Court File and Parties

Court File No.: CV-13-10108-00CL Date: 20150908 Superior Court of Justice – Ontario Commercial List

Re: Royal Bank of Canada, Plaintiff And: Galmar Electrical Contracting Inc., Brenmar Heating & Air Conditioning Ltd., Galmar Electric Limited, 1125055 Ontario Limited, Galmar Group (2012) Ltd., Luigi Martellacci also known as Louie Martellacci, 1342153 Ontario Limited ("1342153") carrying on business as MJM Mechanical Contractors, 551297 Ontario Ltd., Terra Moda Beaches Inc., Terra-Moda Building Corp., C.G.M.F. Enterprises Inc. and Mercello Di Francesco, Defendants

Application Under Section 243(1) of the Bankruptcy and Insolvency Act, RSC 1985, c. B-3, as amended and Section 101 of the Courts of Justice Act, R.S.O. 1990, c.C.43

Before: Newbould J.

Counsel: Catherine Francis and Mark A. Freake, for the Plaintiff Demetrios Yiokaris and James Harnum, for the International Brotherhood of Electrical Workers, Local 353 J. Ross Macfarlane and Alyssa Adams, for Grant Thornton Limited, the Receiver Angela Shen, for the Canada Revenue Agency

Heard: September 3, 2015

Endorsement

[1] Royal Bank of Canada ("RBC") is a secured creditor of Galmar Electrical Contracting Inc. ("GECI"), Brenmar Heating & Air Conditioning Ltd. ("Brenmar"), Galmar Electric Limited ("GEL") and 1125055 Ontario Limited ("1125055").

[2] By order dated May 9, 2013, Grant Thornton Limited ("GTL") was appointed as Receiver of GECI, Brenmar, GEL and 1125055. GECI, Brenmar and GEL are now bankrupt. GTL is also the trustee in bankruptcy of those corporations.

[3] The Receiver brought a motion originally returnable on August 10, 2015, for, inter alia, an approval and vesting order with respect to real property owned by GEL, for approval of the Receiver's fees and disbursements, and approval of a proposed distribution of funds to creditors.

[4] The International Brotherhood of Electrical Workers, Local 353 (the "Union") opposed the proposed distribution of funds, and brought a cross-motion seeking payment of its claim, which is alleged to be a "super-priority" claim over all of the companies in receivership.

[5] On August 10, 2015, the approval and vesting order was granted, and the Receiver's fees and disbursements were approved, all with the consent of the Union. A timetable was set for the balance of the issues.

[6] The Receiver is now seeking to distribute funds to RBC pursuant to real property first mortgage security held by RBC, from the estate of 1125055, which was a real estate holding company that owned premises on Canotek Road in Ottawa, and from Galmar Electric Limited ("GEL"), which was a real estate holding company that owned premises on Steinway Drive in Etobicoke.

[7] The Union claims it is owed $1,088,889.30 relating to amounts owing for pension benefits and $455,019.16 relating to other benefits provided under the collective agreement. GECI is the company that is a party to the collective agreement in question. Brenmar, GEL and 1125055 are not parties to the collective agreement. The Union claims a super priority for these amounts under sections 81.3 to 81.6 of the BIA, which if granted, would rank ahead of all other claimants, including CRA. The Union claims that not only GECI was the employer of those union members working for GECI, but Brenmar, GEL and 1125055 were also employers as it claims that the Galmar group of companies was operated as one seamless enterprise that employed all members of the Union. The Union claims that it is entitled to all funds on hand held by the Receiver of the various companies and entitled to require the Receiver pay back all fees and disbursements previously approved by court order and paid to the Receiver.

[8] There are different amounts held by the Receiver/Trustee in Bankruptcy for the different companies. I will first deal with GECI.

GECI

[9] GECI was put into receivership on May 9, 2013. It was later assigned into bankruptcy by the Receiver on May 29, 2013. The gross receipts in the GECI estate to date amount to $655,768. CRA has a claim in the GECI estate in the amount of $1,039,830.01 for unpaid source deductions. CRA claims priority for this claim over all other creditors, including the Union. I conclude that the position of CRA is correct and that it has priority over the super-priority claims of the Union against the GECI asset recoveries.

[10] Pursuant to subsection 227(4) of the Income Tax Act, persons who have withheld employee source deductions but have not remitted the deductions to the CRA are deemed to hold those source deductions in trust for the Crown. The Crown has a deemed trust over the withholdings notwithstanding any security interest therein. By virtue of subsection 227(4.1) of the ITA, the deemed trust extends to (a) the property of those persons, (b) the property held by the person's secured creditors and (c) the proceeds from these assets. Property of the person who made the withholding to the extent of the amount deemed to be held in trust is deemed to form no part of the estate or property of such person and the Crown has a beneficial ownership in those withholdings. Those sections of the ITA provide:

S. 227.(4) Every person who deducts or withholds an amount under this Act is deemed, notwithstanding any security interest (as defined in subsection 224(1.3)) in the amount so deducted or withheld, to hold the amount separate and apart from the property of the person and from property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for the security interest would be property of the person, in trust for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act.

(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection 227(4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for a security interest (as defined in subsection 224(1.3)) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed

(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and

(b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest

and is property beneficially owned by Her Majesty notwithstanding any security interest in such property and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.

[11] The BIA preserves this priority on a bankruptcy. Section 67(1)(a) provides:

67. (1) The property of a bankrupt divisible among his creditors shall not comprise

(a) property held by the bankrupt in trust for any other person;

[12] Subsection 67(2) of the BIA provides that all deemed trusts created by federal or provincial legislation for Her Majesty are rendered invalid, subsection 67(3) provides an exception for source deduction deemed trusts under subsection 227(4) and (4.1) of the ITA. These sections provide:

67. (2) Subject to subsection (3), notwithstanding any provision in federal or provincial legislation that has the effect of deeming property to be held in trust for Her Majesty, property of a bankrupt shall not be regarded as held in trust for Her Majesty for the purpose of paragraph (1)(a) unless it would be so regarded in the absence of that statutory provision.

68. (3) Subsection (2) does not apply in respect of amounts deemed to be held in trust under subsection 227(4) or (4.1) of the Income Tax Act…

[13] Sections 81.4 and 81.6 of the BIA provide employees of an employer in receivership with a super-priority for unpaid wages owed by the employer (to a maximum of $2000 per employee) and for unpaid pension benefits deducted from the employees' remuneration or not paid as required by the employer. Sections 81.3 and 81.5 of the BIA provide for the same super-priority for employees of an employer in bankruptcy. The Union contends that the provisions dealing with receivership should apply to GECI and not those provisions dealing with bankruptcy even though GECI was first placed into receivership and shortly after into bankruptcy. The Union contends that there is a difference in the two sets of sections that indicates that the CRA deemed trust does not trump the Union's super-priority in a receivership. I do not agree.

[14] RBC and CRA take the position that once a company that was in receivership goes into bankruptcy, it is the bankruptcy sections, sections 81.4 and 81.6 of the BIA, that apply rather than the receivership sections 81.3 and 81.5. The Union contends that both set of sections apply and it is entitled to rely on one set that it says gives it priority over the CRA claim. There is some authority that the two sets of sections are not intended to be mutually exclusive. See GMSC Commercial Finance Corp. v. SAAN Stores Ltd, an unofficial endorsement of Morawetz J. (as he then was) dated August 19, 2009, in which he stated that sections 81.3 and 81.4 applied to SAAN and that Parliament did not intend that the two sections were to be mutually exclusive. He held that the look back periods of the two sections (six months before bankruptcy and six months before the earlier receivership order) were to apply to give protection to employees who were employed only before the bankruptcy.

[15] I do not think it matters whether both sets of sections applies. In my view, the priority given to the CRA for source deductions not remitted to the CRA applies to both.

[16] The Union says that the priority ranking in favour of employees under sections 81.3 and 81.5 for bankrupt employers expressly makes an exception for the CRA priority under section 67(3) but that the exception for the employees' priority under sections 81.4 and 81.6 for employers in receivership does not. Therefore it says the Union has priority under sections 81.4 and 81.6.

[17] The ranking of security for bankrupt employers is provided in sections 81.3(4) and 81.5(2) which provide:

81.3 (4) A security under this section ranks above every other claim, right, charge or security against the bankrupt's current assets — regardless of when that other claim, right, charge or security arose — except rights under sections 81.1 and 81.2 and amounts referred to in subsection 67(3) that have been deemed to be held in trust.

81.5 (2) A security under this section ranks above every other claim, right, charge or security against the bankrupt's assets, regardless of when that other claim, right, charge or security arose, except

(a) rights under sections 81.1 and 81.2;

(b) amounts referred to in subsection 67(3) that have been deemed to be held in trust; and

(c) securities under sections 81.3 and 81.4.

[18] The ranking of security for employers in receivership is provided in sections 81.4(4) and 81.6(2) which provide:

81.4 (4) A security under this section ranks above every other claim, right, charge or security against the person's current assets — regardless of when that other claim, right, charge or security arose — except rights under sections 81.1 and 81.2.

81.6 (2) A security under this section ranks above every other claim, right, charge or security against the person's assets, regardless of when that other claim, right, charge or security arose, except rights under sections 81.1 and 81.2 and securities under sections 81.3 and 81.4.

[19] The CRA contends, and I accept, that the fact that section 67(3) has not been exempted from the employees' priority claim in the receivership sections for source deductions can be explained because the priority of the CRA under section 67(3) of the BIA applies by its terms to a bankruptcy and not to a receivership. There was thus no need for Parliament to exclude the section 67(3) priority of the CRA in sections 81.4 and 81.6 dealing with employers in receivership.

[20] That does not mean however that the priority of the CRA under subsections 227(4) and (4.1) of the ITA does not survive. Under those sections, property of the person who made the withholdings to the extent of the amount deemed to be held in trust is deemed to form no part of the estate or property of such person and the Crown has a beneficial ownership in those withholdings.

[21] In light of the fact that the priority of the CRA takes precedence over any claim the Union may have against the assets of GECI, there is no need to deal with other issues raised by the Union regarding GECI.

Other members of the Galmar Group

[22] The Union asserts that its claims under sections 81.3 to 81.6 should apply to all companies in the Galmar Group. At the core of its argument is a contention that all members of the Galmar Group were related employers with similar directors, officers, guiding and controlling minds, operations and employer operations.

[23] The Union says its strongest claim for recovery, other than against GECI, is from GEL. GECI entered into contracts with its customers and completed the related work using GECI employees. GEL was a real estate holding company that owned the land and building on Steinway Blvd. in Toronto from which premises GECI carried on its business. Its few employees did not do any work on GECI contracts. GEL was not a party to any collective agreement and did not participate in any pension plans.

[24] There is evidence that GEL paid some of GECI's employees in respect of work performed on GECI's contracts. The Union takes the position that GECI arranged for its employees' wages to be paid by GEL so to defraud the employees and/or the Union. Whether this was the motivation, this does not in itself make the Union a creditor of GEL.

[25] So far as the wage claims under section 81.3 or 81.5 up to a maximum of $2000 per employee are concerned, the Union filed a proof of claim against GECI, not GEL, for $455,019.16, without regard to the express time frame and dollar limits for a priority claim under the BIA, and without providing a breakdown of the claim by employee for comparison to the amounts claimed by employees through Service Canada. The Union also did not credit the sum of $150,000 received by it from Mattamy Homes by the Union's counsel three days before the receivership order or amounts collected by the Union on account of the lien claims filed against GECI and its customers or claims filed by GECI's employees with Service Canada, for which Service Canada has a subrogated claim. Even if this claim could possibly be made against GEL it would be a weak claim indeed as employees are advised on a receivership to make their claims up to $2000 to Service Canada and they are paid such claims under the WEPPA program.

[26] In any event, no claim for this was filed by the Union against GEL. In its proof of claim it named GECI "and related entities" as debtor and it now takes the position that the proof of claim was made against GEL and other entities. I cannot agree.

[27] Section 124(2) of the BIA provides that a claim shall be proved by delivering a proof of claim in the prescribed form. The prescribed form is Form 31. One of the fundamental pieces of information required in the proof of claim form is the name of the debtor.

[28] Section 124(4) of the BIA states:

The proof of claim shall contain or refer to a statement of account showing the particulars of the claim and any counter-claim that the bankrupt may have to the knowledge of the creditor and shall specify the vouchers or other evidence, if any, by which it can be substantiated.

[29] The Union's proof of claim did not include any statements of account, particulars, vouchers or any other supporting information for claims against any entity other than GECI.

[30] The Receiver is aware of approximately 51 entities that are related to GECI. It cannot guess what companies the claim has been filed against.

[31] So far as the claims for unpaid pension amounts under sections 81.5 and 81.6 of the BIA, the claims by those sections are only against an employer who participated in a pension plan for the benefit of its employees. The opening language of those sections provide:

81.5 (1) If the bankrupt is an employer who participated or participates in a prescribed pension plan for the benefit of the bankrupt's employees, the following amounts that are unpaid on the date of bankruptcy to the fund established for the purpose of the pension plan are secured by security on all the assets of the bankrupt:…

81.6 (1) If a person who is subject to a receivership is an employer who participated or participates in a prescribed pension plan for the benefit of the person's employees, the following amounts that are unpaid immediately before the first day on which there was a receiver in relation to the person are secured by security on all the person's assets:...

[32] GEL did not participate in a pension plan. There could be no claim against GEL's assets under these sections of the BIA.

[33] 1125055 owned property on Canotek Road in Ottawa. RBC provided financing to 1125055 by way of a term facility in the amount of $180,000 secured by, among other things, a mortgage over the property. 1125055 was not an employer, did not participate in a pension plan, and was purely a real estate holding company owning property in Ottawa and elsewhere. There could be no basis for a claim by the Union against 1125055.

[34] With respect to the claim of the Union that that all members of the Galmar group were related employers with similar directors, officers, guiding and controlling minds, operations and employer operations, there is simply no cogent evidence that would support such a finding.

[35] The Union relies on section 1(4) of the Ontario Labour Relations Act, 1995 that provides:

1.(4) Where, in the opinion of the Board, associated or related activities or businesses are carried on, whether or not simultaneously, by or through more than one corporation, individual, firm, syndicate or association or any combination thereof, under common control or direction, the Board may, upon the application of any person, trade union or council of trade unions concerned, treat the corporations, individuals, firms, syndicates or associations or any combination thereof as constituting one employer for the purposes of this Act and grant such relief, by way of declaration or otherwise, as it may deem appropriate.

[36] The Union says that it has clearly established that all of the Galmar group' corporate entities, and especially GEL and GECI, would be found to be a related employer by the OLRB. I disagree. There is no evidence of any kind what the OLRB would do.

[37] The Union asks alternatively that if there is a serious issue that the Galmar group entities other than GECI are not liable for the Union's claims, the Union should be permitted by a lifting of the stay to bring an application for such a declaration to the OLRB. I decline to make such an order for a number of reasons.

[38] In this case, GEL and the relevant companies in the Galmar group whose assets the Union seeks to obtain are in bankruptcy or receivership or both. The Union would be asking the OLRB to make an order treating those companies as one employer for the purposes of the Labour Relations Act. I have been provided with no authority to suggest that the OLRB would be interested, or have jurisdiction, to deal with companies that are no longer carrying on business. What authority I have been given by the Union suggests the opposite.

[39] In Etobicoke Public Library Board, the Ontario Labour Relations Board described the purposes of section 1(4) as follows:

88. The principles and legislative objectives or purposes underlying section 1(4) identified by the Board in these and numerous other decisions may be conveniently summarized as follows: section 1(4) is designed

(a) to preserve or protect from artificial erosion the bargaining rights of the union,

(b) to create or preserve viable bargaining structures, and

(c) to ensure direct dealings between a bargaining agent and the entity with real economic power over the employees.

(See also Penmarkay Foods Limited, [1984] OLRB Rep. Sept. 1214)[^1]

[40] In Lawrence Construction, the OLRB described the purpose of a section 1(4) declaration as follows:

7. …The purpose of section 1(4) is to prevent the application for certification being rendered meaningless by the respondent using another entity to carry on its business and operating double breasted.[^2]

[41] These statements would appear to suggest that the OLRB is interested in what in the future will occur regarding employer groups.

[42] There is another reason for not permitting an application to the OLRB as this stage. These receivership/bankruptcy proceedings have been ongoing since May, 2013. At no time before the Receiver's motion to pay out money to RBC under its security over GEL and 1125055 did the Union ever suggest that it had a claim against any entity other than GECI or that it had a right to be paid ahead of the right of the Receiver and its counsel to be paid as protected by the Receiver's charge. It would be inappropriate at this late stage for the Union to be able to upset the proceedings and the distribution of money by the Receiver. Since these claims of the Union surfaced in late July of this year, the receivership/bankruptcy has ground to a halt as the Union takes the position that its claims rank ahead of the right of the Receiver and its counsel to be paid.

[43] Laches is a ground to deny the application of discretion and I would apply it in this case.

Claim against the Receiver

[44] The Union seeks an order for payment from the Receiver of its secured claims under sections 81.3 to 81.6 of the BIA. It seeks an order that it is entitled to be paid the Receiver's fees and legal fees previously ordered to be paid, i.e. a clawback, and that the Receiver's fees and disbursements sought to be paid should not be permitted. I decline to make such an order.

[45] The Union was aware of the receivership of GECI, Brenmar, GEL, 1125055 and Galmar 2012 from the outset. It participated in the receivership and bankruptcy proceedings, including the investigations conducted by the Receiver and negotiation of settlements with customers of GECI.

[46] The Union's counsel was served with motions and reports by the Receiver seeking approval of its fees and disbursements and those of its counsel. The motions were accompanied by details of the fees incurred and fee affidavits. The Union did not appear on the motions, object to the priority of the Receiver's fees and disbursements or those of its counsel, or object to the approval and payment of the fees and disbursements from funds collected. Orders were made by Mesbur J. on September 9, 2013 and by Brown J. (as he then was) on March 19, 2014 approving the Receiver's fees and activities and the fees of its counsel.

[47] The Union did not move to set aside the orders of Mesbur J. or Brown J., or advise that it would be seeking priority over further fees being incurred by the Receiver and its counsel.

[48] By order dated September 9, 2013, on application by Home Trust Company, the Receiver was appointed as receiver of the defendant Terra Moda Beaches Inc. and on September 11, 2013, the Receiver filed an assignment in bankruptcy on behalf of Terra Moda Beaches Inc. On January 27, 2015, Wilton-Siegel J. approved the fees and activities of the Receiver in relation to Terra Moda Beaches Inc., approved the final statement of receipts and disbursements, authorized any remaining funds to be paid to GTL in its capacity as trustee in bankruptcy of Terra Moda Beaches Inc. and discharged the Receiver as receiver of Terra Moda Beaches Inc. No objection to this order was made by the Union.

[49] For the Union to now try to claw back the fees and disbursements paid to the Receiver pursuant to these court orders would be to be making an impermissible collateral attack on the orders. It would also be extremely unfair to the Receiver and its counsel who have continued to act without any suggestion that their fees and disbursements would not be paid to now have what they have received taken back and to not be paid for the work done by them since the last order approving their fees and disbursements. I find that the Union is estopped from making any claim to the past fees and disbursements paid to the Receiver and its counsel and is estopped from disputing the right of the Receiver and its counsel to be paid for its fees and disbursements incurred since the last orders approving fees and disbursements.

[50] In any event, none of the Receiver's fees and disbursements has been paid from funds over which the Union has a valid priority claim.

[51] No one has objected to the quantum of the Receiver's statement of fees and disbursements. The amounts appear reasonable and they are approved.

Conclusion

[52] It is ordered as follows:

(a) The Receiver's Amended Interim Statement of Receipts and Disbursements dated July 24, 2015 is approved.

(b) The Receiver is authorized to make distributions to RBC from the sale of the Canotek Property up to the amount of the 1125055 loan.

(c) The Receiver is authorized to make distributions to RBC from the proceeds of the sale of the Steinway Property up to the amount of the GEL loan.

(d) The motion of the Union is dismissed.

[53] The Receiver, RBC and the CRA are entitled to their costs. If costs cannot be agreed, brief written submissions from each along with a proper cost outline may be made within 10 days and brief written reply submissions may be made within a further 10 days.

Newbould J.

Date: September 8, 2015

[^1]: Etobicoke Public Library Board, [1989] OLRB Rep. September 935 at para 88. [^2]: Lawrence Construction, [1991] OLRB Rep. October 1160 at para 7.