ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-11-0191
DATE: 2012-01-30

B E T W E E N:

SCOTT SIMPSON

Roderick W. Johansen , for the Plaintiff

Plaintiff

• and -

BRIDGEWATER BANK

Chris Hacio , for the Defendant

Defendant

HEARD: December 12, 2011 and January 6, 2012 at Thunder Bay, Ontario

Mr. Justice D. C. Shaw

Reasons On Motion

1The defendant, Bridgewater Bank (“the Bank”), brings a motion for summary judgment dismissing the action brought by the plaintiff, Scott Simpson.

Background

2Mr. Simpson is a contractor. The Bank carries on business as a lender.

3In 2007, Mr. Simpson entered into a construction contract with Catherine Jane Fraser for the construction of a house in Thunder Bay (“the Property’)

4Mr. Simpson began supplying material and services for the construction project in August 2007.

5Ms. Fraser applied to the Bank for mortgage financing in September 2007. The Bank prepared a commitment letter dated September 11, 2007 which contained the terms of the financing. The mortgage commitment provided for three progress advances to be based on “a cost to complete” at three stages of the construction. Ms. Fraser accepted the mortgage commitment and a mortgage was registered in favour of the Bank on September 19, 2007 after Mr. Simpson began his work on the Property.

6The Bank retained a solicitor, Thomas Mitton, to co-ordinate the three planned progress advances. On the Bank’s instructions, Mr. Mitton made the following three progress advances:

• September 19,2007 – $1119,970.80
• October 16, 2007 – $58,900.00
• December 3, 2007 – $43,400.00

Total $222,272.80

7Mr. Mitton held back 10% from each of the construction advances, for a total of $22,227.28.

8On December 21, 2007, Mr. Simpson registered a lien against title to the property in the amount of $83,394.83 for materials and services supplied from August 15, 2007 to December 20, 2007. Mr. Simpson subsequently perfected the lien by registering a certificate of action and commencing a lien action against Ms. Fraser.

9On January 2, 2008, Mr. Mitton wrote to the Bank, advising it of the lien registered against the Property by Mr. Simpson. He recorded that the above advances had been made under the mortgage. He advised:

“At the present time I am holding the sum of $22,227.28 in trust, being the 10% of the total advances to date.”

10Ms. Fraser defaulted on the mortgage. As a result, the Bank began enforcement proceedings and caused a statement of claim to be issued on July 16, 2008. The Bank issued a Notice of Sale dated August 14, 2008.

11As disclosed by Notice of Sale, and by a Mortgage Payment Statement dated May 18, 2011, the Bank was charging interest to Ms. Fraser on all moneys advanced including the $22, 227.28 which Mr. Mitton had held back from each of the three advances. This was also acknowledged by counsel for the Bank on the hearing of the summary judgment motion.

12On March 8, 2010, Mr. Simpson obtained judgment in his lien action against Ms. Fraser, in the amount of $89,000.

13On May 20, 2011, the Bank completed sale of the Property under power of sale pursuant to its mortgage. The net proceeds of sale were insufficient to satisfy Ms. Fraser’s indebtedness to the Bank.

14Mr. Mitton continues to retain, in trust, the $22,227.28 that he held back from the three mortgage advances to Fraser. It is this money that is an issue.

15Mr. Simpson brings the within action for a declaration that the Bank holds the $22,272.80 in trust for him and he seeks judgment for those moneys. The Bank denies that it is obliged to pay Simpson the moneys claimed or any moneys at all.

Issues

A. Holdback

16The Bank states, firstly, that it is under no obligation under the Construction Lien Act to maintain a holdback.

17The obligation to maintain a holdback is set out in section 22 of the Act .

22(1) Each payer upon a contract or subcontract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of the services or materials as they are actually supplied under the contract or subcontract until all liens that may be claimed against the holdback have expired as provided in Part V, or have been satisfied, discharged or provided for under section 44 (payment into court).

18The Bank submits that it does not meet the definition of “payer” under the Act .

“payer” means the owner, contractor, or subcontractor who is liable to pay for the materials or services supplied to an improvement under a contract or subcontract;

19The Bank submits that implicit in Mr. Simpson’s claim is the suggestion that the Bank is somehow obliged by s. 78(5) of the Act to maintain a holdback. The Bank submits that the only obligation to maintain a holdback is found in s. 22 and that s. 78(5) deals only with the loss of priority for the mortgagee where the owner has failed to maintain a holdback.

20Section 78(5) provides:

78(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.

21The Bank submits that the fact that the Bank’s solicitor retained the moneys in question does not give Mr. Simpson a right to these moneys and, at most, Mr. Simpson could have sought an order that under s. 78(5) his lien took priority over the Bank’s mortgage. The Bank states that the issue is now moot, as the property has been sold under power of sale.

B. Trust Fund

22Secondly, the Bank submits that the moneys held by Mr. Mitton are not subject to the trust provisions of the Act . Section 7 (1) of the Act provides as follows:

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.

23The Bank submits that in order for the moneys retained by Mr. Mitton to be subject to the trust provisions of s.7 of the Act , they must have been “received by an owner”. In this case, the owner is Ms. Fraser and not the Bank. “Owner” is defined by the Act as follows:

“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.

24Mr. Simpson acknowledges that the Bank is not an “owner” within the definition.

C. Is the action statute barred?

25The Bank submits that this action is barred by the provisions of s. 4 of the Limitations Act , 2002.

26Section 4 of the Limitations Act establishes a two year limitation period.

4. Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

27This statement of claim in this action was issued on April 4, 2011. The Bank submits that the cause of action arose upon the failure of Ms. Fraser in December 2007 to pay Mr. Simpson’s account, more than two years before the statement of claim was issued against the Bank.

D. Does res judicata prohibit this action?

28The Bank submits that Mr. Simpson elected not to pursue his potential priority claim against the Bank in his lien action. The Bank contends that Mr. Simpson should have raised the issue in the lien action, putting his entire case forward in a single action, and that his decision not to do so renders the matter res judicata .

Discussion

29Motions for summary judgment under Rule 20 are to be guided by the principles set out by the Court of Appeal in its recent decision of Combined Air Mechanics Services Inc . v. Flesch 2011 ONCA 764 (C.A.), which the Court states “… marks a new departure and a fresh approach to the interpretation and application of the amended Rule 20.”

30The Court has developed what it describes as “the full appreciation test”, that is “… fully appreciating the evidence and issues in a way that permits a fair and just adjudication of the dispute.” At paras. 54-55 the Court states:

The point we are making is that a motion judge is required to assess whether the attributes of the trial process are necessary to enable him or her to fully appreciate the evidence and the issues posed by the case. In making this determination, the motion judge is to consider, for example, whether he or she can accurately weigh and draw inferences from the evidence without the benefit of the trial narrative, without the ability to hear the witnesses speak in their own words, and without the assistance of counsel as the judge examines the record in chambers.

Thus, in deciding whether to use the powers in rule 20.04(2.1), the motion judge must consider if this is a case where meeting the full appreciation test requires an opportunity to hear and observe witnesses, to have the evidence presented by way of a trial narrative and to experience the fact-finding process first-hand. Unless full appreciation of the evidence and issues that is required to make dispositive findings is attainable on the motion record – as may be supplemented by the presentation of oral evidence under rule 20.04(2.2) – the judge cannot be “satisfied” that the issues are appropriately resolved on a motion for summary judgment.

31I have determined that the Bank’s motion for summary judgment should not be granted.

A. Holdback

32I agree with the submission of the Bank that it had under no obligation under the Construction Lien Act , as a mortgagee, to maintain the holdback described in s. 22(1) of the Act . The Bank is not a “payer” within the meaning of the Act . It is not “the owner, contractor or subcontractor who is liable to pay for the materials or services supplied to an improvement under a contract or subcontract.” See Vecero v. C. Wood Inns Marketing Inc. 1995 CarswellOnt. 903 (Div. Ct.) , at paras: 15-17.

33I also agree with the submission of the Bank that s. 78(5) of the Act does not oblige the Bank, as mortgagee, to maintain a holdback. Section 78(5) deals with priorities as between lien claimants and subsequent mortgages. Liens arising from the improvement have prior over a subsequent mortgage to the extent of any deficiency in the holdbacks required to be retained by the owners. In the present case, the mortgage is a “building mortgage” and s.78 (2) applies, which provides, in a manner similar to s. 78(5), for a limited priority of a lien over the mortgage to the extent of any deficiencies in the holdbacks required to be retained by the owner.

34Because of the priority sections of the Act, a mortgagee may not be willing to advance 100% of the value of the work done and materials supplied and will hold back 10% to protect itself from loss of priority. That was the situation in Vecero .

35I also agree with the submission of the Bank that if this was a priority issue, it is now moot because the property has been sold under power of sale.

36However, although I agree with the Bank that it had no obligation under the Act to maintain a holdback, I find, for the reasons that follow, that the moneys constitute a trust fund for the benefit of Mr. Simpson.

B. Trust Fund

37Under s. 7(1) of the Act , all amounts received by an owner, to be used in the financing of the improvement, constitute a trust fund for the benefit of the contractor.

38Contrary to the submissions of the Bank, I find that the moneys which are being held by Mr. Mitton were moneys “received” by Ms. Fraser, as owner.

39The mortgage funds of $222,272.80 had been advanced to Ms. Fraser. She was charged interest, on a running basis, through to the date of the Bank’s judgment against her, on the entire sum, inclusive of the $22,227.28 held in trust by Mr. Mitton. When Mr. Mitton wrote to the Bank on January 2, 2008 to advise that he was holding the sum of $22,227.28 “in trust being 10% of the latest advances to date”, he was holding that money in trust for Ms. Fraser. He was not holding it in trust for the Bank. The bank had no right to that money. It was Ms. Fraser, who was incurring interest on a daily basis for that money, who held the right to that money, at least vis-a-vis the Bank. She was the beneficiary of that particular trust. In turn, that money constituted a trust fund for the benefit of Mr. Simpson pursuant to s.7(1) of the Act .

40Even if Ms. Fraser cannot be said to have actually received the money, notwithstanding it was being held in trust for her, she should, in my view be deemed to have received the money. As noted in Bristow, Glaholt, Reynolds, Wise, Construction, Builders and Mechanics Liens in Canada, 7 th Edition (Toronto: Carswell, 2011, Looseleaf), at p. 9-30, the decision of the Supreme Court of Canada in Minneapolis – Honeywell Regulator Co. v. Empire Brass Co. , 1955 SCC 40 , [1955] S.C.R. 694 (S.C.C.) established the principle of “deemed receipt” in order to give a meaning to the word “received” that would not render the Construction Lien Act nugatory.

41In Andrea Schmidt Construction Ltd. v Glatt (1979), 1980 1711 (ON CA) , 25 O.R. (2d) 567 (H.Ct.), the owner and lender agreed to divert part of the final advance, which was to be used in financing the construction of a building, to reduce another loan that the owner had. The money would have clearly constituted trust funds when received by the owner. Saunders J. held that the money, which was applied to the second loan, was “received” by the owner within the meaning of the Act . At para. 8 he stated:

“It would be contrary to the purpose of the statute if an owner by such a diversion could avoid obligations as trustee.’

42There was, of course, no diversion of money in the present case and I intend no criticism of the Bank or Ms. Fraser in my reference to the decision of Saunders J. The decision supports a finding, however, that a trust arose and applied to the mortgage moneys receivable by Ms. Fraser even though the moneys were not actually received by her but were being held in trust for her benefit by Mr. Mitton.

43The decision of Saunders J. was upheld by the Court of Appeal, reported at (1980), 1980 2714 (ON CA) , 28 O.R. (2d) 672.

44Further support for the finding that the moneys held by Mr. Mitton, in trust for Ms. Fraser are, in turn, impressed with a trust for the benefit of Mr. Simpson, as contractor, is found in Van Arnhorn v Lornewood Tanning Salon , [1993] O.J. No. 2858 (Gen. Div.) . Feldman J., as she then was, referred to Andrea Schmidt . At para. 23, she stated:

“In my view, the interpretation of the word “received” in the context of the s. 7 trust, as including “receivable”, in the appropriate circumstances, is a correct interpretation of the section, and the circumstances of the case before me are ones in which that interpretation should be applied. On the evidence the fund existed, earmarked for this construction. It rested either in the personal funds of the president and director of the owner company or in the funds of a related company in circumstances where that person could direct the funds to be transferred and used for payment as and when needed.”

45Van Arnhorn was cited with approval by the Divisional Court in Elmford Construction Co. v South Winston Properties Inc (2002) 2002 62447 (ON SCDC) , 59 O.R. (3d) 107 (Div Ct.). At para 3, the Court stated:

“We are of the view that the fact that South Winston did not take physical possession of the monies 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 monies 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 monies 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 monies from the escrow fund, we are of the view that these are appropriate circumstances to interpret the word “received” as including receivable otr 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.”

46The fact that Ms. Fraser did not take physical possession of the moneys held in trust for her by Mr. Mitton does not mean that the moneys were not “received” by her, as owner. It is appropriate, in the circumstances of this case, to interpret “received” as including receivable.

C. Is the action statute barred?

47Having found that the moneys held by Ms. Mitton are impressed with a trust for the benefit of Mr. Simpson under s 7(1) of the Construction Lien Act , has the limitation period expired for bringing the within action against the Bank?

48The plaintiff takes the position that there was an agreement between counsel that the Bank would retain the moneys held by Mr. Mitton until Mr. Simpson secured judgment in his lien action against Ms. Fraser. Counsel for the Bank categorically denies that there was such an agreement.

49There was extensive correspondence between counsel, beginning in August 2008 and ending in September 2010. Counsel for the Bank advised counsel for Mr. Simpson by letter dated November 5, 2008 of the advances made to Ms. Fraser pursuant to the Bank’s mortgage and of the $22,227.28 held back by Mr. Mitton. Although those moneys were discussed between counsel, it was not until August 2010 that the Bank made it clear that it would not release the moneys. Counsel for Mr. Simpson wrote to counsel for the Bank on July 5, 2010 and requested that the moneys held back by the Bank be paid as a credit towards the judgment that Mr. Simpson had obtained against Ms. Fraser. By letter dated August 18, 2010, counsel for the Bank responded to advise that Mr. Simpson was estopped from asserting any claim to property in the moneys. By letter dated September 29, 2010, counsel for the Bank took the position that the Bank was not bound by the trust provisions of the Act with respect to the moneys in question.

50In my view, it is not necessary to determine whether or not there was an agreement, as alleged by the plaintiff and denied by the defendant.

51It was upon receipt of the August 18, 2010 letter that Mr. Simpson first discovered that he had a claim against the Bank, because of the Bank’s refusal to turn over the trust moneys to him. The limitation period had not begun to run sooner, merely because as of December 2007 the Bank began holding the moneys in trust, or because Mr. Simpson had not been paid by Ms. Fraser. The trigger for the limitation period was notification to Mr. Simpson of the Bank’s position that the moneys would not be paid to him.

52The action against the Bank was started on April 4, 2011 approximately eight months after the Bank’s notification of its position through its counsel’s letter of August 18, 2010. Mr. Simpson’s action was commenced well within the two year limitation period running from the date of his discovery of his claim against the Bank.

D. Does res judicata prohibit this action?

53I do not agree with the Bank’s submission that because Mr. Simpson did not raise the issues in this action in the lien action against Ms. Fraser, that the matter is now res judicata .

54Res judicata implies identity of parties, of subject matter and of cause. See Dumount Vins et Spiritueux Inc. v. Celliers du Monde Inc., [1992} F.C.J. No. 126 (F.C.A.)

55The Bank is correct in its submission that parties cannot engage in “litigation by installment.” However, the doctrine of res judicata is directed at preventing re-litigation between the same parties or their privies where their legal rights or liabilities have been determined in a prior action. Once a matter has been determined by the courts, it cannot be re-opened for further litigation between those parties.

56The Ontario Court of Appeal in Upper v Upper, [1993] 1 O.R. at p.7 quoted the following proposition from Henderson v Henderson (1843), 67 E.R. 313 (V.C., at p. 318:

“Where a given matter becomes the subject of litigation in and of adjudication by a Court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not, except under special circumstances, permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence might have brought forward at the trial.

57The Bank was not a party to the lien action against Ms. Fraser. The action against Ms. Fraser was for payment of $83,394.83 for the supply of labour and materials. In the present action, the relief that Mr. Simpson seeks as against the Bank is a declaration that it holds $22,272.80 of the mortgage advances to Ms. Fraser in trust for him. In the two cases, there is no identity of parties and of causes of action. In the action against Ms. Fraser, the court was not required to consider the merits of Mr. Simpson’s trust claim. In my view, it cannot be said that the issue of whether the moneys held by the Bank are impressed with a trust properly belonged in the litigation against Ms. Fraser. Moreover, the Bank has not been prejudiced or even inconvenienced by not having been made a party in the action against Ms. Fraser. It has not taken any steps which it otherwise would not have taken if it had been named as a party. The moneys in question remain where they have always been, in the hands of Mr. Mitton. The Bank is not being put to an expense in defending this action which it would not have incurred if it had been required to defend the lien action. There is no possibility of inconsistent judgments in the two actions.

Conclusion

58For the reasons given, the Bank’s summary judgment motion is dismissed.

Costs

59If the parties are unable to agree on costs, the plaintiff shall deliver written submissions, not to exceed five pages, and its Bill of Costs, within 30 days. The defendant shall deliver its written submissions, not to exceed five pages, and any Bill of Costs it may wish to provide for comparison purposes, within 20 days of receipt of the plaintiff’s submissions

The Hon. Mr. Justice D. C. Shaw

Released: January 30, 2012

COURT FILE NO.: CV-11-0191
DATE: 2012-01-30

ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N: SCOTT SIMPSON Plaintiff - and – BRIDGEWATER BANK Defendant

DECISION ON MOTION
Shaw J.

Released: January 30, 2012

/nf