A. INTRODUCTION

[1] This is a chutzpah summary judgment motion in this 4.5-year-old action under the Construction Lien Act, R.S.O. 1990, c. C.30.

[2] Richard Jeffrey is the President and Jean Danilko is the Vice-President of Lomax Management Inc. (“Lomax”), which is a construction management company. In June 2010, Lomax hired One-Way Drywall Inc. (“One-Way”), whose principal is David D’Alimonte, to provide drywall services for a hotel construction project in Toronto. In September 2011, after One-Way was not paid for all its work, it sued Lomax for breach of contract claiming $260,420.30, and it sued Lomax, Mr. Jeffrey and Ms. Danilko for breach of the trust provisions of sections 8 and 13 of the Construction Lien Act.

[3] Lomax, Mr. Jeffrey, and Ms. Danilko denied any breach of trust and Lomax asserted a counterclaim in excess of $540,853.89 for defective workmanship.

[4] Four and half years later, in this audacious motion under Rule 20 or alternatively under rule 25.11 of the Rules of Civil Procedure, Lomax, Mr. Jeffrey, and Ms. Danilko seek to have the breach of trust claims struck from One-Way’s Amended Statement of Claim.

[5] The audacity is their grounds for seeking to have the trust claim dismissed. After Lomax, Mr. Jeffrey, and Ms. Danilko returned $260,420.30 of the funds allegedly subject to the Construction Lien Act trust, they suggest that One-Way’s breach of trust action is moot, inefficient, and a waste of time and that it ought to be dismissed. They argue that the trust claim should not encumber the claim and their counterclaim, which actions, as the discussion below will reveal, have snailed their way forward largely because of the Defendants’ procrastination.

[6] For the reasons that follow, the Defendant’s chutzpah motion is dismissed.

B. THE RELEVANT PROVISIONS OF THE CONSTRUCTION LIEN ACT

[7] At the heart of the dispute between the parties are the so-called trust provisions of section 8 and section 13 of the Construction Lien Act which state:

Contractor’s and subcontractor’s trust

Amounts received a trust

(1) All amounts,

(a) owing to a contractor or subcontractor, whether or not due or payable; or

(b) received by a contractor or subcontractor,

on account of the contract or subcontract price of an improvement constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor or subcontractor.

Obligations as trustee

(2) The contractor or subcontractor is the trustee of the trust fund created by subsection (1) and the contractor or subcontractor shall not appropriate or convert any part of the fund to the contractor’s or subcontractor’s own use or to any use inconsistent with the trust until all subcontractors and other persons who supply services or materials to the improvement are paid all amounts related to the improvement owed to them by the contractor or subcontractor.

Liability for breach of trust

By corporation

(1) In addition to the persons who are otherwise liable in an action for breach of trust under this Part,

(a) every director or officer of a corporation; and

(b) any person, including an employee or agent of the corporation, who has effective control of a corporation or its relevant activities,

who assents to, or acquiesces in, conduct that he or she knows or reasonably ought to know amounts to breach of trust by the corporation is liable for the breach of trust.

Effective control of corporation

(2) The question of whether a person has effective control of a corporation or its relevant activities is one of fact and in determining this, the court may disregard the form of any transaction and the separate corporate existence of any participant.

Joint and several liability

(3) Where more than one person is found liable or has admitted liability for a particular breach of trust under this Part, those persons are jointly and severally liable.

Contribution

(4) A person who is found liable, or who has admitted liability, for a particular breach of a trust under this Part is entitled to recover contribution from any other person also liable for the breach in such amount as will result in equal contribution by all parties liable for the breach unless the court considers such apportionment would not be fair and, in that case, the court may direct such contribution or indemnity as the court considers appropriate in the circumstances.

C. FACTUAL AND PROCEDURAL BACKGROUND

[8] In 2009, Lomax was the general contractor for the construction of a hotel on Carlton Street in Toronto owned by Holiday Inn. Lomax hired One-Way under two contracts to put in drywall for the hotel project.

[9] The work progressed, and Holiday Inn paid Lomax $13.9 million in progress payments. One-Way issued invoices for its work, and it was paid for some, but not for all, of the goods and services it provided.

[10] On September 7, 2011, One-Way issued a Statement of Claim against Lomax, Mr. Jeffrey, and Ms. Danilko. The claim against Lomax was for breach of contract. The claim against Lomax, Mr. Jeffrey, and Ms. Danilko was for breach of sections 8 and 13 of the Construction Lien Act. Although not fully paid, One-Way had let its construction lien rights lapse.

[11] In December 2011, Lomax delivered its Statement of Defence and Counterclaim. In its pleading, Lomax disputed that any monies were owed to One-Way because of the expense of repairing One-Way’s defective workmanship and it alleged that One-Way had been overpaid.

[12] On January 9, 2012, One-Way delivered its Reply and Defence to the Counterclaim.

[13] Almost a year and a half passed during which time Mr. Jeffrey asked Mr. D’Alimonte to forgo pursuing One-Way’s action pending Lomax’s negotiations with Holiday Inn to settle the general contractor’s construction lien claim.

[14] On May 15, 2013, One-Way served its Affidavit of Documents and an Appointment to Examine the Defendants. The examination was scheduled for June 18 and 19, 2013, but the parties subsequently agreed to have examinations on August 6 and 7, 2013.

[15] On July 5, 2013, Lomax delivered an unsworn Affidavit of Documents listing just seven documents. The draft affidavit did not including financial records, bank statements, canceled cheques, requests for payments or statutory declarations.

[16] On July 31, 2013, the Defendants asked that the scheduled discoveries be cancelled because a settlement conference was scheduled in mid-August between Lomax and Holiday Inn. Lomax was claiming $3.4 million from Holiday Inn, which it intended to use to pay One-Way’s claim. One-Way agreed to the postponement.

[17] Although One-Way was not informed about it until later, on August 20, 2013, Lomax and Holiday Inn entered into a settlement agreement, under which Lomax agreed to accept $2.3 million to settle its claim against Holiday Inn. Sometime in the summer of 2013, Holiday Inn paid around $1.8 million to Lomax.

[18] On October 3 and 17, 2013, One-Way’s lawyer requested an update from Lomax on the settlement discussions but no response was received.

[19] On November 7, 2013, One-Way served a new appointment for examinations for discovery scheduled for December 3, 2013, and it requested the Defendants' Affidavits of Documents with disclosure of the financial records.

[20] On November 14, 2013, the Defendants’ lawyers advised that the Defendants were not available on December 3, 2013.

[21] On December 3, 2013, at One-Way’s request, Master Abrams, who is case-managing the action, ordered a Discovery Plan.

[22] On January 6, 2014, One-Way served an appointment for Examinations for Discovery returnable on February 18, 2014.

[23] On February 3, 2014, One-Way’s lawyer repeated the request for Affidavits of Documents.

[24] On February 4 and 5, 2014, the Defendants advised that they would not be attending the discoveries due to “unforeseen circumstances.” The discoveries were rescheduled for February 27, 2014.

[25] On February 6, 2014, the Defendants provided One-Way with a copy of the Minutes of Settlement between Holiday Inn and Lomax. The Minutes revealed that Lomax had received $15.8 million in payments from Holiday Inn. The same day, One-Way’s lawyer repeated the request for an Affidavit of Documents with documentary disclosure of the financial records and requested that the Defendants segregate the moneys owed to One-Way. These requests were repeated on February 13, 2014.

[26] On February 13, 2014, the Defendants’ lawyers advised One-Way’s lawyers that they were holding enough monies in trust to satisfy the principal amount of One-Way’s claim, and in response, One-Way’s lawyers asked whether the funds would be paid into court and whether Mr. Jeffrey, and Ms. Danilko would be prepared to consent to judgment for breach of trust in the amount found due under the contract, in which event, the discoveries would no longer examine the financial issues.

[27] On February 14, 2014, the Defendants advised that they would not attend the discoveries scheduled for February 27, 2014.

[28] On February 26, 2014, the Defendants advised that they would not pay One-Way’s claim into court pending the resolution of the action and that their lawyer would not hold the funds in trust.

[29] On February 27, 2014, One-Way served a Notice of Examination returnable April 15 and 16, 2014 and advised the Defendants that there would be no more postponements.

[30] On March 4 and 18, 2014, One-Way’s lawyer asked whether the Defendants had disbursed the funds it was holding in trust, and on March 25, 2014, One-Way was advised that the funds being held by the Defendants’ lawyers were going to be paid out to Lomax.

[31] On April 14, 2014, the Defendants advised that they would consent to judgment on the breach of trust claim provided that One-Way succeeded in its breach of contract claim. They also advised that Mr. Jeffrey would not attend the examination for discovery scheduled for April 15, 2014 but would attend the following day.

[32] On April 16, 2014, Mr. Jeffrey attended for his examination for discovery, but he refused to answer any questions on the breach of trust allegations, and he refused to provide financial disclosure with respect to the receipt and disbursement of trust funds. An excerpt from his examination for discovery follows:

Q.40 … who made the decision to put her as an officer and director in the first instance?

MR. BILIMORIA: And my question to you, then, was how is this relevant? You indicated that she was named as a defendant pursuant to a breach of trust claim. So, few are refusing questions on the breach of trust claim on the basis that the individual defendants, Jean Danilko and Richard Jeffrey, are consenting to a judgment for the breach of trust portion of the plaintiff’s action, provided that the breach of contract portion of the plaintiff’s action is proven against Lomax Management Inc. Two points follow from that, sir. Firstly, Mr. Jeffrey is here solely as representative of Lomax Management Inc. to answer your questions not in his personal capacity. Secondly, any question in relation to the breach of trust portion of the claim will be refused on that basis. Now we think this is actually in the interest of both parties in that it will speed up this action, save both parties an expense, and lead to the most expeditious trying of this action.

Q. 102 Does Lomax Management Inc. consent or agree that it also breached the trust provisions of the Construction Lien Act with regard to this case?

MR. BILIMORIA: We will take that one under advisement for you.

Q. 103 All right. And just so that I am clear on this, when you say your clients individually are consenting to a judgment for a breach of trust once the contract amount is determined is that not the same as them making an admission that they were or they have breached the trust provisions of the Construction Lien Act at the material times?

MR. BILIMORIA: Counsel, I thought you didn’t want to have this debate on the record?

MR. TIBOLLO: Oh, no …

MR. BILIMORIA: And I agreed with that.

MR. TIBOLLO: No, no, you keep raising it, so I want your response to that. What is your position on that?

MR. BILIMORIA: You don’t need to get an admission. You have a consent to judgment. The admission is irrelevant.

MR. TIBOLLO: It is irrelevant? And does Lomax Management Inc. admit that it breached the trust provisions of the Construction Lien Act?

MR. BILIMORIA: I am going to refuse that on the same basis.

Q,109 … So, Lomax Management Inc. is consenting to a judgment for breach of trust, as well?

MR. BILIMORIA: Provided that a breach of contract is also established.

Q. 110 And how is the breach of contract going to be established, sir?

MR. BILIMORIA: That is for you to do, Counsel.

[33] On May 27, June 18, June 26, and July 2, 2014, One-Way sought confirmation as to whether the Defendants' lawyers had held back sufficient funds in their trust account to satisfy One-Way’s claim.

[34] On July 29, 2014, the Defendants' lawyers confirmed that they had released all of the trust funds to Lomax and the lawyers took the position that they were at liberty to do so.

[35] On August 6, 2014, One-Way’s lawyer wrote the Defendants’ lawyers inquiring what use had been made by the client of the funds released to it. There was no response.

[36] On October 14, 2014, One-Way’s lawyer wrote to the Defendants’ lawyers to advise that One-Way intended to have the Defendants’ lawyers added as party defendants because of the disbursal of the funds paid by the owner of the hotel project. A flurry of e-mails followed on October 16, 21, and 23, 2014.

[37] On November 18, 2014, One-Way served a motion record for a motion seeking to amend the Statement of Claim to add the Defendants’ lawyers to the breach of trust claim. The motion was returnable on January 23, 2015, but it did proceed at that time.

[38] While the motion was pending, there was another flurry of correspondence between the parties on November 18 and 19, 2014, December 9, 10, and 18, 2014, and January 5, and 9, 2015. The Defendants continued to refuse to provide copies of their lawyer’s trust account statements.

[39] The tsunami of e-mails continued and by April 2015, the Defendants’ lawyers offered up dates for examinations for discovery of Mr. Jeffrey and Ms. Danilko.

[40] On May 21, 2015, One-Way’s lawyers were advised by the Defendants’ lawyers that $260,420.30 had been returned into their trust account. With the return of the money, One-Way decided not to add the Defendants’ lawyers to the action and the Statement of Claim was amended on consent to increase the amount of One-Way’s claim to $288,358.30.

[41] The prayer for relief in the Amended Statement of Claim states:

(i) breach of trust under Party II of the Construction Lien Act and breach of trust under the common law;

(ii) an accounting of all funds received from the Holiday Inn project;

(iii) an Order tracing the distribution of the funds received;

(iv) in the alternative, payment of $288,358.30 owing under the contract(s) for breach of contract;

(v) in the further alternative, payment of $288,358.30 on the basis of quantum meruit and unjust enrichment;

(vi) in the further alternative, payment of $288,358.30 pursuant to sections 245(c) and 248 of the Ontario Business Corporations Act;

(vii) a declaration that Lomax, Richard and Jean breached the trust provisions of the Construction Lien Act and in the event that anyone of them becomes bankrupt, any judgment against them shall not be released by the discharge of the bankrupt from bankruptcy; and

(viii) interest and costs.

[42] The Defendants delivered an Amended Statement of Defence and Counterclaim.

[43] More correspondence followed upon which for present purposes nothing turns.

[44] On February 9, 2016, the Defendants brought the motion now before the court seeking an Order striking out or expunging all or part of the Amended Statement of Claim or, in the alternative, an Order for summary judgment dismissing the claims for breach of trust against the Defendants Lomax, Ms. Danilko and Mr. Jeffrey.

D. DISCUSSION AND ANALYSIS

[45] Lomax, Mr. Jeffrey, and Ms. Danilko submit that there is no reason for One-Way to pursue the breach of trust claim. Lomax submits that there has been no misappropriation of funds because they have placed funds equal to One-Way's original claim, in their lawyer's trust account to the credit of the action. Alternatively, they submit that if there was a breach of trust, it was a technical breach and the breach of trust issue is now moot because of the available funds. Moreover, Mr. Jeffrey, and Ms. Danilko are willing to personally guarantee payment of any amount found owing to One-Way up to the amount of the original Statement of Claim. The Defendants submit, therefore, that it is unnecessary to prolong and complicate and add to the expense of the claim and counterclaim with a pointless breach of trust claim and that the trust claim should be dismissed.

[46] Lomax points out that s. 67 (1) of the Construction Lien Act requires that “[t]he procedure in an action shall be as far as possible of a summary character” and that rule 1.04(1) of the Rules of Civil Procedure requires that parties are “to take the most expeditious and least expensive course in their proceedings”. Moreover, rule 25.11 of the Rules of Civil Procedure, permit the court to strike out or expunge all of part of a pleading on the grounds that the pleading: (a) prejudices or delays the fair trial of an action; (b) is scandalous, frivolous or vexatious; or (c) is an abuse of the process of the court. Therefore, Lomax submits that to pursue the breach of trust claim with the attendant further oral and documentary discovery would be frivolous, vexatious, unnecessarily time-consuming and costly to the Defendants, and contrary to the spirit of the Construction Lien Act and the Rules of Civil Procedure.

[47] The Defendants’ argument is made from whole cloth; there is no precedent that supports the Defendants’ submissions that expediency based on a defendant’s provisional confession of judgment or the defendant’s offering to hold funds to the credit of the action secured by personal guarantees justifies dismissing the plaintiff’s claim. That there is no precedent is not surprising because it would be beyond remarkable to think that a court would permit expediency to triumph over access to justice.

[48] While I am not to be taken to deciding its ultimate merits, One-Way has pleaded a tenable and purposeful cause of action for breach of the trust provisions of the Construction Lien Act; see: St. Mary's Cement Corporation v. Construc Ltd. (1997), 1997 12114 (ON SC), 32 O.R. (3d) 595 (Gen. Div.); Sunview Doors Ltd. v. Pappas, 2010 ONCA 198. One-Way is entitled to have its tenable breach of trust claim determined by the court.

[49] Apart from the fact that One-Way’s amended claim is for $288,358.30, the fact that the Defendants are willing to hold $260,420.30 in their lawyer’s trust account to be available should One-Way succeed in its breach of contract claim ignores the fact that the breach of trust claim under the Construction Lien Act and also at common law has a substantive legal value to One-Way that is not replicated by the breach of contract claim.

[50] The “elephant in the room” or to be more precise the “elephant in the courtroom” is that One-Way’s breach of contract claim will be discharged if Lomax goes bankrupt, a not uncommon phenomenon in the construction industry, but One-Way’s breach of trust claim would likely survive the bankruptcy of Lomax, Mr. Jeffrey, or Ms. Danilko because of s. 178(1)(d) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B.3, which provides that: “an order of discharge does not release the bankrupt from any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity.”

[51] A breach of the statutory trust under the Construction Lien Act may qualify as a liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity.

[52] See: Toro Aluminum Ltd. v. Revah, [1999] O.J. No. 5346 (S.C.J.); Zumbo (Re), [2000] O.J. No. 1759 (S.C.J.); Superior Crane (Canada) Inc. v. Justan Consulting Ltd., [2003] O.J. No. 4717 (S.C.J.); Commdoor Aluminum v. Solar Sunrooms Inc., [2004] O.J. No. 863 (C.A.); Dicroce (Re), [2004] O.J. No. 1742 (S.C.J.); Bibico Electrician Inc. v. Battlefield Electrician Services Inc., [2011] O.J. No. 6567 (S.C.J.), aff’d 2012 ONCA 676; Ieluzzi (Re), 2012 ONSC 3447.

[53] There is no basis for denying One-Way the protections provided by sections 8 and 13 of the Construction Lien Act and by s. 178(1)(d) of the Bankruptcy and Insolvency Act and this motion should be dismissed.

E. CONCLUSION

[54] For the above reasons, the Defendants’ motion is dismissed.

[55] If the parties cannot agree about the matter of costs, they may make submissions in writing, beginning with One-Way’s submissions within 20 days of the release of these Reasons for Decision, followed by the Defendants’ submissions within a further 20 days.

Perell, J.

Released: February 29, 2016

CITATION: One-Way Drywall Inc. v. Lomax Management Inc., 2016 ONSC 1462

COURT FILE NO.: CV-11-434473

DATE: 20160229

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

ONE-WAY DRYWALL INC.

Plaintiff

– and –

LOMAX MANAGEMENT INC., JEAN DANILKO and RICHARD JEFFREY

Defendants

REASONS FOR DECISION

PERELL J.

Released: February 29, 2016

One-Way Drywall Inc. v. Lomax Management Inc., 2016 ONSC 1462

Case Summary

A. INTRODUCTION

B. THE RELEVANT PROVISIONS OF THE CONSTRUCTION LIEN ACT

C. FACTUAL AND PROCEDURAL BACKGROUND

D. DISCUSSION AND ANALYSIS

E. CONCLUSION

Judge

Counsel

Parties

Areas of Law

Fact Patterns

Financial Outcomes

Issues

Legislation 3