Court File and Parties

COURT FILE NO.: 19-70627 DATE: 2020-04-06 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Philip Court and Karen Murray, Plaintiffs AND: Stephen Johnston, Stephen Johnston operating as Johnston Contracting and Johnston Developments Inc., Defendants

BEFORE: Justice L.C. Sheard

COUNSEL: Matthew G. Moloci, for the Plaintiffs/Responding Parties Ian C. Matthews, for the Defendants/Moving Parties

HEARD: February 6, 2020

Endorsement

Overview

[1] The defendants move under rr. 21.01(1)(a) and (1)(b) of the Rules of Civil Procedure for an order striking out, without leave to amend, certain paragraphs of the plaintiffs’ Amended Amended Statement of Claim dated November 15, 2019 (the “Claim”).

[2] Viewed broadly, the defendants ask to strike the plaintiffs’ claims for breach of trust, misappropriation, defalcation and the related claims for interim relief. A copy of the Claim, filed by the defendants and marked as Exhibit #1 on the motion, identifies the words and paragraphs that the defendants ask be struck, together with the basis for the request.

[3] Rule 21.01 (1) provides as follows:

A party may move before a judge,

(a) for the determination, before trial, of a question of law raised by a pleading in an action where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs; or

(b) to strike out a pleading on the ground that it discloses no reasonable cause of action or defence,

and the judge may make an order or grant judgment accordingly.

[4] Rule 21.01(2) provides that no evidence is admissible on a motion under r. 21.01(1)(b) and is admitted only with leave of a judge or on consent of the parties under r. 21.01(1)(a).

Positions of the Parties

[5] The defendants specifically assert that paragraphs in the Claim that seek relief under the Bankruptcy and Insolvency Act (the “BIA”) and under Ontario’s Assignments and Preferences Act (the “APA”) ought to be struck as being premature; the defendants are not bankrupt and, unless and until the plaintiffs obtain a judgment against the defendants, they are not “creditors” as required by the APA.

[6] The defendants assert that, as a matter of law, the plaintiffs have no “cognizable” claims against the defendants for breaches of trust, or under s. 178(1) of the BIA or pursuant to the APA. The defendants seek an order that, as a matter of law, deposits paid by the plaintiffs to the defendants are forfeit, subject only to the court’s discretion to grant relief from forfeiture.

[7] The plaintiffs oppose the relief sought and assert that there are no pure questions of law that can be determined on the motion; all of the causes of action pleaded and issues in dispute are questions of mixed fact and law that require an evidentiary record. The plaintiffs further assert that the claims pleaded are tenable and founded in law.

[8] For the purposes of this motion, r. 21.01 requires the court to accept as facts the allegations set out in the Claim. The defendants submit that the Claim, “as supplemented” by the plaintiffs’ response to the defendants’ demand for particulars, provides the “factual lens through which the questions of law are presented”.

Facts as Pleaded

[9] The plaintiffs are spouses who own a cottage property in Huntsville, Ontario. The defendants are an individual (“Stephen”), his unincorporated business (“Johnston”) and his corporation (“Johnston Inc.”). The defendants operate a general contracting and construction business.

[10] In the summer of 2018, the plaintiffs engaged the defendants to construct a new garage on their cottage property. The proposed budget included the installation of a new septic system. Work began in November 2018.

[11] This action concerns three deposits made by the plaintiffs to Stephen respecting the cottage:

(i) $40,000 paid on October 17, 2018 for a septic system (the “Septic System Deposit”);

(ii) $226,000 paid on May 15, 2019 respecting the proposed tear-down of the existing cottage and construction of a new cottage (the “Cottage Deposit”); and

(iii) $40,000 paid on June 17, 2019 for Hydro and electrical services (the “Hydro Deposit”).

[12] The Cottage Deposit was paid in anticipation of Stephen providing the plaintiffs with an acceptable proposal for the work to be performed. That did not happen. The plaintiffs did not accept Stephen’s proposal of July 3, 2019.

[13] In early July 2019, the plaintiffs learned that Johnston Inc.’s Tarion registration had expired and that Stephen and Johnston: were not completing work on other projects or paying material suppliers, subcontractors or employees; did not have building risk insurance; were overcharging for work; and were in dire financial straits. For those and other reasons, the plaintiffs terminated their relationship with the defendants and retained a different contractor to complete unfinished work.

[14] The plaintiffs then asked Stephen for the return of the monies deposited, which totalled $306,000, and for an accounting of monies paid to him pursuant to their “time, materials and expenses contract” with Stephen and Johnston.

[15] Stephen and Johnston failed or refused to provide an accounting of the funds paid and the amounts incurred for the labour and materials provided on the construction of the garage; they also failed to refund the Hydro Deposit, the Septic System Deposit, or the Cottage Deposit (collectively, the “Deposits”).

[16] The plaintiffs claim that it was an implied term of their oral agreements with Stephen and Johnston with respect to the garage/septic construction that the plaintiffs’ payments would be used “only for the time, materials, services and subcontractor services acquired and incurred to complete the garage/septic construction”: see Claim, at para. 27(f).

[17] The plaintiffs also claim that it was an implied term of their oral agreement with Stephen and Johnston for the hydro and electrical services work, that the Hydro Deposit would be used only for the “time, materials, services and subcontractor services acquired and incurred to complete the hydro and electrical services installation”: see Claim, at para. 34(f).

[18] The plaintiffs claim that they did not enter into an agreement with Stephen and Johnston for the cottage construction – at most they had “an agreement to agree”: see Claim, at para. 40. Alternatively, the plaintiffs state that if the Cottage Deposit was paid to secure the future performance of the cottage construction, the Cottage Deposit ought not to be forfeited: see Claim, at para. 41.

[19] Among other things, the plaintiffs claim that Stephen and Johnston breached an implied term of their oral contracts with the plaintiffs by using the Deposits for purposes other than those for which the Deposits were made: for example, by using the Deposits to pay for improvements made to property owned by Stephen, which property is subject to liens/construction liens exceeding $1,737,092, and/or to pay expenses for other construction projects.

[20] The plaintiffs also allege that Stephen and Johnston were not “forthright and honest” with the plaintiffs when they failed to disclose that they were insolvent, that the Deposits had been used by the defendants and that the defendants did not have the “the resources or ability to complete” the work already commenced or the work not yet commenced for which the Deposits had been paid. Among other things, the plaintiffs specifically claim that between May 15 and mid-July 2019, Stephen and Johnston used the $226,000 Cottage Deposit for purposes other than the cottage renovation.

Issues to be Decided

[21] The parties agree on the issues to be decided by this court, summarized below:

1. Is it plain and obvious that the breach of trust claim is doomed to fail?
2. Is it plain and obvious that the claim for a declaration under s. 178 of the BIA, based on alleged “misappropriation and defalcation” by Johnston while acting in a fiduciary capacity, is doomed to fail?
3. Is it plain and obvious that the claim alleging that Johnston made preferential payments to other creditors, contrary to the APA, is doomed to fail?
4. Is it plain and obvious that the claims for “an interim declaration”, an interim accounting and an interim “partial summary judgment” are doomed to fail?
5. Is it plain and obvious that, as a matter of law, the Deposits were forfeited when the plaintiffs terminated their relationship with Stephen/Johnston prior to the work being completed, subject to relief from forfeiture?

Analysis

Issue #1: Is it plain and obvious that the breach of trust claim is doomed to fail?

[22] I conclude that it is not plain and obvious that the plaintiffs’ breach of trust claim will fail.

[23] If, at trial, the plaintiffs succeed in proving that they had an agreement with Stephen and Johnston whereby the Deposits would be used exclusively for the services and materials rendered in respect of the improvements to the plaintiffs’ cottage property, they may succeed in their claim that the Deposits were impressed with a trust. I find that the facts set out in the Claim could support a finding that the parties had agreed that the Deposits were to be held in trust by Stephen and to be disbursed only for the benefit of the plaintiffs, that is, for improvements to the plaintiffs’ property: see Robertson v. Fieldstone Homes Ltd. (2009), 89 R.P.R. (4th) 150 (Ont. S.C.).

[24] Stated differently, it is not plain and obvious that the trust claim based on the agreements between the plaintiffs and Stephen and Johnston are bound to fail. For those reasons, I do not strike out any words found in paragraphs 1(a) or 1(b) of the Claim.

Issue #2: Is it plain and obvious that the claim for a declaration under s. 178 of BIA, based on alleged “misappropriation and defalcation” by Johnston while acting in a fiduciary capacity, is doomed to fail?

[25] The plaintiffs seek to establish that they had an agreement whereby the Deposits paid to Stephen would be held in trust and used exclusively to pay expenses related to the plaintiffs’ cottage. If that is established, and the plaintiffs prove that Stephen and Johnston otherwise used the Deposits, the plaintiffs could succeed in making out a claim of misappropriation or defalcation.

[26] The plaintiffs also assert that, in breach of their oral agreement that the Deposits be held in trust, Stephen and Johnston took the Deposits for their own use, when they knew that they would not have the resources or ability to complete the construction for which the Deposits had been made.

[27] It is not for me to determine whether the plaintiffs will succeed in proving what is alleged in the Claim; I must accept the facts as set out in the Claim. Looking only at the paragraphs in the Claim, which are the subject of this motion, I conclude that it is not plain and obvious that the plaintiffs’ claim for misappropriation or defalcation is doomed to fail. Rather, the facts set out in the Claim, could support a finding that Stephen and Johnston deliberately misled the plaintiffs and, possibly misappropriated the Deposits.

[28] I note that to an extent, there are inconsistencies between the Claim and the plaintiffs’ response to the defendants’ demand for particulars. For example, in the latter, the plaintiffs allege that all amounts received from the plaintiffs by the defendants were for the benefit of the subcontractors and others who supplied services and materials to improve the plaintiffs’ property: at para. 5(b)(i). Those particulars appear to conflict with allegations in the Claim, including paragraphs 46, 55 and 56, in which the plaintiffs assert that the Deposits were “unlawfully retained” by Stephen and Johnston and “impressed with an equitable constructive trust in favour of the plaintiffs”, which funds are subject to “equitable tracing remedies to aid in recovery of trust funds improperly taken or retained”. Still, taken as a whole, these inconsistencies do not lead me to conclude that the identified claims are doomed to fail.

[29] The defendants also submit that the plaintiffs’ claim for damages by reason of misappropriation and/or defalcation ought also to be struck from the Claim. In support of their position, the defendants submit that those allegations are pleaded to support an order sought under s. 178(1)(d) of the BIA, an order which can only be obtained if it is established that the defendants were acting in a fiduciary capacity, a fact that is not asserted by the plaintiffs.

[30] I am not persuaded that it is “plain and obvious” that the plaintiffs’ claim against Stephen and Johnston for misappropriation or defalcation cannot succeed and/or that those allegations are or must be tied to the claim under s.178(1)(d) of the BIA. For those reasons, I do not strike any portions of paragraph 1(c).

[31] However, I do accept the defendants’ submissions that a claim for declaratory relief under s. 178(1)(d) of the BIA is not appropriately asserted unless and until: (i) a creditor seeks to enforce a pre-existing liability or judgment debt; and (ii) the debtor (bankrupt) relies on his discharge from bankruptcy “as a basis for resisting enforcement of pre-bankruptcy liability”: see B2B Bank v. Batson, 2014 ONSC 6105, [2014] O.J. No. 4913, at para. 18.

[32] I also agree with and adopt the reasoning in Royal Bank of Canada v. Elsioufi, 2016 ONSC 5257, 40 C.B.R. (6th) 334, at para. 7, in which the court refused to make an advance declaration under s. 178(1)(e) of the BIA on the basis that the court lacked “jurisdiction to make such a hypothetical declaration before the issue actually arises.”

[33] Although the plaintiffs allege that the defendants were insolvent (Claim, at para. 29(g)), there is no allegation that the defendants filed an assignment in bankruptcy and/or were resisting the payment of amounts claimed by the plaintiffs on the basis that their discharge from bankruptcy extinguished any debt owed to the plaintiffs.

[34] For the reasons set out above, I conclude that the relief set out in paragraph 1(d) is premature and “doomed to fail” and that paragraph 1(d) should be struck from the Claim.

Issue #3: Is it plain and obvious that the claim alleging that the defendants made preferential payments to other creditors, contrary to the APA, is doomed to fail?

[35] Reference to the APA is found at paragraph 61 of the Claim but there does not appear to be relief claimed that connects this paragraph to the relief set out in paragraph 1 of the Claim.

[36] The defendants submit that unless and until the plaintiffs have obtained a judgment against the defendants, they are not creditors for the purposes of the APA.

[37] The facts set out in the Claim are insufficient to establish that the plaintiffs are creditors as contemplated by the APA: see Alriyatti Ltd. v. O.B. Properties Canada Ltd., 2000 CarswellOnt 1391 (S.C.), at para. 32. Thus, the plaintiffs’ claim is premature, and for that reason, I conclude that paragraph 61 should be struck from the Claim.

Issue #4: Is it plain and obvious that the claims for “an interim declaration”, an interim accounting and an interim “partial summary judgment” are doomed to fail?

[38] The defendants assert that the interim orders sought at subparagraphs 1(f)(i), (iv) and (vi) of the Claim are doomed to fail in that the claims are either not “viable” or are premature or, in the case of the claim for an interim declaration of trust, would serve no useful purpose. The defendants also assert that the plaintiffs’ claim for an interim order for partial summary judgment is not properly claimed as interim relief. The defendants ask that the following words be struck from paragraph 1(f)(iii) of the Claim: “that are impressed with a deemed trust, a common-law trust and/or an equitable constructive trust in favour of the plaintiffs”.

[39] Included under subparagraph 1(f) of the Claim are claims for interim orders based on a “common law trust”. On this motion, the plaintiffs assert that a “common law trust” may be implied or derived from the statutory deemed trust created by s. 8(1) of the Construction Act. The plaintiffs submit that The Guarantee Company of North America v. Royal Bank of Canada, 2019 ONCA 9, 144 O.R. (3d) 225 (“Guarantee”) supports this argument.

[40] In Guarantee, the court was asked to determine a priority dispute between certain creditors and employees of a bankrupt company. Specifically, the issue to be determined was whether the funds owing to or received by the bankrupt contractor and impressed with the statutory trust created by s. 8(1) of the Construction Lien Act, R.S.O. 1990, c. C. 30, were excluded from distribution under the BIA to the contractor’s creditors. The court concluded that the statutory trust satisfied the general principles of trust law. The court concluded that by operation of s. 67(1)(a) of the BIA, the subject funds satisfied the requirements for trust at law and were not available for distribution to the bankrupt corporation’s creditors.

[41] The arguments set out in the plaintiffs’ factum proceed on the basis that the findings in Guarantee support the plaintiffs’ argument that a common-law trust may be implied from the statutory deemed trust under s. 8(1) of the Construction Act. The plaintiffs acknowledge that their argument may be novel, but that it is not “plain and obvious” that it is doomed to fail.

[42] I conclude otherwise. The findings of the court in Guarantee that the statutory trust imposed by the Construction Lien Act satisfied the general principles of trust law (at para. 3), does not support the plaintiffs’ position advanced that a common law trust is, or can be, created by virtue of that statute.

[43] The defendants ask the court to strike paragraphs 52, 53, 54 and 57 and parts of paragraphs 55, and 56 of the Claim, which, in part, set out the plaintiffs’ theory that the Construction Act creates a common-law trust, and that the defendants have breached that trust. The defendants, however, do not seek to strike the portions of those paragraphs that assert that the Deposits are impressed with an equitable trust or the plaintiffs’ claim for equitable tracing remedies.

[44] Notwithstanding my views on the plaintiffs’ claim, r. 21.01 permits an order to be granted only if the order made will dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs. In that the defendants do not seek to strike the plaintiffs’ claim that an “equitable constructive trust” should be imposed, I cannot conclude that striking out all of the above-referenced paragraphs, in which the plaintiffs seek to advance alternate legal arguments that a trust exists, satisfies the requirements of an order under r. 21.01. As observed by the court in PDC 3 Limited Partnership v. Bregman + Hamann Architects, et al. (2001), 52 O.R. (3d) 533 (Ont. C.A.) at para. 8, if it will still be necessary for a court to hear all of the evidence to make findings on the remaining issues, it is not appropriate to make an order under r. 21.

[45] The same reasons would apply to the motion to strike out paragraphs 59 and 60 of the Claim. Accordingly, I dismiss the motion to strike out paragraphs 52, 53, 54, 57, 59, 60, and parts of paragraphs 55 and 56 of the Claim.

[46] The defendants also seek an order striking out paragraphs 48 and 49 of the Claim. The allegations in paragraph 48 appear to rely, in part, upon s. 6.1 of the Construction Act. That section had not yet been proclaimed in force and, for that reason I conclude that it is plain and obvious that the claim under that paragraph is doomed to fail and paragraph 48 shall be struck out.

[47] Paragraph 49 appears to be an accurate statement of the law respecting the obligation of a contractor pursuant to the Construction Act. It is unclear how that section has application to the plaintiffs’ claim. However, as I cannot conclude that striking it out will dispose of all or part of the action or save costs or trial time, I do not strike out paragraph 49.

[48] The defendants also assert that the relief claimed by the plaintiffs as “interim relief” is relief not properly granted on an interim basis. The “interim orders” sought, mirror the other relief claimed in paragraph 1 of the Claim.

[49] Absent a full evidentiary record, and, likely, a trial, it is difficult to envision how the plaintiffs could succeed in obtaining the interim relief claimed. However, I cannot conclude that striking out the paragraphs that seek this interim relief will dispose of all or part of the action or save costs. For that reason, I do not strike any portion of paragraph 1(f) from the Claim.

Issue #5: Is it plain and obvious that, as a matter of law, the Deposits were forfeited when the plaintiffs terminated Johnston prior to the work being completed, subject to relief from forfeiture?

[50] The defendants submit that, as a matter of law, the court should grant an order that the Deposits are forfeit, subject only to the court’s discretion to subsequently grant relief from forfeiture. The defendants assert that the plaintiffs have admitted that the monies paid to Stephen/Johnston are deposits and that the law is well-settled that deposits are forfeit, subject only to relief from forfeiture.

[51] The defendants rely on Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149, 98 R.P.R. (5th) 177. In Benedetto, the court was addressing the legal question of the interaction of the law governing deposits that secure “contracts for the purchase and sale of real property” with Ontario’s Business Corporations Act. Benedetto, and the body of law on which the court relied in that case, is distinguishable: here the Deposits do not relate to a contract for the purchase and sale of real property.

[52] The plaintiffs identified a second basis for refusing to grant the order sought by the defendants, namely, that whether the monies paid by the plaintiffs are characterized as a deposit or as a part payment is a question of mixed fact and law, that cannot be determined at the pleadings stage: see Aylward v. Rebuild Response Group Inc., 2018 ONSC 4800, 92 C.L.R. (4th) 291 and Agrette, et al. v. Sacco, et al., 2016 ONSC 617, [2016] O.J. No. 407.

[53] I accept the plaintiffs’ arguments and conclude that the issue of whether the Deposits are forfeit, subject to the court’s discretion to grant relief from forfeiture, is an issue that ought to be decided by the trial judge on a full evidentiary record.

Disposition

[54] For the reasons set out above, the following orders shall issue:

(1) Paragraphs 1(d), 48 and 61 shall be struck from the Claim; and (2) the balance of the defendants’ motion is dismissed.

Costs

[55] If the parties cannot agree on costs, within 14 days of the release of this decision, the parties shall submit written costs submissions electronically as follows:

(i) The written submissions are to comply with r. 4.01(1)-(4) and shall not exceed 3 pages, together with copies of any offers to settle and/or documentation that supports the hours and disbursements claimed; (ii) The electronic material must be in WORD and may not exceed 10MB; (iii) The costs submissions are to be submitted to the attention of the judicial assistants at Sopinka at HamiltonSCJCourt@ontario.ca; (iv) The subject line of the email must indicate that these are costs submissions, intended for me; (v) The body of the email must include the (i) court file number; (ii) the short title of proceedings; and (iii) counsels’ contact information.

Sheard J. Date: April 6, 2020