COURT FILE NO.: 12-55254R

DATE: September 3rd, 2014

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: X-L-AIR ENERGY SYSTEMS LTD, Plaintiff

AND:

HYDE PARK RESIDENCES INC, et. al., Defendants

BEFORE: MASTER MACLEOD

COUNSEL: Catherine E. Willson for Aluma Systems Inc, lien claimant, moving party

Jonathan F. Lancaster, for Landform Canada Construction Ltd, lien claimant, responding party

Heather L. Acton, for the plaintiff, responding party

HEARD: July 3rd, 2014

ENDORSEMENT

[1] I am the referee under a judgment of reference pursuant to the Construction Lien Act granted on February 1st, 2013. On December 27th, 2013 I made an interim report providing for distribution of funds held in trust by Rasmussen Starr Ruddy, lawyers for the plaintiff. As detailed in my reasons I held that there had been default under a settlement agreement, that the lien claimants were entitled to judgment against the owner and developer, that the funds held in trust were available to satisfy the lien claims and were not impressed with any trust in favour of the lender (“Pillar”).[^1] I directed that the funds be distributed to the lien claimants in accordance with their pro rata shares.

[2] The liens originally before the court were all registered in 2012. Aluma Systems Inc. which is a subsequent lien claimant having registered liens in November of 2013 and March of 2014 brings this motion to vary the report. Aluma was not a lien claimant at the time the reference was commenced and has not previously been made a party. Aluma now seeks to be let in and to share in the funds to be distributed to the original lien claimants. For the reasons that follow, Aluma is entitled to certain orders to protect its interests but there is no reason to vary the interim report.

Background

[3] The project in question and the details of the agreement are described in my earlier reasons. I will not repeat those facts at length here. As set out in my December reasons, “Hyde Park Richmond”, was conceived as a retirement community in which the eventual occupants would obtain life leases. There were to be three phases to the project, one of which is already completed and occupied. Consequently the project is only partially completed but the lands on which the construction is taking place are already subject to the life leases granted to the occupants of phase one. Phase two of the project was to contain two multi story buildings referred to respectively as “Apartment A” and “Immanuel House”.

[4] The owner and developer (the “Hyde parties”) are related corporations, Hyde Park Residences Inc. and Courtyard Developments Inc. The project ran into difficulty which resulted in numerous liens being registered. These liens became the subject of a reference in February of 2013. By that time the parties had worked out terms of an agreement and accordingly I was presented with a consent order which I granted in April of 2013.

[5] Under the agreement the lien claims then outstanding were resolved on the basis that the quantum of the liens was accepted, $2 million was paid to the lien claimants immediately and the balance owing to each of them was converted to a collateral charge against the property. The agreement then provided a mechanism for funding ongoing construction on a “pay as you go” basis to avoid further disputes. The object of the agreement was to permit partial payment of the outstanding liens and then to provide a mechanism for work to resume and the project to be completed. The parties were to focus their efforts on completing “Apartment A” and no further work was to be done on “Immanuel House”.

[6] The work on Apartment A was to proceed by way of packages or envelopes of work which would be funded in advance and completed once the funds were paid into trust. The agreement was implemented and a certain amount of additional work on Apartment A was completed.

[7] Despite the resumption of work, the owner was unable to raise all of the necessary funds called for under the agreement. This prevented completion of the agreement and work once again came to a halt. Ultimately the lien claimants declared the agreement in default in May of 2013.

[8] A motion in respect of the default and the ownership of the funds in trust was argued on November 5th and 29th, 2013. The point of the motion was to determine whether the Hyde parties were in default and if so whether the remaining funds in trust should be returned to the lender or were available to the lien claimants in satisfaction of the debt secured by the collateral charge. For the reasons detailed in my decision I concluded that pursuant to the agreement, the funds were to be paid to the lien claimants and were not subject to clawback by the lender. The interim report was issued accordingly.

[9] The motion was argued by counsel for the plaintiff and by counsel for the Hyde parties and “Pillar” (the financier). Unknown to the court was the fact that a new lien had been registered on November 18th, 2013. This was Aluma’s lien for $331,260.00.

[10] My interim report was issued in December of 2013. Subsequently in January of 2014 Landform also registered a lien for $517,305.00. In February of 2014 the project went into receivership and there was a court ordered receiver/manager installed. On March 28th, 2014 Aluma registered a second lien for $62,621.00. I have not been made aware of any other lien claims.

[11] On May 12th, 2014 the parties appeared at a hearing for directions. Counsel for Aluma Systems Inc. also appeared and I was advised that this motion would be brought before me in my capacity as referee. I was advised the December interim report had not been confirmed because although it had been signed and served, it had not been filed with the affidavit of service as required by Rule 54.09 (1) (b) so that the 15days had not begun to run. Accordingly it was open to me to hear a motion to vary the report.

[12] My May 12th order added Aluma as a party to the reference and required that the receiver be put on notice of further steps in the reference. I observed that there may be issues arising out of the receivership order and that Justice Beaudoin is seized of the insolvency proceeding. Specifically the receiving order contains a stay of proceedings as follows:

Position of Aluma

[13] Aluma is a supplier of scaffolding. It had entered into a subcontract with Landform Canada Construction Ltd. (“Landform”) to supply scaffolding to the project. Aluma’s scaffolding has been on site since at least 2011 and remains in place today. Indeed it may be impossible to remove it until the Immanuel House construction is completed or is at a more advanced stage. In any event there is no doubt that originally Aluma was a subcontractor to Landform and Landform had a contract with Courtyard to provide scaffolding, forming and other equipment and services. Aluma’s scaffolding comprises only a portion of the material and services supplied to the project by Landform.

[14] Landform had ceased paying Aluma in early 2012 when the project first ran into difficulty and Courtyard ceased paying Landform. Landform purported to withdraw its services from the project in July of 2012 and registered a lien. Most of the other trades and subtrades did likewise.

[15] Aluma could have liened the property along with the other lien claimants in 2012 but it agreed with Landform not to do so. Landform was of course carrying the amount owing to Aluma in its own claim for lien. The settlement agreement between the lien claimants and the Hyde parties was finalized in October, 2012. Simultaneously Landform and Aluma reached their own agreement. Aluma and Landform agreed that Aluma would be paid 10% of what Landform recovered from Courtyard and would not otherwise pursue the outstanding amounts owing to it by Landform for 2012.

[16] Aluma was not a signatory to the October settlement agreement between the lien claimants and the Hyde Parties. But Aluma was aware of that agreement and it was part of Aluma’s agreement with Landform that Aluma would be paid for its 2012 invoices only through that mechanism and not by the exercise of lien rights. This is not in dispute.

[17] Aluma recognizes that this agreement with Landform is binding upon it. Landform has paid 10% of the funds received to date and intends to do likewise when the trust funds are distributed. Aluma understands that it has abandoned the right to pursue other remedies for its 2012 invoices and does not seek to do so. It does however seek to attach funds payable to Landform in satisfaction of its 2013 & 2014 lien claims.

[18] When Aluma reached agreement with Landform in respect of the 2012 invoices and Landform entered into the settlement agreement with the other lien claimants, Aluma made it clear to Landform that it was not abandoning any lien rights for amounts arising subsequent to the end of 2012. Landform apparently resumed making monthly payments to Aluma in July of 2012 when it began to receive monthly payments from Courtyard and ceased making those payments in January of 2013 when Courtyard stopped paying once again.

[19] The lien rights now asserted by Aluma cover rental fees accrued between January of 2013 and February of 2014. The first lien covers the period of January 2013 to November 2013 in the amount of $331,259.86. The second claim for lien was for the period of November 20th, 2013 to February 20th, 2014 in the amount of $62,621.33.

[20] The issue before me on this motion was not whether Aluma has a claim against Landform in contract and it is not whether the 2013 and 2014 liens are valid. The question is whether the registration of the claims for lien gives Aluma a remedy against the funds held in trust under the settlement agreement.

[21] In argument Aluma took the position that it does not seek to disturb the pro-rata distribution to the other lien claimants pursuant to the report. It simply claims to be entitled to all of the funds that would be paid to Landform in priority to Landform. Although the payments to Landform are in partial satisfaction of liens registered in 2012 and covering a period when Aluma agreed not to exercise lien rights, Aluma seeks to have those funds diverted to satisfy its liens registered in 2013 and 2014.

[22] Aluma claims that Landform owes it rental fees for each month its equipment is on site. It contends that this liability continues whether or not Landform has been able to recover amounts owed under its contract with Courtyard and continues even if the Hyde parties at some point agreed to pay Aluma directly.

The position of Landform

[23] As I understand it, Landform’s position is firstly that it withdrew from the original contract with Courtyard in July of 2012 and there was a new contract with the Hyde parties that certain equipment including the Aluma scaffolding would be left on site for use in Immanuel House. Landform was then paid for equipment rental for the balance of 2012 and it duly paid Aluma. But Landform also contends that it made a new arrangement with Aluma whereby Aluma understood it would only be paid if and when Landform was paid by the Hyde parties. When those payments ceased at the end of 2012 Landform stopped paying Aluma as it was entitled to do under the “pay when paid” agreement. Finally Landform asserts that the Hyde Parties entered into a new contract with Aluma to assume direct liability for the scaffolding in August of 2013 and it is relieved of further obligation at that point. In short, as I understand it, Landform admits to liability for January to August of 2013 but only if and when it is paid by Courtyard. It denies liability after August of 2013.

[24] These issues between Aluma and Landform relate to the question of how much Landform owes Aluma as a matter of contract. This is a perfectly legitimate question that will in due course be determined in the context of Aluma’s litigation against Landform. It is important however not to confuse the contractual question with the right of Aluma to register and enforce a lien.

[25] Landform does not dispute that Aluma has lien rights. It does oppose this motion and it resists the notion that Aluma’s after acquired lien rights should interfere with the flow of funds under the agreement disposing of the 2012 liens. It must be remembered that Aluma agreed with Landform to resolve its own 2012 claims by taking the benefit of that agreement. As noted earlier in these reasons, Landform is to pay Aluma 10% of what it recovers on its 2012 lien.

Analysis

[26] A great deal of argument was directed to proper interpretation and application of the Construction Lien Act, technical questions of priority and whether estoppel may be asserted in the face of a statutory remedy. Aluma and Landform are in a direct contractual relationship so the question of whether Landform owes Aluma the full amount of its claim is not dependent on lien rights. The narrow question is whether Landform’s share of the funds to be paid in satisfaction of its 2012 lien should be available to Aluma to satisfy its subsequent liens? Subject to proving those claims, the answer is yes. This does not lead to the conclusion that Aluma should be paid before proving its lien nor to the conclusion that extraordinary security should be ordered.

[27] Moreover there is another problem. The order of Justice Beaudoin appointing a receiver and manager contains a stay of proceedings and specifically authorizes counsel for the plaintiff to distribute the trust funds in accordance with my December interim report. In my view therefore Aluma needs leave to proceed with its lien action whether or not it is encompassed in the reference. That leave will have to be sought from the judge seized of the insolvency proceeding.

[28] Dealing with the arguments of Aluma in order, the first contention was that the settlement agreement is void to the extent that it conflicts with Aluma’s lien rights. The Construction Lien Act exists for the protection of tradesmen, contractors and subcontractors in the construction industry in Ontario. It superimposes statutory rights on the pre-existing contractual and common law rights which remain enforceable. Specifically the Act creates lien rights, holdback obligations and trust provisions and provides for a summary method to enforce lien rights. S. 4 of the Act prohibits contractual provisions that purport to waive the statutory rights and s. 5 of the Act deems all construction contracts to be amended to be in conformity with the Act. Aluma argues that the settlement agreement is void to the extent that it purports in any way to limit Aluma’s rights or to override the remedial provisions of the Act.

[29] I do not really have to deal with this question because in the final analysis, Aluma is not seeking to undo the agreement or to disturb the distribution to other lien claimants. Aluma simply seeks priority over the amounts to be paid to Landform. Nevertheless it is an important point.

[30] The purpose of these provisions is to protect parties with inequality of bargaining power and to prevent owners or general contractors from extracting waivers of rights from their sub trades or suppliers. The Act is not designed to prevent lien claimants who have asserted their lien rights from then entering into settlement agreements or to compromise their lien rights after the fact in order to permit a project to proceed. Settlement meetings under s. 61 would be rendered meaningless were that the case. The settlement agreement was in my view perfectly valid and legitimate and is not contrary to the Act.[^2] Though not a signatory to that agreement, Aluma was fully aware of it and made its own agreement with Landform based on that agreement. There is nothing improper or contrary to the statute in the parties resolving the 2012 lien claims on the basis they did.

[31] Although Aluma made its own side agreement with Landform with respect to the 2012 obligations, Aluma made it very clear that it was not surrendering any lien rights for payments due subsequent to 2012 should those not be paid. Landform does not dispute this and does not dispute the right of Aluma to register and enforce a lien in respect of its 2013 invoice. I am not sure what position it takes with respect to the lien registered in 2014 after the receiving order was made but in any event it denies liability after August of 2013.

[32] The question is not whether the settlement agreement in relation to the 2012 liens is void. The question is whether the funds currently to be received by Landform out of the funds remaining in the plaintiff’s counsel’s trust account are funds to which Aluma is entitled under the Act because of its subsequent lien? Those funds were in fact funds deposited to prepay work to be done under the agreement but upon default by the owner they were pursuant to my order to be applied to the outstanding balance of the lien claims. I agree with counsel for Aluma that the trust funds should therefore be classified as funds to be received on account of a contract or subcontract.

[33] It will not do for Landform to argue that its lien rights were converted to mortgage rights. Section 80 (2) of the Act provides inter alia that a mortgage given to a person who has a lien claim in payment or as security for that claim is void against all other persons entitled to a lien on the premises. Thus a mortgage taken by the original lien claimants as security for their lien rights will not have priority over other lien claims.

[34] I also agree with counsel for Aluma that the definitions of “project” and of “funds received” lead to the conclusion that any funds received by Landform on account of a contract or subcontract price are potentially trust funds under Section 8 of the Act. Thus Landform will have to account for all funds received and it will not be entitled to appropriate any of those funds for its own use until all of its subtrades are paid. Whether it has done so and is exposed to liability under the trust provisions of the Act has not been determined.

[35] The question of breach of trust is not before me nor can it be on a reference under s. 58. That is because a breach of trust action must be commenced separately from a lien proceeding pursuant to s. 50 (2). It is possible to obtain a reference of a trust claim under the reference rules and to have the lien action and the trust claim tried together but that has not been done here. Accordingly although the existence of the trust provisions are relevant considerations and I can take notice of the fact that funds received by Landform will be trust funds, I cannot determine the question of whether Landform is in breach of trust as the matter is currently constituted.

[36] Finally counsel for Aluma is also correct that the priority provisions of the Act require that if Aluma has a valid lien claim, that claim be paid in priority to Landform’s own lien. Section 79 of the Act creates classes of lien claimants. Specifically all persons who have supplied services or materials to the same payer are a class. In this case Aluma is a class (having supplied materials and services to Landform) while Landform and all other lien claimants who supplied materials or services to Courtyard are another class. Subsection 80 (1) (c) provides that the lien of every member of a class has priority over the lien of the payer of that class. In other words, Aluma is entitled to be paid before Landform is paid because Landform is the payer of the class to which Aluma belongs. There can be no dispute that this is the scheme under the Act. This however deals with priority and does not establish entitlement.

[37] Landform will therefore be liable to pay Aluma out of any funds it receives from Courtyard or from the project to the extent that Aluma has provable lien claims. But the question of Landform’s liability to Aluma under its lien action has yet to be determined and it can only be determined once Aluma obtains an order lifting the stay. The breach of contract claim against Landform could proceed independently but the priority provisions of the act only apply to lien claims and the lien action is an action in connection “with the debtor or the property” within the meaning of the stay.

[38] In my view therefore the appropriate remedy is to let Aluma into the reference, to declare that funds received by Landform are impressed with a trust in favour of Landform’s subtrades or suppliers, to require Landform to pay 10% of what it receives to Aluma forthwith and providing the necessary order is obtained from the insolvency judge, to adjudicate the question of Landform’s liability to Aluma and its defences as efficiently and quickly as possible. The liens remain on the title and no one has sought to bond them off. I see no justification for ordering additional security while the liens remain registered against the lands and there is no evidence to suggest Landform is insolvent. These supplementary orders do not require amendment of the interim report.

[39] Landform is at fault in this matter. Aluma should have had the right to make these submissions before the interim report was issued and should have been on notice of the motion heard in 2013. Landform ought to have brought Aluma’s interest in the lands and the project funds to the attention of the court as soon as it was apparent there was a dispute and certainly the instant the lien was registered. Aluma should have been made a party to the reference at a much earlier date. Aluma should also have been on notice of the motion before Justice Beaudoin if that was not the case because it is clearly a party affected by the terms of the order.

[40] In summary there will be an order as follows:

a. Subject to obtaining leave to continue pursuant to the order of Justice Beaudoin, Aluma Systems Inc. is continued as a party to the reference.

b. Rasmussen Star Ruddy LLP may proceed to release the funds pursuant to my interim report and the plaintiff is to proceed to confirm the report in accordance with the reference rules.

c. Landform is to pay 10% of the funds received pursuant to my report to Aluma pursuant to the 2012 agreement.

d. The balance of the funds received by Landform shall be impressed with a trust in favour of Aluma and any other lien claimant of the same class.

e. I will provide further direction concerning the proof of Aluma’s claim against Landform and adjudication of the Landform defences in due course.

f. The parties are to consider whether any further steps should be taken in the reference without leave of the insolvency judge. This will include the question of Landform’s own 2013 lien.

g. There will be a further hearing for directions on a date to be obtained from my office.

h. I may be spoken to regarding the costs of this motion.

Master MacLeod

September 3, 2014

[^1]: 2013 ONSC 8015

[^2]: The courts have been unwilling to interpret the Act to prohibit agreements for arbitration or other ADR processes (see Automatic Systems Inc. v. Bracknell Corp. (1994) 1994 1871 (ON CA), 18 O.R. (3d 257 (C.A.)) and of course they are routinely requested to approve settlements under s. 61.