CITATION: Redstone Investment Corporation (Re), 2015 ONSC 533
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF REDSTONE INVESTMENT CORPORATION AND REDSTONE CAPITAL CORPORATION
BEFORE: Regional Senior Justice Morawetz
COUNSEL: Aubrey Kauffman and Zohaib Maladwala, for Maplebrook Capital Corp.
Steven Graff and Ian Aversa, for Grant Thornton Ltd., in its capacity as Receiver and Manager of Redstone Investment Corporation, Redstone Capital Corporation and 1710814 Ontario Inc. o/a Redstone Management Services
Geoff R. Hall, for Warner Sulz Family Trust and Gino Martone (Investors in Maplebrook)
HEARD: October 31, 2014 and November 12, 2014
ENDORSEMENT
INTRODUCTION
[1]
Introduction
Maplebrook Capital Corp. (“Maplebrook”) brought this motion to compel Grant Thornton Ltd. (“GTL”), in its capacity as the Court appointed Receiver and Manager (the “Receiver”) of Redstone Investment Corporation (“RIC”), Redstone Capital Corporation (“RCC”) and 1710814 Ontario Inc. o/a Redstone Management Services (“RMS”) to pay the following amounts to Maplebrook:
a) $750,000 advanced by Maplebrook to fund the Pro-Hairlines transaction (as defined below), less 37.5% of the legal fees ($13,189.12) incurred by RIC;
b) $150,000 that was received on April 7, 2014 in full satisfaction of the outstanding principal owed under the CFT Properties Loan (as defined below) and any interest payments collected under the CFT Properties Loan after March 28, 2014;
c) $311,400 that was received on March 31, 2014 in full satisfaction of the outstanding interest and principal owed under the Chiu Chow Loan (as defined below); and
d) $28,494 that was collected after March 28, 2014 in satisfaction of interest payments owed under the AG Loans (as defined below).
2The Receiver opposed the relief requested by Maplebrook. The Receiver took the position that all funds in which Maplebrook claimed an ownership interest formed part of the property of RIC and ought not to be paid to Maplebrook in priority to RIC’s other creditors.
3On March 28, 2014, RIC and a related company RCC, made an application to commence proceedings under the Companies’ Creditors Arrangement Act (the “CCAA Proceedings”). An order (the ‘Initial Order”) was granted which appointed GTL as Monitor in the CCAA.
4On August 8, 2014, an order was made (the “Receivership Order”) appointing GTL as the Receiver and Manager of all of the assets, undertakings and properties of RIC and RCC.
5On September 17, 2014, the Receivership Order was amended to include RMS as a party subject to the Receivership Order.
6At the outset, it is noted that Maplebrook accepted and agreed to GTL’s recommendation to terminate the Agency Agreements in respect of the AG Loans and the Quality Contract Loan (as defined below). This relief was granted by order dated November 12, 2014. The AG Loans and the Quality Contract Loan were declared to be the property of Maplebrook and the stay of proceedings was lifted in order to allow Maplebrook to terminate its Agency Agreements with RIC effective as of November 12, 2014.
FACTS
[7]
Facts
Maplebrook is an Ontario corporation established in May 2013. Its President and sole Officer and Director is Mr. John Pizzacalla. Maplebrook carries on business as a short-term lender to small and medium sized Canadian businesses.
8In the fall of 2013, Maplebrook advanced five loans to borrowers through RIC (the “Assigned Loans”). The Assigned Loans are comprised of:
a) A $500,000 loan to CFT Properties Inc. (“CFT Properties”);
b) A $650,000 to AG Yonge Street Investments Inc. (“AG Investments”);
c) A further $350,000 loan to AG Investments;
d) A $300,000 loan to Chiu Chow Koon Chinese Restaurant Inc. (“Chiu Chow”); and
e) A $400,000 loan to Quality Contract Manufacturing Ltd. (“Quality Contract”).
9The general structure of the Assigned Loans was such that RIC would obtain an assignable promissory note from the borrower, which RIC would assign to Maplebrook. Maplebrook would irrevocably appoint RIC as its agent to collect and enforce the Assigned Loans and the related security. Maplebrook would advance the funds to RIC. The loan proceeds would be advanced to the borrowers. RIC would collect and remit payments of principal and interest in respect of the loan to Maplebrook.
10RIC has not remitted any payments of interest and principal that it has received with respect to the Assigned Loans since February 22, 2014 (when RIC remitted payments to Maplebrook in respect of interest and principal collected in January 2014).
11On March 31, 2014, RIC received $311,000 from Chiu Chow in full satisfaction of the Chiu Chow Loan that had been assigned to Maplebrook.
12On April 7, 2014, RIC received $150,000 from CFT Properties in full satisfaction of the CFT Properties Loan that had been assigned to Maplebrook.
13After the Initial Order, RIC also received $28,494 in interest payments from AG Investments in respect of the AG Loans that had been assigned to Maplebrook.
14RIC deposited these post-CCAA collections in its general account rather than remitting them to Maplebrook or keeping them segregated from RIC’s other assets.
15Since its appointment, the Receiver has not remitted any payments to Maplebrook in respect of the Assigned Loans.
16With respect to the AG Loans and the Quality Contract Loan, the Receiver acknowledges that, pursuant to the assignments entered into between Maplebrook and RIC, these loans are Maplebrook property.
17With respect to the Chiu Chow Loan and the CFT Properties Loan, the Receiver also appears to acknowledge that these loans were Maplebrook Property and that RIC acted as Maplebrook’s agent to collect and enforce these loans. However, as noted above, the Receiver takes the position that the interest and principal that RIC collected on these loans does not belong to Maplebrook and should not be returned to Maplebrook, ahead of RIC’s other creditors.
18The Receiver’s position is based on its assertion that the funds collected by RIC in respect of the assigned loans are not trust funds. The Assignment Agreements for the Assigned Loans do not explicitly state that the proceeds of the Assigned Loans are to be held in “trust” for Maplebrook. Further, the Receiver relies upon the fact that the proceeds of the Chiu Chow and CFT Properties Loans were deposited to RIC’s general account.
19Maplebrook takes the position that RIC has no beneficial entitlement to the funds, and neither the Receiver nor RIC’s creditors can have any higher claim. Accordingly, a constructive trust in Maplebrook’s favour is necessary to prevent this unjust result.
20In addition to the Assigned Loans, Maplebrook also agreed to participate in a sixth loan through RIC in late February 2014. The loan to 2234241 Ontario Inc. c.b.a. Pro-Hairlines (“Pro-Hairlines”), was to be for $2 million, with RIC advancing $1.25 million of the total loan and Maplebrook advancing the remaining $750,000 of the loan. The Maplebrook portion of the loan was to have been structured in the same manner as the Assigned Loans (the “Pro-Hairlines Transaction”).
21In anticipation of closing, Maplebrook transferred $750,000 to RIC on March 4, 2014 (the “Pro-Hairlines Advance”) to acquire its portion of the loan. The Pro-Hairlines Advance was subsequently transferred by RIC to its lawyers trust account in anticipation of closing.
22The Pro-Hairlines Transaction did not close. On March 25, 2014 RIC informed Maplebrook that it would not participate in the Pro-Hairlines Transaction. Maplebrook decided not to participate and requested that RIC return the Pro-Hairlines funds.
23On March 25, 2014, Mr. Karim Habib, the RIC consultant who was in charge of the Pro-Hairlines Transaction informed Mr. Eric Hansen, the sole director and officer of RIC, and Mr. Chris Shaule, a consultant of RIC, that the Pro-Hairlines Advance should “immediately” be returned to Maplebrook after RIC’s lawyer transferred it back to RIC.
24The funds were returned by RIC’s lawyer to RIC on April 1, 2014, which post-dated the commencement of CCAA Proceedings.
25The Receiver takes the position that Maplebrook did not transfer the Pro-Hairlines Advance to a trust account (instead, transferring the funds directly to RIC) and the funds were transferred in the absence of any executed agreement. Consequently, as no trust was created, there is no basis upon which to repay the Maplebrook Advance to Maplebrook.
26Maplebrook takes the position that RIC received the Pro-Hairlines Advance in trust and that the Pro-Hairlines Advance remains subject to that trust obligation in the Receiver’s hands.
27The Receiver asserts that Mr. Pizzacalla acknowledged that Maplebrook had a close relationship with RIC and RMS. For example, RIC (presumably through RMS, since RIC had no employees) would carry out the bookkeeping and accounting functions for Maplebrook. RMS’s and RIC’s bookkeeper has signing authority on Maplebrook’s accounts, but was required to seek Mr. Pizzacalla’s instructions before dealing with Maplebrook’s funds. The Receiver also suggested that RIC and/or RMS did not appear to have received any compensation for the performance of these management functions. The Receiver also suggests that Mr. Pizzacalla appeared to have acted as a representative of RIC, RCC and RMS for the purpose of soliciting investments in these entities from various individual third parties.
28Additionally, the Receiver pointed out that there may be funds owing to RMS from Maplebrook.
29During oral argument on October 31, 2014, I raised questions with respect to the apparent lack of formal documentation in respect of the Assigned Loans. I also raised questions as to whether there was any type of a relationship as between Maplebrook and RIC that was not fully explained in the materials.
30Prior to the continuation of oral argument on November 12, 2014, a supplementary affidavit of Mr. Pizzacalla was filed.
31In the supplementary affidavit, Mr. Pizzacalla provided additional information concerning:
A step-by-step explanation of the Loan Purchase Transactions;
Maplebrook’s financial statements;
Maplebrook/Pizzacalla’s relationship with RIC/RMS/RCC; and
Details with respect to other transactions.
32Mr. Pizzacalla stated the following at paragraph 3 of the supplementary affidavit as follows:
A STEP BY STEP EXPLANATION OF THE LOAN PURCHASE TRANSACTIONS
As explained in paragraph 23 of the First Pizzacalla Affidavit, all of the Assigned Loans were structured in essentially the same way. In connection with RIC’s loan to the ultimate borrower (the “Borrower”), RIC would obtain an assignable promissory note from the Borrower. RIC would, in turn, absolutely assign the promissory note and related security to Maplebrook in consideration for Maplebrook’s investment (which was in the same amount as the assigned promissory note). Maplebrook would, in the assignment agreement, appoint RIC as its agent to collect and enforce the promissory note and security on its behalf. RIC would then collect the lender fees, interest and principal in respect of the Assigned Loans and deposit those amounts, in full, into Maplebrook’s account. Thereafter, Maplebrook would remit RIC’s share of the lender fees and interest spread.
33On the issue of the interest split in the Lender Fees Split Arrangement, when Maplebrook was interested in a potential transaction, it would offer the transaction to its investors at a lower interest rate than would be paid by the Borrower. The difference between the interest rate paid by the Borrower and the interest rate paid to investors would be split equally between RIC and Maplebrook (the “Interest Split”). The Interest Split for the Assigned Loans varied between 4% and 8%.
34The Borrowers of the Assigned Loans paid lender fees (“Lender Fees”) in addition to interest. With the exception of the CFT Transaction, Lender Fees were split equally between Maplebrook and RIC.
35Mr. Pizzacalla acknowledged there was no written formal agreement with regard to the Interest Split and Lender Fees. The oral agreement was the same for each transaction, which was reflected in the loan schedules for the Assigned Loans. Mr. Pizzacalla did acknowledge that with respect to the CFT Transaction, which had been sourced by Mr. Habib, the parties agreed that Mr. Habib would receive a 1% “Finders Fee”.
36Mr. Pizzacalla also elaborated on the method by which RIC would collect the interest, principal and Lender Fees owing under the Loans and remit these amounts to Maplebrook.
37Specifically, after Maplebrook purchased the Loan, RIC, as Maplebrook’s agent, would collect all interest, Lender Fees and principal payments due from the Borrower and remit those amounts, in full, to Maplebrook.
38Mr. Pizzacalla would meet Ms. D’Leon, usually on a monthly basis to confirm the interest, principal and Lender Fees due to Maplebrook on each of the Assigned Loans. Ms. D’Leon would cause these amounts to be transferred from RIC’s bank account to Maplebrook.
39On a monthly basis, Maplebrook would pay its investors the interest and principal owed to them on any transactions that the investors had participated in, including the Assigned Loans.
40After RIC collected and remitted to Maplebrook all interest and Lender Fees due under the Assigned Loans, Ms. D’Leon would then calculate the Interest Split and Lender Fees Split that Maplebrook owed.
41Ms. D’Leon also maintained a loan schedule for every loan that Maplebrook was involved in. The Loan Schedules included all the pertinent details for each transaction that Maplebrook was involved in.
42During the October 31, 2014 hearing, I requested copies of Maplebrook’s financial statements in order to review how the Assigned Loans were recorded. The financial statements were produced. The Assigned Loans were individually recorded and the Borrowers set out.
43With respect to the relationship as between Maplebrook and RIC/RMS and RCC, Mr. Pizzacalla stated that neither he, nor Maplebrook, has ever had an interest in, or control of RIC/RCC or RMS.
44With respect to other transactions, Mr. Pizzacalla acknowledged that, in light of RIC’s refusal to pay certain amounts owing to Maplebrook, Maplebrook was retaining certain funds due to RMS on account of potential set-off claims.
45The evidence of Mr. Pizzacalla was not challenged.
ISSUES
[46]
Issues
From the standpoint of Maplebrook, the following issues have to be addressed:
a) Who owned the loans in issue?
b) Is Maplebrook entitled to the post-CCAA collections?
c) Is Maplebrook entitled to a return of the Pro-Hairlines Advance?
47The Receiver submits that the issues to be resolved on the motion are:
a) Are the proceeds of the RIC/Maplebrook loans subject to a constructive trust in favour of Maplebrook?
b) Is the Maplebrook advance subject to a specific purpose or Quistclose Trust in favour of Maplebrook?
c) Should Maplebrook be denied the equitable relief it seeks on the basis that it does not come to court with clean hands.
48Maplebrook submits that, in each of the Assigned Loans, RIC obtained from the Borrower an assignable promissory note and, in each case, that promissory note and related security was absolutely assigned to Maplebrook. In each assignment document, Maplebrook also engaged RIC as its agent with authority to, on Maplebrook’s behalf and for Maplebrook’s benefit, collect any payment under the promissory note and enforce the security.
49The Receiver submits that the facts give rise to a debtor-creditor relationship between RIC and Maplebrook and do not give Maplebrook any proprietary interest in the Assigned Loans proceeds.
50The Receiver takes the position that the agency relationship pursuant to which RIC collected the Assigned Loan proceeds was created as part of the assignments executed in respect of each of the Assigned Loans. The Receiver points out that these assignments to do not impose any obligations on RIC with respect to how the funds are to be collected, how they are to be held by RIC on Maplebrook’s behalf, nor how they are to be paid to Maplebrook.
51The Receiver submits that it is well established that, in the absence of an agreement to hold funds collected on a principal’s behalf in a separate account, an agent and its principal are in a debtor/creditor relationship. In support of this proposition, the Receiver relies on Re General Publishing Co. (2002), OJ No. 2270 (ONCA) and M.A. Hanna Co. v. Provincial Bank of Canada (1935), 1934 CanLII 217 (SCC), S.C.R. 144 (SCC).
ANALYSIS
[52]
Analysis
With respect to the AG Loans and the Quality Contract Loan, the Receiver acknowledged that these are the property of Maplebrook and that RIC was acting as Maplebrook’s agent in administering the Loans and even recommended terminating the agency relationship in order to allow Maplebrook to enforce its security. In my view, there is no material difference between the structure, documentation, and administration of the AG Loans and the Quality Contract Loans and the CFT Property Loans and the Chiu Chow Loan. These loans were also the subject of absolute equitable assignments to Maplebrook.
53The documentation establishes RIC’s intention to covey the debts to Maplebrook, thereby transferring all credit risks to Maplebrook, retaining only the administrative role of Maplebrook’s agent for collection purposes. The evidence also establishes that the parties conducted themselves in a manner consistent with the assignment documentation.
54Counsel to Maplebrook submits that where there has been an assignment of a debt, and the assignor becomes bankrupt or otherwise seeks protection from its creditors, the debt will no longer form part of the bankrupt’s estate. Insofar as the assignor receives repayments of interest or principal of such an assigned debt, these receipts are held in trust for the assignee and are not available for distribution among the assignors’ creditors (see Pythe Navis Adjusters Corp. v. Columbus Hotel Co. (1991), 2014 BCCA 262).
55In this case, prior to RIC and RMS seeking protection in the CCAA Proceedings on March 28, 2014, agreed upon amounts were forwarded by RIC to Maplebrook in accordance with the terms of the Assigned Loans.
56Upon the commencement of CCAA Proceedings, the Court issued a stay order. RIC remained a debtor-in-possession (under the supervision of the Court and GTL as Monitor, carrying on RIC’s business). As a consequence of the stay order, Maplebrook was precluded from terminating its agency arrangements with RIC, revoking RIC’s authority as agent and retaking its property (that is, the Assigned Loans).
57The purpose of a CCAA stay order is to maintain the status quo amongst creditors and prevent their maneuvering for position. While the stay order prevents secured creditors and other parties from exercising and confirming their security for proprietary rights, it should not be used to prejudice those rights or to reorder the priorities as they existed on the date that the stay is granted (see: Re Sharpe-Rite Technologies Ltd., 2000 BCSC 414 and Re Windsor Machine & Stamping Limited, 2009 CanLII 39771 (ON. S.C.)).
58The stay order effectively prevented Maplebrook from terminating RIC’s agency agreement so as to take over the administration of the loans and ensure that it receive the post-CCAA collections directly from the debtors, CFT Properties, Chiu Chow and AG Properties. Counsel to Maplebrook submitted that RIC was not at liberty – during the status quo period – to negate these propriety rights by receiving the post-CCAA collections and depositing them in its general account. I agree
59The Receiver relies on general statements as set out in General Publishing and Hanna, to the effect that the absence of an agreement to hold funds in a separate account results in a legal conclusion that the parties are in a debtor/creditor relationship. These statements have to be considered in the context of the facts in General Publishing and Hanna and also subsequent jurisprudence. Hanna involved a priority dispute as between a secured creditor bank and a supplier who sought to establish the foundations for a consignment agreement that, if demonstrated, would result in a proprietary right. General Publishing involved a priority dispute between the secured creditor (Bank of Nova Scotia) and publishers who claimed a proprietary right and resulting priority over the Bank with respect to accounts billed to and collected by the distributor, General Distribution Services. In both cases, Hanna and General Publishing collections were deposited into the general account of the debtor.
60This case does not involve a priority dispute between a secured creditor and a third party. Rather, it involves a dispute between the Receiver and Maplebrook, with Maplebrook asserting a proprietary right to the loans, a right that the Receiver has acknowledged with respect to the AG Investments and Quality Contract loans.
61The Chiu Chow and CFT Properties loans were structured in the same way as the AG Investors and Quality Contract loans. In my view, it is surprising that the Receiver maintains that the interest and principal that RIC collected on the Chiu Chow and CFT Properties loans does not belong to Maplebrook and should be available to RIC’s other creditors. The explanation for and the flaw in the Receiver’s position can be found in a review and analysis of the authorities relied upon by Maplebrook.
62The Receiver submits that, in the absence of an agreement to hold funds collected on a principal’s behalf in a separate account, an agent and its principal are in a debtor/creditor relationship which would defeat the property claim of Maplebrook. However, the cases relied upon by the Receiver to support its submissions, predate the controlling authority and do not consider cases relied upon by Maplebrook, which address whether the absence of a separate account determines the issue.
63In Shenzhen City Luohu District Industrial Development Co. v. Yao, 2000 BCSC 677, the Court enumerated a number of factors that should be considered in deciding whether a party receiving funds does so as a mere debtor, or as a trustee:
[T]he presence of comingling, while a factor to be weighted in favour of a debtor-creditor relationship is not necessarily determinative. The nature of the relationship depends on whether the certainties which constitute a trust are present. Factors to consider include: whether there was an obligation to keep the funds separate; whether the terms of the agreement clearly set out an obligation to keep the funds separate; whether it was intended that, should the funds be comingled, the trustee could do as he pleased with the money; whether the trustee was required to fulfil a specific purpose; whether the recipient could use the funds for any other purpose before making payment for the specific purpose; and whether the settlor had any direct supervision or control over the financial dealings of the recipient.
64Shenzhen City followed the decision of the Alberta Court of Appeal in R. v. Lowden, 1981 ABCA 79, where the Court held that a travel agent receiving funds from a customer for the specific purpose of purchasing travel services or hotel accommodations assumed a trust obligation to apply the funds as directed or return them to the customers:
Undoubtedly a direction that monies are to be kept separate and apart is a strong indication of a trust relationship being created. It does not appear to me, however, that the converse is necessarily so ( … ). The fact that there is no specific discussion about monies being kept separate and apart from other monies does not detract from the fact that the money is paid first for a particular purpose, namely the obtaining of tickets for specific flights or reservations at named accommodation for a particular period. … To my mind, the paying of money to a travel agency for a particular trip on a particular date with a carrier flying regularly, or the payment of money for a particular reservation with a particular hotel for a particular period, creates more than a simple debtor and creditor relationship. To my mind, it is implicit that the agent is either expected to get the ticket or to return the money.
65These principles were confirmed by the Supreme Court of Canada in Air Canada v. M & L Travel Ltd., 1993 CanLII 33 (SCC), [1993], 3 SCR 787, where the Court cited McEachern v. Royal Bank of Canada, [1990] A.J. No. 1145 (ABQB) and Lowden, the Court agreed that “while the presence or absence of a prohibition on the comingling of funds is a factor to be considered in favour of a debt relationship, it is not necessarily determinative”.
66In my view, these cases stand for the proposition that the absence of an agreement to hold funds collected in a separate account is not necessarily determinative of whether a debtor-creditor relationship is established. In the circumstances of this case, further examination is necessary, including an examination as to whether a constructive trust may be imposed.
67Counsel to the Receiver acknowledges that a constructive trust may be imposed in circumstances where:
a) the alleged constructive trustee has engaged in the type of wrongful conduct that is capable of giving rise to a constructive trust; or
b) the alleged constructive trustee has been unjustly enriched, and a constructive trust is the appropriate remedy (see: Gorecki v. Canada (Attorney General) 2006 CanLII 9035 (ON CA), 2006 CarswellOnt 1745 (Ont. C.A.); and Re Confederation Life Insurance Company, [1995] CarswellOnt 318 (Ont. Gen. Div.), affirmed 1997 CarswellOnt 62 (Ont. C.A.)).
68The test for finding a constructive trust based on wrongful conduct was set out by the Supreme Court of Canada in Soulos v. Korkontzilas, 1997 CanLII 346 (SCC), [1997] 2 SCR 217. The following criteria is to be considered in determining the availability of the remedial constructive trust:
The defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;
The assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;
The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties; and
There must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected.
69Counsel to Maplebrook submits that these criteria are satisfied in the present case.
a) Under the Assignment Agreements, RIC acted as Maplebrook’s agent in enforcing the CFT Properties Loan, Chiu Chow Loan and AG Investments Loan. As such, and as the assignor under the Equitable Assignments, RIC owed equitable obligations to Maplebrook to remit all sums paid. This is how the parties operated prior to the CCAA Proceedings and it was by virtue of this agency relationship that the post-CCAA collections came to be in RIC’s hands.
b) The post-CCAA collections came to be in RIC’s possession by virtue of this agency relationship. While it may not have been a breach of RIC’s fiduciary obligations to receive that money, it constitutes a breach of RIC’s equitable obligations to retain that money and not to remit it to Maplebrook.
c) There is nothing “illegitimate” about Maplebrook’s claim for a proprietary remedy. Failing to grant this remedy would result in an unjust enrichment of RIC’s creditors. As in Soulos, “no less is required … to return the parties to the position that they would have been in had the breach not occurred”.
d) There is nothing that would render the imposition of a constructive trust unjust in these circumstances. On the contrary, it would be unjust if RIC’s creditors received a windfall by virtue of the stay order, which effectively prevented Maplebrook from revoking the agency and retaking its property. The creditors that would benefit are not “intervening creditors”; rather, they are creditors who, before the stay order, had interests that were subordinate to Maplebrook’s ownership interests. It would be unjust for the stay orders – and RIC’s actions under that order to extinguish those proprietary rights and defeat that priority.
70Counsel to Maplebrook also submits that there is an overriding principle of “good conscience”. In this case, Maplebrook does not allege that RIC or its creditors having engaged in any actionable conduct; it is simply that it would be contrary to good conscience to permit them to retain the benefits derived from Maplebrook’s properties. The Court, in Soulos, expressly recognized this broader principle, quoting with approval:
A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts into a trustee: Soulos, supra at paragraph 29, quoting Beatty v. Guggenheim Exploration Co., 225 NY 380 (1919) at 386-387.
71This principle was the basis for imposing a constructive trust in Cummings v. Peopledge HR Services, 2013 ONSC 2781, a case that arose out of the receivership of a payroll management company. When payroll went into receivership, employers sought to recover funds that had been conveyed to Peopledge, but that had not yet been distributed to employees. Some of the agreements with the employers imposed express trust obligations or segregated obligations but many did not. Further, Peopledge did not maintain segregated employer-by-employer accounts. In Peopledge, the Court held that the terms of the agreements, and the manner in which Peopledge actually handled the funds were not determinative; all such funds were received by Peopledge as agent for the employers and, therefore, they could not in good conscience be applied to discharge Peopledge’s obligations to its own creditors:
In these circumstances, it would appear to be inequitable to permit the general creditors of Peopledge other than the customers who provided the funds to now be paid their claims from those funds. It was never intended that Peopledge or its creditors would have any beneficial interest in these funds. … Under the umbrella of good conscience, constructive trusts are recognized to remedy the unjust and corresponding deprivation (see McLaughlin J. in Soulos at paras. 20 and 43). In this case, Peopledge and its general creditors would be enriched by having the ability to access the payroll funds advanced by customers to Peopledge. The customers and their employees, would be deprived by not having the funds paid to them and there would be no juristic reason for this to occur. It was never intended that Peopledge or its creditors, would have any beneficial interest in the payroll funds advanced by customers.
72In this case, while the documents may not have expressly obligated RIC to segregate the loan payments received from borrowers, or to hold these funds in trust, it was nevertheless understood between the parties that these funds were the property of Maplebrook. In addition, as previously noted, the Receiver has acknowledged that the structure of the Assigned Loans results in Maplebrook being the owner and equitable assignee of the loans originated by RIC.
73After March 28, 2014, the stay order effectively stayed any right of Maplebrook to terminate RIC’s agency and retake its property. The monies at issue in this case were received after the granting of the Initial Order. In my view, if these post-CCAA collections were to form part of RIC’s assets, RIC’s creditors would receive a windfall; RIC had no beneficial entitlement to these funds, and neither the Receiver nor RIC’s creditors can have any higher claim. Accordingly, I am satisfied that the absence of RIC to maintain a separate trust account, although a factor to be taken into account, is not determinative of the issue as to whether the relationship between Maplebrook and RIC was one of debtor-creditor. In my opinion, the relationship was not one of debtor-creditor. RIC recognized the assignment in favour of Maplebrook and there is no basis to alter this recognition after the CCAA filing. To alter the relationship would be inconsistent with the long recognized principle that the purpose of the CCAA is to preserve the status quo. Accordingly, I am satisfied the Soulos test has been met and it is appropriate and necessary to impose a constructive trust in Maplebrook’s favour to prevent an inequitable and unjust result.
74On the issue of Maplebrook’s entitlement to repayment of the Pro-Hairlines Advance, Maplebrook submits that there can be no question that RIC received the Pro-Hairlines Advance in trust and that the Pro-Hairlines Advance remains the subject of that trust obligation in the Receiver’s hands.
75The existence of a trust depends upon satisfying the three certainties of (1) an intention to create a trust; (2) the subject matter of the trust; and (3) the trust objects or purposes.
76There is no issue respecting the latter two requirements as the subject matter or corpus of the trust was the Pro-Hairlines Advance, and the object was to fund the Pro-Hairlines Transaction. While Maplebrook did not impose any express obligation requiring RIC to hold the Pro-Hairlines Advance “in trust” or to segregate the Pro-Hairlines Advance from RIC’s own funds, I am satisfied that there was no question that the Pro-Hairlines Advance was being advanced for, and could only be used for, one particular purpose: to fund the loan to Pro-Hairlines.
77I accept the submission of Maplebrook that RIC received the Pro-Hairlines Advance in trust and that the Pro-Hairlines Advance remains the subject of that trust obligation in the Receiver’s hands. The actions of both RIC and Maplebrook established that there was an intention to settle a trust and impose trust obligations.
78Although the Pro-Hairlines Advance was transferred into RIC’s general account, the analysis in Shenzhen, Lowden, Air Canada and McEachern referred to above is relevant to this issue as the absence of a specific trust account is not determinative of the issue.
79In my view, the trust principles described above, result in a conclusion that the Pro-Hairlines Advance is being held on a trust obligation in favour of Maplebrook. Maplebrook never parted with beneficial title to the funds: they were conveyed to RIC subject to an equitable obligation to use those funds to make the loan to Pro-Hairline (that is, to “purchase a $750,000 debt to be assigned to Maplebrook”, or to return the funds to Maplebrook if the transaction did not close). I am in agreement with counsel to Maplebrook that nothing in the evidence supports the view that the Pro-Hairlines Advance was advanced to RIC to use in any way that it saw fit, with a mere obligation to make repayment to Maplebrook if and when RIC elected to do so. At the time that the funds were returned to RIC, with RIC operating under court supervision and under the supervision of a Monitor, the obligations in favour of Maplebrook are even more definite. The position of Maplebrook should not be prejudiced during the CCAA proceedings.
80Counsel to Maplebrook also submitted that another line of cases that supports the existence of a trust in the present case is that applying the principle developed by the English House of Lords in Barklays Bank Ltd. v. Quistclose Investments Ltd. (1968), UKHL 4. The Alberta Court of Appeal summarized that principle in the following terms:
This type of trust, commonly called a Quistclose trust, arises when funds are advanced for a specific purpose, but cannot be or are not used for that purpose.
81The Ontario Court of Appeal has commented that the Quistclose trust has not yet been adopted in Ontario, and has warned against the potential negative impact such trust may have on creditors who have no notice that a debtor’s funds are not available to general creditors, as follows:
“As I have concluded that the requirements for a Quistclose trust have not been met in this case, I do not need to decide to what extent that expansion should be adopted in Ontario. However, when that decision does have to be made, the Court will have to consider a number of commercial consequences, one of the most significant of which is the potential effect on the creditors of the borrower (or grantee) of the subject funds. For example, as in this case, where funds are advanced to a business with no registration under the Personal Property Security Act, RSO 1990, cP-10, creditors will have no notice, and in many cases no knowledge, that they are dealing with a debtor whose money is subject to a trust and not available to general creditors.” Ontario (Minister of Training, Colleges and Universities v. Two Feathers Forest Products LP, 2013 ONCA 598 (“Two Feathers”).
82In the circumstances of this case, with the Pro-Hairlines Advance being provided to RIC and forwarded on to RIC’s counsel expressly for the purpose of being held by counsel pending the completion of the transaction, and then being returned to RIC subsequent to the filing of the CCAA Proceedings, there does not appear to be any opportunity for any creditor of RIC to have been misled or in any way detrimentally affected by having the knowledge that the funds were subject to a trust and not available to general creditors.
83The principle of Quistclose as summarized by the Alberta Court of Appeal in Carevest Capital Inc. v. Leduc (County), 2012 ABCA 161 is as follows:
This type of trust, commonly called a Quistclose trust, arises when funds are advanced for a specific purpose, but cannot be or are not used for that purpose.
84I am mindful of the comments of the Ontario Court of Appeal in Two Feathers to the effect that Quistclose has not yet been adopted in Ontario. In my view, it is not necessary to determine this issue as I have determined that the Pro-Hairlines Advance is being held in a trust obligation in favor of Maplebrook. However, if I am in error in reaching that conclusion, I am also of the view that this is a situation where the requirements for a Quistclose trust have been met. In reaching this conclusion, I have taken into account that:
The funds were advanced by Maplebrook for a specific purpose;
The funds were returned to RIC at a time when RIC was operating under court supervised creditors’ protection and under the supervision of the Monitor; and
If the funds are returned to Maplebrook, there is no effect on the other creditors of RIC. The funds were never the property of RIC and the creditors of RIC have no entitlement to the funds in question.
DISPOSITION
[85]
Disposition
In the result, Maplebrook’s motion is granted. The Receiver is to pay the following amounts to Maplebrook’s legal counsel, Fasken, in trust:
i) The sum of $750,000, less 37.5% of legal fees ($13,189.12) incurred by RIC in respect of the Pro-Hairlines Transaction;
ii) The sum of $150,000 and any interest payments collected after March 28, 2014 in respect of the CFT Properties Loan;
iii) The sum of $311,400 representing the outstanding principal and interest collected after March 28, 2014 in respect of the Chiu Chow Loan; and
iv) The sum of $28,494 representing interest collected after March 28, 2014 in respect of the AG Loans.
86However, prior to making payment to Maplebrook, the Receiver, in consultation with Maplebrook, is to establish the amount owing by Maplebrook to RMS. This amount is to be held back from the amount due to Maplebrook. The Receiver can apply for directions, if necessary, as to how the amount held back is to be allocated as between the Redstone estates. If the parties are unable to come to agreement on the amount to be held back, a 9:30 a.m. appointment can be scheduled.
87Maplebrook has been the successful party and is entitled to its costs on a partial indemnity basis. I would ask counsel to confer in an effort to settle on an appropriate amount of costs, taking into account the submissions made on this subject at the conclusion of oral argument. If not agreement can be reached, brief submissions to a maximum of 3 pages can be submitted, within thirty days.
Morawetz, RSJ
Date: January 30, 2015