioned the absence of fire insurance several times. However, read in combination with paragraph 17, the above-quoted passages from his reasons confirm that he considered the following factors in determining whether the evidence established that Celestine was an owner of the Mortgaged Premises:
(i) the evidence of Archer’s “acts and omissions” as a commercial lender – acting through Celestine – and as the directing mind of the redevelopment project, including:
(a) his motivation in refraining from ensuring that fire insurance was obtained,
(b) the continued advance of funds – through Archer’s various companies – to Minaki Inc. although no payments had been made on either the First or Second Mortgages, and
(c) Celestine’s failure to protect the priority of the advances by determining – prior to each advance – whether liens had been registered on title against the Mortgaged Premises;
(ii) Mr. LeGrange’s evidence of Archer’s cavalier dis-regard for the interests of the lienholders;
(iii) Archer’s own testimony regarding the liens and the redevelopment project; and
(iv) the evidence establishing that Celestine and Minaki Inc. were “indistinguishable”.
[42] The trial judge’s comments about the absence of fire insurance must also be understood in the context of his earlier factual findings that: (i) Archer was the directing mind of and had complete control over the redevelopment project; and (ii) Archer’s dealings and those of his companies with the redevelopment project were not at arm’s length but, rather, “were entirely under the control and whim of Archer”.
[43] Finally, the trial judge’s holding of Celestine’s ownership was also grounded in his assessment of Archer’s credibility. The trial judge indicated that Archer’s failure to fulfill a trial undertaking concerning the financial circumstances of his companies and his inconsistent trial testimony regarding the existence of financial statements for those companies, “greatly undermine[d] Archer’s credibility as a witness”. The trial judge also regarded Archer’s testimony as establishing an intent to arrange the corporate structure for the redevelopment project in his own self-interest, so as to defeat the interests of the lienholders.
[44] I conclude, therefore, that the majority of the Divisional Court misapprehended the basis for the trial judge’s finding that Celestine was an owner of the Mortgaged Premises. The failure to obtain fire insurance was only one of many factors considered by the trial judge in his analysis of whether Celestine fit within the statutory definition of “owner” under the Act.
(b) Lifting Celestine’s corporate veil
[45] The majority of the Divisional Court held that the trial judge erred by “finding that Celestine’s corporate veil could be pierced and Minaki [Inc.] substituted for it”. In the majority’s opinion, it was “unwise” in this case to “lift the corporate veil of Celestine so as to find it to be an ‘owner’ under the [Act]”. Relying on Phoenix, supra, and Big Creek Construction Ltd. v. York-Trillium Development Group Ltd. (1993), 8 C.L.R. (2nd) 138 (Ont. S.C.), aff’d (1993), 107 D.L.R. (4th) 331 (Ont. Div. Ct.), the majority concluded that corporate veil considerations should be kept separate from the issue of ownership under the Act.
[46] The majority also disagreed with the trial judge’s finding that the redevelopment project was conducted on a non-arm’s length basis:
Minaki [Inc.] was in no way interposing the corporate body of Celestine between it and any subsequent lien holders. Its mortgage was first in place and later subsumed into the [Second Mortgage], before any lien holder was registered. Celestine was a lender, and the funds used by Celestine to fund the project came from a group of syndicated mortgagees who invested their own personal or corporate funds in the syndicated mortgage given to Minaki [Inc.]. How can this set-up not be at arm’s length?
[47] Elsewhere in its reasons, the majority added: “Celestine and Minaki [Inc.] were two separate entities, even though Archer wore the hat of director in each” and “there is no corporate relationship between Minaki as owner and Celestine as mortgagee.”
[48] I do not agree that the trial judge erred by piercing Celestine’s corporate veil to ascertain the real nature of its interest in the Mortgaged Premises. Nor, in my view, was it open to the majority of the Divisional Court on the record in this case to interfere with the trial judge’s factual findings concerning the true relationship between Celestine and Minaki Inc.
[49] While a corporation is a legal entity distinct from its shareholders, this principle may be disregarded by ‘lifting the corporate veil’ and regarding the company as the agent or vehicle of its controlling shareholder or parent corporation where enforcing the ‘separate entities’ principle would yield a result “too flagrantly opposed to justice”: Kosmopoulos v. Constitution Ins. Co. of Canada, [1987] 1 S.C.R. 2, at para. 12, citing L.C.B. Gower, Modern Company Law 4th ed. (London: Stevens, 1979), at p. 112.
[50] But this does not mean that the courts enjoy ‘carte blanche’ to lift the corporate veil absent fraudulent or improper conduct whenever it appears ‘just and equitable’ to do so. In Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 (Ont. Gen. Div.), aff’d, [1997] O.J. No. 3754 (C.A.), Sharpe J. (as he then was) indicated at pp. 433-34:
[T]he courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct. The first element, “complete control”, requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently… .
The second element relates to the nature of the conduct: is there “conduct akin to fraud that would otherwise unjustly deprive claimants of their rights”? [Citations omitted.]
[51] Earlier in Transamerica, at pp. 432-33, Sharpe J. accepted the following formu-lation of the test for lifting the corporate veil, set out in Gower, Modern Company Law, 5th ed. (1992) at pp. 132-33:
There seem to be three circumstances only in which the courts can [lift the corporate veil]. These are:
(1) When the court is construing a statute, contract or other document.
(2) When the court is satisfied that a company is a “mere facade” concealing the true facts.
(3) When it can be established that the company is an authorized agent of its controllers or its members, corporate or human.
See also, Gregorio v. Intrans-Corp. (1994), 18 O.R. (3d) 527 (C.A.); ScotiaMcLeod Inc. v. People Jewellers Ltd. (1995), 26 O.R. (3d) 481 (C.A.), leave to appeal to S.C.C. refused, [1996] S.C.C.A. No. 40; ADGA Systems International Ltd. v. Valcom Ltd. (1999), 43 O.R. (3d) 101 (C.A.), leave to appeal to S.C.C. refused, [1999] S.C.C.A. No. 124; Downtown Eatery (1993) Ltd. v. Ontario (2001), 54 O.R. (3d) 161 (C.A.), leave to appeal to S.C.C. refused, [2001] S.C.C.A. No. 397; 642947 Ontario Limited v. Fleischer (2001), 56 O.R. (3d) 417 (C.A.); Wildman v. Wildman (2006), 82 O.R. (3d) 401 (C.A.); Lynch v. Segal (2006), 82 O.R. (3d) 641 (C.A.), leave to appeal to S.C.C. refused, [2007] S.C.C.A. No. 84.
[52] In this case, the trial judge made three crucial findings of fact: (i) Archer’s dealings and those of his companies (including Celestine) with the redevelopment project “were not at arm’s length and were entirely under the control and whim of Archer”; (ii) Celestine and Minaki Inc. were indistinguishable; and (iii) Archer’s conduct, acting through his companies, revealed a “striking lack of concern for the lien claimants”, a willingness to compromise their interests, and a failure “to act in a reasonable commercial fashion”.
[53] The trial judge’s appreciation of the evidence and his factual findings attract considerable deference from any appellate court. Absent palpable and overriding error, appellate interference with those findings is precluded. See Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235.
[54] There was ample evidence in this case to support the trial judge’s findings, described above. The record before the trial judge established that:
- Archer controlled Celestine, LDC and the Archer Group;
- Archer was the president and chief operating officer of both Minaki Inc. and Celestine;
- although Archer’s wife was the sole shareholder of Minaki Inc., it was Archer who negotiated with contractors (including Parkland), hired staff and consultants and arranged the purchase of necessary equipment for the redevelopment project;
- Archer signed both the First and Second Mortgages on behalf of Minaki Inc.;
- promissory notes issued by Minaki Inc. in respect of the funds advanced to finance the acquisition of the Mortgaged Premises were delivered in favour of LDC, Celestine, Archer, and the Archer Group, collectively, although the advances were made exclusively by LDC;
- the promissory notes were “accepted” by Archer on behalf of LDC, Celestine, Archer, and the Archer Group, collectively;
- payments on behalf of Minaki Inc. were made directly to third parties by LDC, Celestine, Archer, and the Archer Group;
- the third-party payments were treated as advances by Celestine to Minaki Inc. although neither of these companies actually received the funds;
- Archer intended to protect these third-party payments by increasing the interests of the payors under the syndicated mortgages to the extent of their financial contributions;
- in his trial testimony, Archer continued to fail to differentiate between his companies or his companies and himself in respect of the acquisition and redevel-opment of the Mortgaged Premises;
- neither Archer nor Celestine took any steps to enforce Celestine’s rights as a secured lender until several months after the registration of the liens and the commencement of the lienholders’ actions; and
- Archer’s conduct, acting through Celestine, was inconsistent with that of a reasonable commercial lender, with the result that the interests of the lienholders were “willingly compromised”.
[55] This evidence, in my view, was more than sufficient to justify the trial judge’s decision to pierce Celestine’s corporate veil to determine whether it was an owner of the Mortgaged Premises for the purpose of the Act.
[56] Further, I do not regard the decisions in Big Creek and Phoenix as presenting any impediment to the trial judge’s decision to pierce Celestine’s corporate veil. On the contrary, neither Big Creek nor Phoenix hold that it is impermissible, in a proper case, to lift the veil of a corporation when determining whether it is an owner within the meaning of the Act.
[57] In Big Creek, the motion judge exercised his discretion under the Act to discharge and vacate three liens registered against a property. He did so after finding that the evidence of the lien claimant’s repeated representations that it was the “owner”, “joint owner” or “agent” of the owner established such a close identification between the lien claimant and the actual owner of the property as to warrant the discharge of the liens on the basis that they contravened the principle that an owner cannot lien its own property. Thus, on the facts in Big Creek, it was unnecessary to lift the corporate veil to establish the lien claimant’s lack of entitlement to a lien under the Act.
[58] In Phoenix, the Supreme Court of Canada cautioned that the overall arrangements between the parties must be scrutinized in an ‘ownership’ inquiry to ascertain the real substance of the enterprise at issue: see pp. 208-09, 214-15 and 217-18. In my view, this mandated approach is entirely consistent with piercing the corporate veil of a corporation to resolve a priorities dispute under the Act where – as here – the necessary evidential foundation is established and the interests of justice will be furthered by so doing. Indeed, the jurisprudence of the Supreme Court of Canada confirms that the form of the parties’ arrangements cannot be allowed to mask their true character: see Northern Electric Company Limited v. Manufacturers Life Insurance Company, [1977] 2 S.C.R. 762, at pp. 765 and 774. See also City of Hamilton v. Cipriani, [1977] 1 S.C.R. 169, at p. 173.
[59] In this case, the evidence demonstrated and the trial judge found that Archer exercised clear domination and control over the redevelopment project through a stable of companies that included Celestine and Minaki Inc., such that, in effect, these companies acted as a mere corporate facade for Archer’s own activities. On this record, the trial judge’s holding that Celestine and Minaki Inc. were indistinguishable – so that the acts of one were the acts of the other as Archer’s agents throughout – is unimpeachable.
(c) Statutory definition of “owner”
[60] The respondents argue, and the majority of the Divisional Court accepted, that none of the statutory requirements for a finding of ownership by Celestine was satisfied in this case. With respect, I disagree.
[61] To fit within the definition of “owner” under s. 1(1) of the Act, three prerequisites must be met: (i) the person said to be an owner must have an “interest in a premises”; (ii) that person must have “request[ed]” an improvement to the premises; and (iii) the improvement to the premises must have been made on the credit, on behalf of, with the privity or consent of, or for the direct benefit of the person said to be an owner.
[62] The respondents correctly point out that the trial judge did not expressly mention the statutory definition of “owner” under the Act. Nonetheless, in my opinion, his reasons demonstrate that Celestine fit squarely within this definition.
[63] The first prerequisite of the ownership test under the Act is not contested by the respondents. The phrase an “interest in the premises” is defined under s. 1(1) of the Act as follows:
“interest in the premises” means an estate or interest of any nature, and includes a statutory right given or reserved to the Crown to enter any lands or premises belonging to any person or public authority for the purpose of doing any work, construction, repair or maintenance in, upon, through, over or under any lands or premises;
[64] An estate or interest of any nature in premises, including a mortgage, satisfies this definition: see for example, Muzzo Brothers Ltd. v. Cadillac Fairview Corp. Ltd. (1982), 34 O.R. (2d) 461 (S.C.), at p. 469; Roboak Developments Ltd. v. Lehndorff Corp. (1986), 39 R.P.R. 194 (O.H.C.J.), at p. 202, aff’d (1987), 47 R.P.R. 275 (Ont. Div. Ct.). Celes-tine had an interest in the Mortgaged Premises under the First and Second Mortgages.
[65] The second prerequisite of the statutory definition of “owner” requires a showing that the person said to be an owner “requested” that an improvement be made to the premises. The majority of the Divisional Court was of the opinion that none of the work at Minaki Lodge was done at Celestine’s request and that “Celestine never had any dealings with any lien claimant nor does its name appear on any document.” The majority also held that the trial judge erred by relying on Muzzo, stating that Muzzo is “quite a different case from Celestine, in that [Celestine] had no negotiations with any lienholder, nor did it have any say in any of the building that was taking place.”
[66] These comments suggest that the majority regarded the absence of direct dealings between Celestine and the lienholders as fatal to the claim that Celestine “requested” improvements to the Mortgaged Premises. This was an error.
[67] The absence of direct dealings between the person said to be an owner under the Act and construction suppliers is only one factor to consider in examining the relation-ship between the parties. It is not determinative. Were it otherwise, a developer could easily escape its obligations to suppliers by the simple device of arranging for an associated or related company to directly engage suppliers for the provision of services or materials. This would defeat the intended protection provided to lienholders under the Act. For this reason, the courts have recognized that a “request” for work to be done may be inferred from the totality of the circumstances, viewed in light of the substance of the relationship between the parties: Phoenix, at pp. 215-18; Cipriani, at p. 173; Northern Electric, at p. 769; Roboak, at pp. 203-04; Muzzo, at pp. 469-71; Orr v. Robertson (1915), 23 D.L.R. 17 (Ont. C.A.), at p. 18.
[68] Nor was the trial judge’s reliance on Muzzo misplaced. In that case, the court was concerned with the meaning of “owner” under s. 1(1)(d) of the Mechanics’ Lien Act, R.S.O. 1970, c. 267, a predecessor statute to the current Act. The court considered Phoenix, Northern Electric and Cipriani and, consistent with these authorities, concluded that a request by a person to have work performed could be inferred from all the circumstances of the case. Thus, in Muzzo, a vendor of subdivision land was held to be an owner for the purpose of a lien claim where, following the sale transaction, the vendor remained the registered owner of the land and retained the rights to approve building plans and to repurchase the land on certain events.
[69] When adverting to Muzzo, the trial judge in this case recognized, correctly, that cases in which the meaning of “owner” under the Act or its predecessor statutes has been considered are highly fact-specific. Moreover, care must be exercised when examining cases – like Muzzo – that involve ownership inquiries under legislation that differs from the Act. No doubt with these considerations in mind, in respect of Muzzo the trial judge said merely that the question of ownership by a mortgagee was considered in that case “in somewhat similar circumstances” (emphasis added). He also accurately observed: “There is no question, however, that mortgagees have been found to have committed the acts of an owner and have lost their priority.”
[70] The claim that Celestine did not request any of the work undertaken at Minaki Lodge rests on the proposition that Celestine operated independently from Archer, Archer’s other companies, and Minaki Inc. This flies in the face of the trial judge’s finding that Celestine and Minaki Inc. were indistinguishable, a finding that I have concluded was open to the trial judge on the evidence. It follows that requests by Minaki Inc. or by Archer on behalf of Minaki Inc. for the provision of services or materials from suppliers constituted requests by Celestine.
[71] I note one additional factor. As in Muzzo with respect to the arrangements involving the developer and the vendor, Minaki Inc. was obliged under the First and Second Mortgages to construct the redevelopment in accordance with plans and specifications approved by Celestine or its designate if any part of the secured indebtedness was occasioned “in development of the Land”.
[72] In other words, to the extent that the funds advanced constituted a construction loan, Celestine’s involvement with the plans and design of the Mortgaged Premises was required. The record indicates that as Celestine did not require Minaki Inc. to prepare the necessary plans and specifications, it did not participate in the approval of these documents. Nonetheless, some of the funds advanced under the Second Mortgage were utilized to finance the construction of the redevelopment of Minaki Lodge. As in Muzzo, therefore, Celestine was contractually entitled to become directly involved in the building project.
[73] I turn now to the third and final prerequisite for ownership under the Act, which requires that the improvement must have been made under at least one of the following conditions: (i) upon the credit of, (ii) on behalf of, (iii) with the privity or consent of, or (iv) for the direct benefit of, the alleged owner: see Phoenix, at p. 218.
[74] Although the trial judge did not expressly mention this part of the statutory ownership test, his reasons reveal that it too was satisfied in this case. It is inherent in the trial judge’s findings, which I have previously described, that Minaki Inc. and Celestine constituted inseparable parts of a joint enterprise with Archer, LDC and the Archer Group for the purpose of the redevelopment project. As a result, improvements to the premises carried out on behalf of Minaki Inc. and for its benefit were also undertaken on Celestine’s behalf and for its direct benefit. Thus, the final requirement of the statutory definition of “owner” was also met in this case.
(2) Other Issues
[75] In light of my conclusion that Celestine was an owner of the Mortgaged Premises, it is unnecessary to address Parkland’s alternative submission that even if Celestine was not an owner, the Divisional Court erred by holding that the Second Mortgage has priority over the liens to the extent of the funds advanced to Minaki Inc. to acquire the Mortgaged Premises.
[76] However, the effect of the conclusion that Celestine was an owner of the Mortgaged Premises on the priorities dispute between the parties remains to be considered. This issue involves two related questions. First, given that Celestine was an owner, what are the priorities of the liens and the Second Mortgage under the s. 78 priorities scheme of the Act? Second, does s. 78(3) of the Act create a special “owner’s priority” exception to the s. 78(1) general priorities rule, as asserted by the respondents?
[77] These questions may be dealt with summarily. As I have indicated, s. 78(1) of the Act establishes the general rule that all liens arising from an improvement have priority over all mortgages affecting the owner’s interest in the premises. This rule is subject to any applicable exception otherwise provided under s. 78. The issue, therefore, is whether any of the s. 78 exceptions are triggered in this case so as to deprive Parkland of the priority status otherwise attaching to its lien under s. 78(1). In my opinion, none of the s. 78 exceptions, including the s. 78(3) exception, applies to displace the priority con-ferred on Parkland’s lien by s. 78(1) of the Act.
[78] To begin, the controlling principle of s. 78 of the Act is that “the value of improve-ments to real property is to be preserved for the benefit of the persons who made them”: see Charles G.T. Wiebe and Markus Rotterdam in Construction Remedies: Beyond the Lien, Mortgagees and Lien Claimants (Toronto: Ontario Bar Association, 2008), at p. 2. The s. 78 exceptions to this principle are concerned with priority conflicts between lien claims and transfers or dispositions of an owner’s interest in the premises. See McGuinness, supra, at paras. 5.55, 5.127 and 5.130.
[79] In other words, the s. 78 statutory exceptions to the s. 78(1) priorities rule are directed at conflicts between lienholders and persons who acquire derivative interests, i.e. the interest of the owner in the premises, or some interest derived from the owner’s interest. The exceptions are not concerned with the owner’s interest per se. As a result, a mortgagee will lose its priority over lien claimants where – as here – the mortgagee is held to be an owner for the purpose of the Act.
[80] Nor does s. 78(3) assist the respondents. That provision states:
Subject to subsection (2), and without limiting the effect of subsection (4), all conveyances, mortgages or other agree-ments affecting the owner’s interest in the premises that were registered prior to the time when the first lien arose in respect of an improvement have priority over the liens arising from the improvement to the extent of the lesser of,
(a) the actual value of the premises at the time when the first lien arose; and
(b) the total of all amounts that prior to that time were,
(i) advanced in the case of a mortgage, and
(ii) advanced or secured in the case of a conveyance or other agreement. [Emphasis added.]
[81] The respondents argue that s. 78(3) creates an “owner’s priority” such that, to the extent that the Second Mortgage is a ‘purchase money’ charge, it enjoys priority over the liens in respect of the funds advanced by Celestine to Minaki Inc. to acquire the Mortgaged Premises ($2.2 million). In the circumstances of this case, this argument must be rejected.
[82] Section 78(3) deals with the priority of a derivative interest (like a security interest created by a mortgage) that is registered prior to the time when the first lien arose, in particular, advances made prior to the time when the making of the improvement commences: McGuinness, at para. 5.132. It does not apply where the interest in the premises in respect of which priority is claimed is that of an owner.
[83] Put somewhat differently, the language of s. 78(3) confirms that it is concerned with conveyances, mortgages or other agreements that affect an existing interest of an owner in the premises, as distinct from those that create an owner’s interest in the premises. The priorities contemplated by s. 78(3) assume that an owner’s interest in the premises already exists. None of the cases relied on by the respondents to advance their s. 78(3) claim involved a purchase money mortgage where the mortgagee was held to be an owner under the Act.
V. Disposition
[84] Accordingly, for the reasons given, I would allow the appeal, set aside the order of the Divisional Court, and substitute in its stead an order declaring that Parkland’s lien has priority under the Act over the Second Mortgage held by Celestine on the Mortgaged Premises. The appellant is entitled to its costs of the appeal, fixed in the total amount of $20,000, inclusive of disbursements and GST. The appellant is also entitled to its costs of the proceeding before the Divisional Court, fixed, as agreed by the parties, in the total amount of $15,000, inclusive of disbursements and GST.
RELEASED: March 24, 2009 (“E.A.C.”)
“E.A. Cronk J.A.”
“I agree J.C. MacPherson J.A.”
“I agree Paul Rouleau J.A.”
SCHEDULE A
- (1) In this Act,
“improvement” means,
(a) any alteration, addition or repair to, or
(b) any construction, erection or installation on,
any land, and includes the demolition or removal of any building, structure or works or part thereof, and “improved” has a corresponding meaning;
“interest in the premises” means an estate or interest of any nature, and includes a statutory right given or reserved to the Crown to enter any lands or premises belonging to any person or public authority for the purpose of doing any work, construction, repair or maintenance in, upon, through, over or under any lands or premises;
“lien claimant” means a person having a preserved or perfected lien;
“owner” means any person, including the Crown, having an interest in a premises at whose request and,
(a) upon whose credit, or
(b) on whose behalf, or
(c) with whose privity or consent, or
(d) for whose direct benefit,
an improvement is made to the premises but does not include a home buyer;
(1) A person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien upon the interest of the owner in the premises improved for the price of those services or materials.
A person’s lien arises and takes effect when the person first supplies services or materials to the improvement.
(1) Except as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner’s interest in the premises.
(2) Where a mortgagee takes a mortgage with the inten-tion to secure the financing of an improvement, the liens arising from the improvement have priority over that mort-gage, and any mortgage taken out to repay that mortgage, to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV, irrespective of when that mortgage, or the mortgage taken out to repay it, is registered.
(3) Subject to subsection (2), and without limiting the effect of subsection (4), all conveyances, mortgages or other agreements affecting the owner’s interest in the premises that were registered prior to the time when the first lien arose in respect of an improvement have priority over the liens arising from the improvement to the extent of the lesser of,
(a) the actual value of the premises at the time when the first lien arose; and
(b) the total of all amounts that prior to that time were,
(i) advanced in the case of a mortgage, and
(ii) advanced or secured in the case of a conveyance or other agreement.
(4) Subject to subsection (2), a conveyance, mortgage or other agreement affecting the owner’s interest in the premises that was registered prior to the time when the first lien arose in respect of an improvement, has priority, in addition to the priority to which it is entitled under subsection (3), over the liens arising from the improvement, to the extent of any advance made in respect of that conveyance, mortgage or other agreement after the time when the first lien arose, unless,
(a) at the time when the advance was made, there was a preserved or perfected lien against the premises; or
(b) prior to the time when the advance was made, the person making the advance had received written notice of a lien.
(5) Where a mortgage affecting the owner’s interest in the premises is registered after the time when the first lien arose in respect of an improvement, the liens arising from the improvement have priority over the mortgage to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV.
- Where a premises that is subject to a lien is destroyed in whole or in part, any amount received by the owner or a mortgagee by reason of any insurance on the premises shall take the place of the premises so destroyed and shall be distributed in accordance with the priorities set out in the Part.
[^1]: I refer in these reasons to Minaki Lodge and the Adjoining Lots, collectively, as the “Mortgaged Premises”.