COURT OF APPEAL FOR ONTARIO

CITATION: 306440 Ontario Ltd. v. 782127 Ontario Ltd. (Alrange Container Services), 2014 ONCA 548

DATE: 20140718

DOCKET: C57856

Doherty, Simmons and Tulloch JJ.A.

BETWEEN

306440 Ontario Ltd.

Applicant (Respondent)

and

782127 Ontario Ltd. o/a Alrange Container Services

Respondent

M. Gordon Hearn, for the appellant Textainer Equipment Management (US) Ltd.

Dennis Van Sickle, for the respondent 306440 Ontario Ltd.

John N. Birch, for the Receiver

Heard: May 20, 2014

On appeal from the order of Justice James M. Spence of the Superior Court of Justice, dated October 24, 2013.

Doherty J.A.:

I

overview

[1] This litigation over the distribution of a bankrupt’s estate pits the secured claim of the lender, who financed the operation of the failed business, against the claims of an unsecured business creditor. Under the priority scheme established by the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B.3, this would be no contest. The secured creditor would have priority. However, the business creditor asserts a constructive trust over certain funds held by the Receiver. Trust property does not form part of the bankrupt’s estate and is not subject to the priorities established under the bankruptcy scheme.

[2] The constructive trust claim relies on what has been called the “swollen assets” theory. The business creditor, the appellant, argues that the bankrupt was unjustly enriched by its sale of property owned by the appellant. The appellant further argues that but for the funds these unauthorized sales generated and the bankrupt’s use of the proceeds of those sales to maintain its day-to-day operations, the bankrupt’s business would have failed much earlier and would not have generated some of the accounts receivable that were ultimately collected by the Receiver and now form part of the funds awaiting distribution in the bankruptcy proceeding. The appellant claims a constructive trust over those funds in an amount equal to the proceeds of the unauthorized sales of its property.

[3] The motion judge declined to impose a constructive trust. I agree with that disposition with one variation. I would impose a constructive trust in relation to the proceeds from the sales that were still in the bankrupt’s account at the time of the receivership.

II

facts

[4] The bankrupt, Alrange Container Services (“Alrange”), operated a business storing shipping containers for various customers. It also serviced, refurbished and, in some instances, bought and then resold those containers to third parties.

[5] By January 2013, Alrange’s business was in dire financial straits. On February 15, 2013, the respondent, 306440 Ontario Ltd. (“306 Ontario”), Alrange’s sole secured creditor and its source of financing, successfully applied for the appointment of a Receiver over the affairs of Alrange. Alrange made an assignment in bankruptcy in May 2013. At the time of the bankruptcy, Alrange owed 306 Ontario approximately $750,000, much of which had been advanced to Alrange during the latter part of 2012.

[6] The appellant, Textainer Equipment Management (US) Ltd. (“Textainer”), had been a customer of Alrange for many years. Textainer is one of the world’s largest lessors of intermodal containers. Textainer stored containers at the Alrange yard. Alrange provided storage space and serviced the containers pursuant to a written agreement (the “Depot Agreement”). Alrange also refurbished and bought containers Textainer had designated for resale. Alrange resold these containers to other buyers. In 2012, Alrange purchased containers from Textainer valued at about U.S. $800,000.

[7] The Depot Agreement did not speak to sales of containers stored at the Alrange facility. There is a dispute over the exact terms of the arrangement governing the purchase and resale of those containers. Specifically, Textainer claims that Alrange needed prior approval before it could sell any Textainer container. The Receiver’s investigation of the bankrupt’s business revealed sales that were made without prior approval. Alrange periodically notified Textainer of sales and Textainer would then invoice Alrange.

[8] In January 2013, Textainer learned that Alrange was in serious financial distress. Textainer had about 800 containers at Alrange’s facility and it immediately took steps to inventory and recover those containers. Ultimately, Textainer could not account for 127 containers. Alrange had sold them. Eighty-three of those containers were included in Textainer’s leasing inventory and 44 were listed in Textainer’s resale inventory. Textainer’s review of Alrange’s records suggested that Alrange had been paid about $261,000 for 76 of the containers.

[9] In the course of the bankruptcy, Textainer asserted a priority over the claim of the secured creditor 306 Ontario in an amount equal to the proceeds of the sale of the missing 127 containers. Textainer fixed that amount at $291,800. Eventually, Textainer and two other companies that also stored containers at Alrange’s facility brought a motion seeking an order imposing a constructive trust over funds received by the Receiver in the amount of the proceeds of the sales of the containers.[^1]

[10] The Receiver investigated Textainer’s claim to a priority over the proceeds of the sales of the missing 127 containers. In its second report, the Receiver reported that 90 of the containers had been disposed of by Alrange before October 3, 2012. Alrange used the proceeds from those sales to cover ongoing business expenses. Alrange sold the remaining 37 containers after October 3, 2012, but before January 25, 2013. The proceeds of those sales were also comingled with other monies in Alrange’s bank account and used to cover operating expenses. Alrange’s bank account was in overdraft as of January 18, 2013 and did not begin to accumulate a positive cash balance until after January 21, 2013.

[11] The Receiver also reported that as of February 15, 2013, the date of the receivership, Alrange had cash in hand and funds in its bank accounts totalling $459,833.15. Between February 15 and August 30, 2013, the Receiver collected additional receipts totalling $554,110.39.[^2]

[12] The Receiver identified five transactions involving the sale of Textainer containers by Alrange between January 21 and 25, 2013. The Receiver also identified $27,244 in Alrange’s bank account as the proceeds of those five transactions. The Receiver estimated, based on its understanding of the arrangement between Textainer and Alrange concerning the sale of Textainer containers, that Textainer would have billed Alrange approximately U.S. $10,800 for the five containers.

III

the reasons of the motion judge

[13] In his brief endorsement, the motion judge assumed that Alrange had been unjustly enriched by the sale of the Textainer containers. He declined, however, to impose a constructive trust on any of the funds held by the Receiver. He gave two reasons for dismissing Textainer’s claim for a constructive trust.

[14] First, the motion judge held that there was no connection between the asset over which the appellant sought a constructive trust, that is, part of the funds held by the Receiver, and the proceeds from the sales of Textainer containers. Those proceeds had been comingled with other funds and spent before January 21 when Alrange had a zero balance in its account. Consequently, the proceeds from the sale of the containers were not part of or related to the funds held by the Receiver. The motion judge made no reference to the proceeds from the sale of the five containers ($27,244) in his analysis.

[15] Second, the motion judge, relying on Soulos v. Korkontzilas, 1997 346 (SCC), [1997] 2 S.C.R. 217, at para. 45, held that the legitimate intervening interest of the secured creditor, 306 Ontario, would render the imposition of a constructive trust in favour of Textainer unjust in the circumstances.

IV

the arguments

[16] Like the motion judge, the appellant proceeds on the premise that it established unjust enrichment on the part of Alrange. Counsel for the appellant submits that the motion judge wrongly treated the appellant’s claim for a constructive trust as one based upon Alrange’s wrongful conduct rather than unjust enrichment. Counsel maintains that the distinction between a constructive trust claim based on wrongful conduct and one based on unjust enrichment is important because the criteria developed in Soulos for the imposition of a constructive trust based on wrongful conduct demand a direct connection between the property over which the trust is sought and the wrongful conduct of the defendant: see Soulos, at para. 45.

[17] Counsel concedes that, with the exception of the $27,244 attributable to the sale of the five containers after January 21, 2013, he cannot show a direct connection between the proceeds of the sale of the containers and the funds held by the Receiver. He submits, however, that because Textainer seeks a constructive trust based on unjust enrichment it need not show the same direct connection between the property and Alrange’s misconduct. Counsel, relying on a line of family law cases in which constructive trusts were imposed in respect of family-related property, contends that an indirect connection between the property over which the trust is sought and the conduct constituting the unjust enrichment can suffice. The appellant’s argument, and the limited authority supporting it, are summarized in David M. Paciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities Over Creditors” (1989) 68 Can. Bar Rev. 315, at pp. 332-33.

[18] I think counsel’s submission comes down to the assertion that a factual “but for” causal link between the property over which the trust is sought and the property that is the product of the unlawful act or unjust enrichment will suffice to warrant the imposition of a constructive trust over that property. On this argument, if “but for” the proceeds of the unauthorized sales of the containers, Alrange would have had to use other funds to cover ongoing expenses, would not have stayed in business as long as it did and, therefore, would not have generated some unspecified amount of the accounts receivable eventually recovered by the Receiver, there is a sufficient connection between the proceeds of the sales of the containers and the funds held by the Receiver to justify the imposition of a constructive trust over an amount equal to the proceeds of the sales.

[19] Counsel for the respondent begins by taking issue with the assumption that Alrange was unjustly enriched. He argues that the arrangement between Alrange and Textainer, whereby Alrange purchased and resold some of the containers stored in its facility, provided a juristic reason for the payments to Alrange. If Alrange breached that agreement, Textainer’s claim lies in breach of contract, not unjust enrichment and its remedy lies in damages and not a constructive trust: see Garland v. Consumers’ Gas Co., 2004 SCC 25, [2004] 1 S.C.R. 629, at para. 40.

[20] With one exception, I propose to do as the motion judge did and proceed on the assumption that Textainer had established unjust enrichment. I will return to the respondent’s claim that in fact there was no unjust enrichment because the arrangement between Alrange and Textainer provided a juristic reason for the payments when I address the disposition of the $27,244 in Alrange’s account arising from the sale of five of Textainer’s containers after January 21, 2013.

[21] Counsel for the respondent submits that the indirect and nebulous “but for” causal link on which the appellant relies has never justified the imposition of a constructive trust over specified property in the commercial context. In his submission, were the court to accept the causal argument put forward by the appellant, the creation of constructive trusts in favour of business creditors would routinely trump the established priority scheme in bankruptcy proceedings. Counsel relies on Ontario v. NRS Mississauga Inc. (2003), 2003 36551 (ON CA), 64 O.R. (3d) 97 (C.A.), at paras. 36-39, leave to appeal to S.C.C. refused, [2003] S.C.C.A. No. 311, in which he submits the court rejected the imposition of a constructive trust absent a clear and direct connection between funds held in a bankrupt’s account and the proceeds of the defendant’s wrongful conduct.

[22] Finally, counsel for the respondent submits that while the principles applicable to the imposition of constructive trusts remain constant across different areas of the law, the application of those principles will inevitably be coloured by the nature of the dispute in which they arise. What may suffice to establish a sufficient causal connection between the property and the unjust enrichment in a family law property dispute will not necessarily suffice to create the necessary linkage in a purely commercial context where the reasonable expectations of the parties are very different: Kerr v. Baranow, 2011 SCC 10, [2011] 1 S.C.R. 269, at para. 34; Sorochan v. Sorochan, 1986 23 (SCC), [1986] 2 S.C.R. 38, at p. 49.

V

analysis

(A) Is Textainer Entitled to a Constructive Trust?

[23] In Canada, constructive trusts belong to the law of remedies. If a plaintiff successfully establishes a restitutionary claim, often but not always, on the basis of unjust enrichment, the judge may, in the exercise of his or her discretion, grant a constructive trust over specified property if the judge concludes that a monetary award does not properly address the plaintiff’s legitimate remedial needs in the particular circumstances: Peter v. Beblow, 1993 126 (SCC), [1993] 1 S.C.R. 980, at pp. 987-88, 997; Lac Minerals Ltd. v. International Corona Resources Ltd., 1989 34 (SCC), [1989] 2 S.C.R. 574, at pp. 673-77, per La Forest J.

[24] 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.

[25] In Lac Minerals, at p. 678, La Forest J. connected the appropriateness of granting the remedy of a constructive trust to the unique benefits that flowed from that remedy:

The constructive trust awards a right in property, but that right can only arise once a right to relief has been established. In the vast majority of cases a constructive trust will not be the appropriate remedy. … [A] constructive trust should only be awarded if there is reason to grant to the plaintiff the additional rights that flow from recognition of a right of property. Among the most important of these will be that it is appropriate that the plaintiff receive the priority accorded to the holder of a right of property in a bankruptcy. [Emphasis added.]

[26] The very nature of the constructive trust remedy demands a close link between the property over which the constructive trust is sought and the improper benefit bestowed on the defendant or the corresponding detriment suffered by the plaintiff. Absent that close and direct connection, I see no basis, regardless of the nature of the restitutionary claim, for granting a remedy that gives the plaintiff important property-related rights over specific property. A constructive trust remedy only makes sense where the property that becomes the subject of the trust is closely connected to the loss suffered by the plaintiff and/or the benefit gained by the defendant. Professor Paciocco, at p. 333, explains the need for the connection:

So long as the constructive trust is a remedy attaching to particular property and creating rights to that property in the plaintiff, it would be arbitrary to select simply a particular item of property and impose upon it a constructive trust. Why that property and not other property? There is an undeniable allure in ensuring that a plaintiff who is given a claim to particular property as a matter of remedy, [has] a claim as a matter of fact.

[27] Professor Paciocco goes on to argue that the requirement of a close connection between the property over which the trust is sought and the product of the unjust enrichment is particularly strong in the commercial context. He observes, at p. 333:

In the commercial context where there should be a hesitance to award proprietary relief, a purer tracing process is justifiable. This approach accurately describes the prevailing trend in Canadian case law.

[28] Professor Paciocco’s observations made in 1989 are borne out by the subsequent case law. In Peter, at p. 995, McLachlin J. said:

The constructive trust, based on analogy to the formal trust of traditional equity, is a proprietary concept. The plaintiff is found to have an interest in the property. A finding that a plaintiff is entitled to a remedy for unjust enrichment does not imply that there is a constructive trust. As I wrote in Rawluk, supra, for a constructive trust to arise, the plaintiff must establish a direct link to the property which is the subject of the trust by reason of the plaintiff’s contribution.[^3] [Emphasis added.]

[29] The requirement of the direct connection described in Peter, has been reaffirmed and emphasized in Kerr, at para. 51:

As to the nature of the link required between the contribution and the property, the Court has consistently held that the plaintiff must demonstrate a “sufficiently substantial and direct” link, a “causal connection” or a “nexus” between the plaintiff’s contributions and the property which is the subject matter of the trust … A minor or indirect contribution will not suffice.

[30] The direct connection described in Peter, and again in Kerr, has been emphasized in the commercial context in various appellate courts: e.g. Ontario v. NRS Mississauga Inc.; Creditfinance Securities Ltd. (Re), 2011 ONCA 160, 277 O.A.C. 377, at para. 43; Ladner v. Wolfson, 2011 BCCA 370, 24 B.C.L.R. (5th) 43, at paras. 49-53, leave to appeal to S.C.C. refused, [2011] S.C.C.A. No. 475; Michelin Tires (Canada) Ltd. v. Canada, 2001 FCA 145, [2001] 3 F.C. 552, leave to appeal to S.C.C. refused, [2001] S.C.C.A. No. 367. The comment in Michelin Tires, at para. 19, is particularly apropos to the circumstances of this case:

In particular, a constructive trust will not be imposed unless the plaintiff can point to property in the hands of the defendant that is identifiable as the property, or its proceeds, that was transferred by or obtained from the plaintiff without a juristic reason, or that the defendant could not otherwise retain in good conscience. That is, the constructive trust attaches to specific assets of the defendant that represent the enrichment; it is not a charge on the defendant’s general assets for the amount of the plaintiff’s claim. [Emphasis added.]

[31] Setting aside the $27,244 realized from the sale of the five containers after January 21, 2013, Textainer does not suggest that the funds held by the Receiver include the property Alrange obtained through the unauthorized sale of the containers. Nor can Textainer trace any of the funds held by the Receiver to the proceeds of those sales. Textainer cannot say how much of the proceeds from the sales actually found their way into Alrange’s general account. Nor can Textainer identify when the funds were deposited or how they were used. In effect, Textainer claims a constructive trust based on Alrange’s use of some unspecified amount of the proceeds of the sale of the containers to assist in some unspecified way in maintaining Alrange’s operation, thereby generating some unspecified portion of the accounts receivable on which the Receiver ultimately realized and now sit in the bankrupt’s estate. Any connection between the proceeds of the sales of the containers and the funds sitting in the bankrupt’s estate is far too remote and indirect to justify imposing a constructive trust over some part of those funds. I agree with the motion judge’s finding.

[32] I make one further observation. The motion judge’s second reason for refusing to impose a constructive trust – the legitimate intervening interests of the secured creditor, 306 Ontario – can be viewed as a further justification for the requirement of a clear and direct connection between the money held by the Receiver and the money realized by the sales as a condition precedent to the imposition of a constructive trust. In the absence of that clear and direct connection, the imposition of a constructive trust would unfairly compromise the legitimate interests of the secured creditor in the funds held by the Receiver.

(B) What about the $27,244?

[33] The $27,244 realized from the sale of the five containers after January 21 stands on a different footing than the proceeds from the sales of the other containers. That amount was in Alrange’s account and could be directly connected by the Receiver to the sale of five Textainer containers. I do not understand the respondent to suggest that if in fact the receipt of the proceeds from the sale of the five containers unjustly enriched Alrange, it would not be entitled to a constructive trust. The respondent does contend, however, that the receipt of those funds did not unjustly enrich Alrange. The respondent also disputes the amount of the constructive trust, assuming Alrange was indeed unjustly enriched.

[34] Alrange was unjustly enriched by receiving the proceeds of the sale of the five containers unless there was a juristic reason for that payment. The respondent maintains that those five containers, along with the rest of the 127 containers, were sold pursuant to an arrangement between Alrange and Textainer that allowed Alrange to sell the containers without prior approval. That agreement, if it existed, constitutes a juristic reason for Alrange’s receipt of the proceeds of the sales and forecloses any unjust enrichment claim by Textainer: see Garland v. Consumers’ Gas Co.

[35] The motion judge did not make any reference to the five containers sold after January 21, 2013 or to the $27,244 in Alrange’s account as a result of those sales. It is unclear from the material whether the disposition of $27,244 was raised as a discrete issue on the motion. Counsel for the respondent, in his submissions, indicated that on the motion the constructive trust argument was put forward as an “all or nothing” proposition. In any event, the motion judge made no finding as to whether Alrange sold the five containers pursuant to an arrangement it had with Textainer.

[36] This court can draw inferences and make findings of fact as long as they do not contradict findings that stand in the court below: Courts of Justice Act, R.S.O. 1990, c. C.43, s. 134(4)(a). A finding that the five containers sold after January 21, 2013 were not sold pursuant to any arrangement between Alrange and Textainer would not be inconsistent with any finding made below. In my view, the evidence supports that finding.

[37] Whatever the arrangement between Textainer and Alrange over the course of their business relationship, Textainer was aware by January that Alrange was in serious financial difficulty. Textainer had put Alrange on a credit watch in late December 2012 and, according to the Receiver’s reports, had rejected Alrange’s itemization of the containers it purportedly purchased in December 2012. These unchallenged primary facts fairly support the inference that whatever arrangement Textainer and Alrange had for the sale of Textainer containers, that arrangement was over before January 21, 2013. The five containers were not sold pursuant to any arrangement. Consequently, there was no juristic reason for Alrange to receive and retain the proceeds of those sales. The proceeds are identifiable as part of the funds held by the Receiver. A constructive trust is an appropriate remedy.

[38] As to the amount of the constructive trust, I do not agree that Textainer is entitled only to the amount that it would have been paid had the containers been sold pursuant to its earlier arrangement with Alrange. The fact of the matter is that they were not sold pursuant to that arrangement. Alrange had no authority to sell those containers and, in my view, it would be inappropriate for Alrange to retain its profit on the sales: see Maddaugh and McCamus, at para. 7:400. Furthermore, Alrange led no evidence of the costs of any refurbishing that may have been done in respect of the containers. It would be speculation to arbitrarily discount some amount for the costs of refurbishing. A constructive trust in the amount of $27,244 is the appropriate remedy.

VI

conclusion

[39] I would allow the appeal to the limited extent of imposing a constructive trust in favour of Textainer over $27,244 held by the Receiver. Otherwise, I agree with the disposition of the motion judge.

[40] As Textainer succeeded on what I would describe as a secondary issue on the appeal, I think each side should bear its own costs of the appeal. I would make no order as to costs on the appeal.

RELEASED: “DD” “JULY 18 2014”

“Doherty J.A.”

“I agree Janet Simmons J.A.”

“I agree M. Tulloch J.A.”

[^1]: The motions brought by the other two companies were heard and dismissed at the same time as Textainer’s motion. One of those companies has appealed to this court. That appeal is pending. [^2]: Taking into account an earlier payment to 306 Ontario by the Receiver, it would appear that there is enough money in the estate of the bankrupt to pay out 306 Ontario fully, assuming its debt has priority over the other claims. [^3]: Rawluk v. Rawluk, 1990 152 (SCC), [1990] 1 S.C.R. 70.