COURT FILE NO.: 17-71823
DATE: 2018/06/05
COURT OF ONTARIO
SUPERIOR COURT OF JUSTICE
In the matter of the Construction Lien Act., RSO 199, c. C.30, as amended
RE: VISION AIR CONDITIONING AND HEATING CORPORATION, Plaintiff
AND:
GOLDEN DRAGON HO INC. and CHI VAN HO, Defendants
BEFORE: Mr. Justice Calum MacLeod
COUNSEL: Stéphane P. Bond, for the Plaintiff
Ryan Flewelling, for the Defendants
HEARD: May 17th, 2018
reasons for decision
[1] The plaintiff brought a motion for summary judgment. The action relates to unpaid invoices for installation of heating and ventilation materials at various properties owned or operated by the corporate defendant. The plaintiff brought the action for payment of its invoices and for breach of trust under the Construction Lien Act.
[2] At the hearing of the motion, it was conceded that the corporation had no legitimate defence and judgment was therefore granted for $82,366.72 plus pre-judgment interest and costs.
[3] The question which was argued and which is addressed in these reasons is whether or not the individual defendant is liable for breach of trust under ss. 8 & 13 of the Act. Both parties agree that this question is an appropriate one to be determined on a summary judgment motion. The motion therefore proceeds under Rule 20.04 (2) (b) of the Rules of Civil Procedure.
Relevant Facts
[4] For purposes of this motion, the relevant facts include the fact that the corporate defendant is controlled by the individual defendant, that the corporation ordered the goods and services, that the corporation did not pay for the services and has been found to owe the amount set out in the judgment. The corporation did not borrow funds to finance the construction projects. Rather it intended to pay the invoices out of its own resources including the rents it received from the various properties. Apparently, the corporation is currently in financial difficulty and several of its properties are in receivership.
Statutory Provisions & the Issue to be Decided
[5] The relevant trust provisions of the Act are as follows:
Owner’s trust
Amounts received for financing a trust
7 (1) All amounts received by an owner, other than the Crown or a municipality, that are to be used in the financing of the improvement, including any amount that is to be used in the payment of the purchase price of the land and the payment of prior encumbrances, constitute, subject to the payment of the purchase price of the land and prior encumbrances, a trust fund for the benefit of the contractor. R.S.O. 1990, c. C.30, s. 7 (1).
Amounts certified as payable
(2) Where amounts become payable under a contract to a contractor by the owner on a certificate of a payment certifier, an amount that is equal to an amount so certified that is in the owner’s hands or received by the owner at any time thereafter constitutes a trust fund for the benefit of the contractor. R.S.O. 1990, c. C.30, s. 7 (2).
Where substantial performance certified
(3) Where the substantial performance of a contract has been certified, or has been declared by the court, an amount that is equal to the unpaid price of the substantially performed portion of the contract that is in the owner’s hands or is received by the owner at any time thereafter constitutes a trust fund for the benefit of the contractor. R.S.O. 1990, c. C.30, s. 7 (3).
Obligations as trustee
(4) The owner is the trustee of the trust fund created by subsection (1), (2) or (3), and the owner shall not appropriate or convert any part of a fund to the owner’s own use or to any use inconsistent with the trust until the contractor is paid all amounts related to the improvement owed to the contractor by the owner. R.S.O. 1990, c. C.30, s. 7 (4).
[6] Pursuant to s. 13 of the Act, every director or officer of a corporation and every person who has effective control of a corporation is jointly and severally liable with the corporation if he or she assents or acquiesces in conduct which he or she should reasonably know amounts to breach of trust. In the case at bar, there is no doubt that the personal defendant is intimately familiar with the operations of the corporation. He is its sole directing mind.
[7] The only question is whether the trust provisions apply to the corporation under the facts of this case. This is a narrow legal issue. Essentially, the question is whether the statute can bear the construction advocated by the plaintiff.
[8] The plaintiff concedes that there was no “payment certifier” and no “certificate of substantial performance”. These are defined terms under the Act. Payment certifier is defined in s. 1 and publication of certificates is governed by s. 32. Consequently, the neither the trust created by subsection 2 nor that created by subsection 3 apply.
[9] The plaintiff relies on subsection 1. Although there was no institutional financing or “building mortgage”, the plaintiff argues that because the corporation was self-financing the improvements, the rents and other sources of income should be regarded as “amounts received by an owner” “that are to be used in the financing of the improvement”. I am asked to find that these amounts were impressed with the trust.
Analysis
[10] As is apparent from the wording of the statute, section 7 of the Act creates an owner’s trust in three situations. As discussed above, the second and third of these arise when a payment certifier certifies that funds under a construction contract are owed to a contractor or when an official certificate or declaration of substantial completion is published. In those instances, all funds in the hands of the owner or coming into the hands of the owner on or after that date are impressed with a trust for the balance due to the contractor. It is a breach of trust to use those funds for any purpose other than paying the outstanding construction obligation.
[11] The trust established by subsection 1 of s. 7 is somewhat narrower. The trust arises when amounts are received by an owner that are to be used in financing of an improvement. Those funds become impressed with a trust for the benefit of the contractor. The most common example of this is a building mortgage. Where funds are borrowed for the specific purpose of financing construction, each advance under the mortgage is impressed with a trust and must be applied to pay the contractors or suppliers.
[12] The plaintiff argues that if the owner decides to self-finance by using a revenue stream such as rental income, that revenue is also captured by the subsection. Otherwise, it argues, owners who have sufficient cash flow to avoid institutional financing escape the trust provisions of the Act.
[13] In support of this argument, the plaintiff relies upon two court decisions but neither is directly on point. In Structural Contractors Ltd. v. Westcola Holdings Inc.[^1] the Court of Appeal held that rental revenue coming into the hands of the owner were impressed with a trust but as apparent from the decision, these revenues were received after a certificate of substantial completion had been published. As such, the trust in question was the trust established by subsection 3 and not subsection 1. Emco Corporation v. Ontario Trenchless Construction Ltd. et. al.[^2] was a decision of this court dealing with setting aside of summary judgment. The court affirmed that the onus is on the plaintiff to prove the existence of the trust and then the onus shifts to the trustee to show how the funds were used. While that is a useful statement of principle, the trust involved in that case was a trust under s. 8 of the Act. That is a trust imposed on contractors and sub-contractors for the benefit of their sub-contractors and suppliers over funds received by them for work done on a construction project. Neither of these cases stands for the proposition that subsection 7 (1) of the Act creates a trust when the only funds received by the owner are general revenues.
[14] Section 7 (1) is broad enough to capture any funds specifically earmarked for financing a construction project or improvement. Examples of funds received for such a purpose might include insurance proceeds, funds advanced by landlords, guarantees or inter-company transfers provided they are funds received (or receivable) by the owner for the specific purpose.[^3] On the other hand, the court has previously found that general revenues of a corporation or even general borrowing on a line of credit are not funds impressed with a trust even if the owner originally intended to use those funds to pay for the construction. The section requires that there is a distinct fund which is identifiably for the purpose of completing the improvement.[^4]
[15] There is no evidence to support the existence of a fund set aside to finance the construction. Rather the corporation intended to pay for the construction out of its general revenues. Accordingly the facts will not support a judgment for breach of trust against the personal defendant under s. 13 of the Act.
Conclusion
[16] In conclusion, the motion for summary judgment against the personal defendant for breach of the s. 7 (1) trust is dismissed.
[17] I should note that this does not mean there can be no personal liability. There is now judgment against the corporation and presumably the next step for the plaintiff is to attempt enforcement. In that circumstance it may be that evidence will be discovered that gives rise to remedies for fraudulent preferences or conveyances or if the corporation is insolvent, there may be remedies under the Bankruptcy and Insolvency Act. There is not however a remedy under s. 13 of the Construction Lien Act.
Costs
[18] Although the motion was argued on the narrow issue of whether judgment could be granted against the personal defendant for breach of trust, the materials were originally prepared because the action had been defended by both defendants. The judgment against the corporation includes costs of the action.
[19] Unless there are offers to settle with which I am not familiar and which should be considered, notwithstanding that the plaintiff has been unsuccessful against the personal defendant, my preliminary view is that there should be no costs of this motion other than the costs against the corporation. Judgment was granted against the corporation for the amount of the invoices as well as pre-judgment interest and costs. Neither of these were quantified because the concession was only made at the last minute.
[20] I would encourage counsel to agree on the calculation of pre-judgment interest and costs against the corporation but if they are unable to do so I will hear further submissions. If either party seeks costs of the portion of the motion relating to the personal defendant and if there are offers or other factors which should be brought to my attention, counsel are to contact my office within 30 days.
Mr. Justice C. MacLeod
Date: June 5, 2018
COURT FILE NO.: 17-71823
DATE: 2018/06/05
ONTARIO
SUPERIOR COURT OF JUSTICE
In the matter of the Construction Lien Act., RSO 199, c. C.30, as amended
RE: VISION AIR CONDITIONING AND HEATING CORPORATION, Plaintiff
AND:
GOLDEN DRAGON HO INC. and CHI VAN HO, Defendants
BEFORE: Mr. Justice Calum MacLeod
COUNSEL: Stéphane P. Bond, for the Plaintiff
Ryan Flewelling, for the Defendants
HEARD: May 17th, 2018
Reasons for decision
Mr. Justice Calum MacLeod
Released: June 5, 2018
[^1]: (2000) 2000 CanLII 5740 (ON CA), 48 O.R. (3d) 417 (C.A.)
[^2]: (2007) 65 C.L.R. (3d) 33 (S.C.J.)
[^3]: See for example Varcon Construction Co. v. 1554098 Ontario Inc, 2011 ONSC 1649 (SCJ), Van Arnhem v Lornewood Tanning Salon Inc., (1993) 11 CLR (2d) 54 (Ont. Gen. Div.), Kasper Land Drainage Inc. v. Spectrum Realty Inc., (1991) 47 CLR 44 (Ont. Gen. Div.)
[^4]: See Andcur Building Corp. v. 756203 Ontario Ltd. (1997), (1997) 35 CLR (2d) 252 (Ont. Gen. Div.) and Fulton Homes Ltd. v. D’Elia, (2005) 42 CLR (3d) 290 (SCJ)