Elmford Construction Company Limited v. South Winston Properties Inc. et al.

[Indexed as: Elmford Construction Co. v. South Winston Properties Inc.]

59 O.R. (3d) 107

[2002] O.J. No. 1124

Docket No. 00-CV-202270

and Div. Court File No. 523-01

Ontario Superior Court of Justice

Divisional Court

Blair R.S.J., Farley and McCombs JJ.

March 25, 2002

Construction liens -- Trust Fund -- Priorities -- Contractor's work certified and contractor obtaining judgment -- Contractor garnishing moneys held by escrow agent of owner -- Judgment creditor of owner also garnishing funds held by escrow agent -- Moneys received by sheriff -- Moneys impressed by trust and not subject to distribution under the Creditors' Relief Act -- Trusts under s. 7(2) and (3) of the Construction Lien Act attaching to general funds of owner, irrespective of whether those funds have any connection with improvement -- Creditors' Relief Act, R.S.O. 1990, c. C.45, s. 32 -- Construction Lien Act, R.S.O. 1990, c. C.30, s. 7.

Elmford Construction Company Limited ("Elmford"), a contractor, and Purple Knights Development Inc. ("Purple Knights") were judgment creditors of South Winston Properties Inc.'s ("South Winston") land. Elmford did work on South Winston's lands and the work was certified by the payment certifier, and Elmford obtained a judgment for $383,700.05. Purple Knight was not a contractor and its judgment was for $143,688.06. As a result of garnishments by Elmford and Purple Knights, the sheriff, who had received $193,367.07 from Torkin Manes, the escrow agent for South Winston, purported to distribute the moneys pursuant to the Creditors' Relief Act. The sheriff distributed $148,555.52 to Elmford and $44,630.85 to Purple Knights. Elmford asserted by application that it was entitled to the whole $193,367.07 because those moneys were trust funds under s. 7(2) of the Construction Lien Act. Hawkins J. dismissed the application, and Elmford appealed.

Held, the appeal should be allowed.

The moneys held by Torkin, Manes were trust funds in the owner's hands and subject to a trust under s. 7(2) of the Construction Lien Act. The facts that the moneys were detoured to the sheriff by the garnishment did not change their character. The fact that the funds had no direct connection with Elmford's work did not prevent them from being trust funds. Section 7(2) is very broadly worded and does not deal with the source of the funds; rather it designates that funds attributable to the owner are designated trust funds for the benefit of a contractor who has had its work certified. The trusts under s. 7(2) and (3) attach to the general funds of the owner, irrespective of whether those funds have any connection with the improvement. Elmford's claim was not effected by the provisions of the Creditors' Relief Act. Creditors with claims under that Act share pro rata as to the property of the debtor, but the moneys held by the sheriff were not the property of the debtor and rather were impressed by a trust pursuant to the Construction Lien Act. Accordingly, the moneys should have been paid to Elmford.

APPEAL of a judgment dismissing a claim under the trust provisions of the Construction Lien Act, R.S.O. 1990, c. C.30.

Cases referred to Structural Contracting Ltd. v. Westcola Holdings Inc. (2000), 2000 5740 (ON CA), 48 O.R. (3d) 417, 187 D.L.R. (4th) 407, 35 R.P.R. (3d) 1, 2 C.L.R. (3d) 165 (C.A.) [Leave to appeal to S.C.C. refused (2001), 268 N.R. 199n]; Van Arnhem v. Lornewood Tanning Salon Inc. (1993), 11 C.L.R. (2d) 54, 1993 CarswellOnt 818 (Ont. Gen. Div.) Statutes referred to Creditors' Relief Act, R.S.O. 1990, c. C.45, ss. 2, 32 Construction Lien Act, R.S.O. 1990, c. C.30, s. 7 Authorities referred to McGuinness, K."Trust Obligations Under the Construction Lien Act" (1994), 15 C.L.R. (2d) 208

David A. Taub, for appellant, Elmford. Mark S. Shapiro, for respondent Purple Knights.

[1] BY THE COURT: -- Elmford appealed the judgment of Hawkins J. dismissing its claim under the trust provisions of the Construction Lien Act, R.S.O. 1990, c. C.30 ("Lien Act") on the basis that the Sheriff had properly distributed the claimed funds to Elmford and to Purple Knights pursuant to the Creditors' Relief Act, R.S.O. 1990, c. C.45 ("Relief Act"). The Sheriff had received $193,367.07 from Torkin Manes (which was acting as escrow agent for South Winston and other owners) as a result of garnishments by Elmford and Purple Knights. Elmford, a contractor, did work on South Winston's land. This work was certified by the payment certifier, with a judgment for Elmford in the amount of $383,700.05. Purple Knights was not a contractor but, pursuant to a judgment, was owed $143,688.06 by South Winston. Elmford asserted that it was entitled to the whole $193,367.07 pursuant to those moneys being trust funds by virtue of s. 7(2) of the Lien Act and that it was not required to share those moneys with Purple Knights pursuant to the distribution scheme of s. 32 of the Relief Act. Elmford had notified the Sheriff and Purple Knights prior to the Sheriff preparing a distribution list that the moneys which the Sheriff was holding were trust funds to which Elmford was entitled. Elmford did not contest the scheme of the Sheriff's proposed distribution. The Sheriff then distributed $148,555.52 to Elmford and $44,630.85 to Purple Knights (which latter amount Elmford seeks to recover from Purple Knights).

[2] Section 7(2) of the Lien Act provides:

7(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] We are of the view that the fact that South Winston did not take physical possession of the moneys released from escrow by Torkin Manes does not prevent them from "being in the owner's hands or received by the owner". Torkin Manes as escrow agent did not own the moneys which it held, rather they were owned by the various owners, including South Winston, who were collaborating in the overall project. The funds in question were released by Torkin Manes to South Winston as owner once South Winston's share was calculated; the fact that the moneys were detoured by the garnishment to the Sheriff did not change their character. In any event, even if South Winston did not come into physical possession of the moneys from the escrow fund, we are of the view that these are appropriate circumstances to interpret the word "received" as including receivable or payable. See Van Arnhem v. Lornewood Tanning Salon Inc., 1993 CarswellOnt 818, 11 C.L.R. (2d) 54 (Ont. Gen. Div.) at paras. 19, 20, 23, 28.

[4] Does the fact that the funds released from escrow had no direct connection with Elmford's work have any bearing on their ability to become trust funds pursuant to s. 7(2) of the Lien Act? We are of the view that that factor does not prevent the funds from becoming trust funds. Section 7(2) is very broadly worded; it should be contrasted with the more restrictive provisions in s. 7(1) which is limited to "[a]ll amounts received by an owner . . . that are to be used in the financing of the improvement . . .". See Structural Contracting Ltd. v. Westcola Holdings Inc. (2000), 2000 5740 (ON CA), 48 O.R. (3d) 417, 187 D.L.R. (4th) 407 (C.A.), leave to appeal to S.C.C. refused 195 D.L.R. (4th) vii, where the court held that rents received by the owner were impressed with the construction trust. After identifying that s. 7(3) and s. 7(2) contained identical relevant language, Austin J.A. for the court observed at para. 17 [p. 422 O.R.]:

It may be that some payments coming into the hands of, or paid out of the funds of, an owner such as Westcola are not subject to the trust imposed by s. 7(3). None were drawn to the court's attention in the instant case.

We do not see that Purple Knights has made out a case to exempt the funds in question from the general application of s. 7(2). Austin J.A. went on at para. 19 [pp. 423-24 O.R.] to state:

The strictures of a trust apply to any and all money coming in to the hands of the owner, up to the amount owing to the contractor, in this case approximately $90,000. As a practical matter, the limitation on the application of s. 7(3) proposed by counsel for the defendants, namely restricting the trust to profits in the hands of the owner, would turn actions to enforce the trust sections of the Act into accounting exercises. Nothing in the Act suggests that that was the intention of the legislature in passing s. 7(3).

It should be kept in mind that s. 7(2) does not deal with the source of the funds; rather s. 7(2) designates that funds attributable to the owner are designated trust funds for the benefit of a contractor who has had its work certified.

[5] In his article "Trust Obligations Under the Construction Lien Act" (1994), 15 C.L.R. (2d) 208, Kevin McGuinness, at pp. 219-20, raises fairness and economically beneficial questions as to "the type of arbitrary preference that ss. 7(2) and 7(3) of the CLA envisage" but he has no doubt that "[t]he sections 7(2) and 7(3) trusts attach to the general funds of the owner, irrespective of whether those funds have any connection with the improvement."

[6] We are therefore of the view that the moneys released from escrow for the benefit of South Winston were trust funds pursuant to s. 7(2) as to which Elmford was entitled to receive. As trust funds, they were no longer the property of South Winston. Only when paid over to Elmford as beneficiary of the trust funds will the debt be extinguished between South Winston and Elmford; in that limited respect does Elmford continue to be a creditor of South Winston.

[7] Is Elmford impacted by the provisions of the Relief Act? We are of the view that the underpinning of that legislation is that execution or garnishment creditors share pro rata (see s. 2) but that sharing is as to the property of the debtor held by the Sheriff. Trust funds under the Lien Act can no longer be the property of the debtor. Therefore, Elmford, as beneficiary of the trust funds pursuant to the Lien Act, is not and cannot be affected by any scheme of distribution of the property of the debtor by the Sheriff pursuant to the Relief Act (except to the extent of its qua creditor status which is secondary to its entitlement claim qua beneficiary of the trust funds which is of an ownership nature). Since Purple Knights had notice of Elmford's trust claim prior to the distribution by the Sheriff, it is equitable and appropriate that Purple Knights reimburse Elmford the $44,630.85 which Purple Knights received from the Sheriff.

[8] In the result, the appeal is allowed.

[9] Elmford is to receive its reasonable partial indemnity costs as assessed (if they cannot otherwise be agreed) from Purple Knights both here and before Hawkins J.

Order accordingly.