2021 ONSC 1823

COURT FILE NO.: CV-19-00616825

DATE: 2021-03-10

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: Matthews Equipment Limited, cob as Hertz Equipment Rental, Plaintiff

AND:

Yalda Contracting Inc., Jan Kareem Yalda and Jack Kareem Yalda, Defendants

BEFORE: Davies J.

COUNSEL: Kenneth P. Eccleston, for the Plaintiff

No materials filed by the Defendants

HEARD at Toronto (in writing): March 8, 2021

REASONS FOR DECISION

A. Overview

[1] In May 2018, Yalda Contracting Inc. entered into a written credit agreement with Hertz Equipment Rental to rent construction equipment for several projects in Guelph, Mississauga, Lefroy and Woodbridge, Ontario. Jack Yalda is the President of Yalda Contracting and signed the agreement on behalf of the company. Jan Yalda is an officer and director of Yalda Contracting.

[2] Hertz delivered the equipment to at least six construction sites and invoiced Yalda Contracting in accordance with the credit agreement. Yalda Contracting failed to pay Hertz $72,669.83 for the equipment rentals.

[3] On March 25, 2019, Hertz issued a statement of claim against Yalda Contracting as well as Jan Yalda and Jack Yalda seeking $72,669.83 for breach of contract plus prejudgment and post-judgment interest. Hertz also seeks a declaration that the defendants are in breach of the trust provisions of the Construction Act, R.S.O. 1990 c. C.30 to the extent of $72,669.83. Finally, Hertz seeks a declaration that this judgment will survive any claim for bankruptcy that might be made by the defendants.

[4] Hertz now brings a motion for default judgment.

[5] For the reasons that follow, the motion is allowed. All three defendants breached the trust provisions of the Construction Act and are liable for the outstanding debt to Hertz plus prejudgment interest. However, I decline to make a declaratory order about whether this judgment will survive a future claim for bankruptcy. That issue should be adjudicated if and when it arises.

B. The Defendants have notice of this default judgment motion

[6] Yalda Contracting was served with the statement of claim on April 15, 2019. Jan and Jack Yalda were served on May 31, 2019. None of the defendants delivered a statement of defence. On May 21, 2019, Yalda Contracting was noted in default. On July 2, 2019, Jan Yalda and Jack Yalda were also noted in default.

[7] On January 22, 2021, Justice Myers ordered Hertz to serve the defendants with its default judgment motion record by January 29, 2021. The defendants were given until February 12, 2021 to bring a motion to set aside the noting in default or otherwise indicate they want to respond to the default judgment motion. The defendants were served with the default judgment motion record in accordance with Justice Myers’ endorsement. The defendants have not filed a motion to set aside the noting in default or responded in any way to this default judgment motion.

[8] I am satisfied that the defendants have notice of this motion and have had ample opportunity to respond.

C. The Defendants breached the trust provisions of the [Construction Act](https://www.canlii.org/en/on/laws/stat/rso-1990-c-c30/latest/rso-1990-c-c30.html)

[9] Because the defendants have been noted in default, they are deemed to have admitted the truth of any alleged fact in the statement of claim: rule 19.02(1)(a). Hertz also filed affidavit evidence in support of its default judgment motion. Based on the admitted facts and the uncontested affidavit evidence, I make the following findings of fact:

• Yalda Contracting entered into a credit agreement with Hertz on May 22, 2018 whereby Hertz would rent construction equipment to Yalda Contracting for various construction projects.
• Jack Yalda, President of Yalda Contracting, signed the credit agreement on behalf of the company.
• Neither Jan Yalda nor Jack Yalda provided a personal guarantee in relation to the credit agreement.
• Hertz delivered construction equipment to at least six locations in Ontario.
• The defendants acknowledged receipt of the equipment in good working order pursuant to the credit agreement.
• The equipment was used by Yalda Contracting to make improvements as defined in s. 1 of the Construction Act at each location.
• Hertz invoiced Yalda Contracting for the equipment rental.
• The defendants failed to pay $72,669.83 for outstanding invoices for the construction equipment provided by Hertz under the agreement.
• Yalda Contracting owes Hertz $72,669.83 in relation to the outstanding invoices.
• Yalda Contracting was paid at least $72,669.83 for construction work it completed using the equipment provided by Hertz.

[10] Based on these findings of fact, I am satisfied that Yalda Contracting breached its credit agreement with Hertz and that Hertz is owed $72,669.83.

[11] Under s. 8(1) of the Construction Act, the payments received by Yalda Contracting on account of a contract for “an improvement” constitutes a trust for the benefit of any subcontractor or supplier who is owed money. An improvement is defined in the Construction Act to include “any construction, erection or installation.” Yalda Contracting is the trustee of the trust and is not allowed to take any of the funds for its own use until all the subcontractors and suppliers are paid in full.

[12] To establish the existence of a trust under s. 8 of the Construction Act, Hertz must establish the following:

i. Yalda Contracting was a contractor, or someone who supplies services or materials for any construction project(s) captured by the definition of “improvement” in the Act;

ii. Hertz supplied services or materials for the construction project(s);

iii. Yalda Contracting was paid or was owed money on account of its contract for the construction project(s); and

iv. Yalda Contracting owes Hertz money for the materials or services provided.

Once Hertz has established the existence of a trust, the onus shifts to Yalda Contracting to show that payments from the trust were made to the beneficiaries of the trust: Sunview Doors Ltd. v. Academy Doors & Windows Ltd, 2010 ONCA 198 at paras. 83-84.

[13] I am satisfied that Yalda Contracting was a contractor as defined in the Act in relation to the improvements being done at the addresses to which Hertz delivered the equipment. I am also satisfied that Hertz supplied equipment to Yalda Contracting for the purpose of those projects. I have already found that Yalda received at least $72,669.83 for its work on the construction projects for which Hertz provided equipment. I have also already found that Yalda Contracting owe Hertz $72,669.83 on the outstanding invoices. I am, therefore, satisfied that Yalda Contracting received $72,699.83 in trust for the benefit of Hertz.

[14] The defendants have not filed any evidence in response to this default judgment motion. I, therefore, have no evidence that the funds received by Yalda Contracting in relation to the projects for which Hertz provided equipment were properly disbursed from the trust. I find that Yalda Contracting failed to satisfy its obligations to refrain from taking, using or converting the money it received in trust for Hertz until Hertz was paid in full. Yalda Contracting breached its trust obligations under s. 8 of the Construction Act.

[15] Section 13 of the Construction Act says that any director or officer of a corporation who “assents to, or acquiesces in, conduct that he knows or reasonably ought to know amounts to breach of trust by the corporation is liable for the breach of trust.” In its statement of claim, Hertz alleges that Jan and Jack Yalda assented to or acquiesced in the conduct of Yalda Contracting that they knew or ought to have known amounted to a breach of trust. Jan and Jack Yalda are deemed to have admitted this statement of fact. Jan and Jack Yalda are, therefore, also liable for Yalda Contracting’s breach of the trust obligations in the Construction Act.

D. A declaration that this judgment survives bankruptcy is not appropriate

[16] Section 178(1)(d) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 says that an order discharging a bankruptcy does not release the bankrupt from any debt arising out of fraud or misappropriation while acting in a fiduciary capacity. A finding of liability for breach of trust under the Construction Act can fit within s. 178(1)(d) of the Bankruptcy and Insolvency Act but only if the breach of trust was not the result of “simple inadvertence, negligence or incompetence”: Simone v. Daley, 1999 CanLII 3208 (ON CA), Re Zumbo, 2000 CanLII 22481 (ON SC) at para. 7 – 9.

[17] While I have made a finding that Yalda Contracting and its directors breached their trust obligations under the Construction Act, the admitted facts and affidavit evidence are not sufficient for me to find that the breach of trust constitutes fraud or misappropriate for the purpose of s. 178(1)(d) of the Bankruptcy and Insolvency Act, or that the breach of trust was the result of something other than inadvertence, negligence or incompetence. To be clear, I am not making a finding one way or the other, and leave this issue to be decided if any of the defendants make an assignment into bankruptcy.

[18] This Court has repeatedly held that a declaration under s. 178 of the Bankruptcy and Insolvency Act should not be made preemptively on a motion for default judgment: L-Jalco Holdings Inc. v. Bell, 2017 ONSC 1035 at para. 21, Royal Bank of Canada v. Elsioufi, 2016 ONSC 5257 at para. 7, B2B Bank v. Batson, 2014 ONSC 6105 at para. 11. While a declaratory order can be made to define the future rights of a party if some contingency arises, that power should be exercised carefully and sparingly. In my view, this is not an appropriate case to make a declaratory order about how this judgment should be treated if any of the defendants declare bankruptcy. The issue of whether the defendants’ breach of trust constitutes fraud or misappropriation for the purpose of s. 178(1)(d) of the Bankruptcy and Insolvency Act should be adjudicated on a proper record if and when the issue arises during bankruptcy or enforcement proceedings.

E. Costs

[19] The plaintiff seeks costs of this motion on a substantial indemnity basis. Although costs are discretionary, a successful party is presumptively entitled to costs on a partial indemnity scale: Bell Canada v. Olympia & York Development Ltd., 1994 CanLII 239 (ON CA), [1994] O.J. No. 343. Costs can be awarded on a substantial indemnity basis if the conduct of a party is reprehensible, scandalous or outrageous and worthy of sanction: Young v. Young, 1993 CanLII 34 (SCC), [1993] 4 S.C.R. 3 at para. 251. In my view, the defendants’ failure to deliver a statement of defence or respond to the default judgment motion is not, without more, enough to justify an enhanced costs order in this case. The plaintiff is, therefore, entitled to costs on a partial indemnity basis.

[20] Any cost award must be fair and reasonable, and must balance the goals of compensating a successful party with fostering access of justice: Boucher v. Public Accountants Council for the Province of Ontario, 2004 CanLII 14579 (ON CA). Rule 57.01 sets out several other factors the Court may consider in exercising its discretion to award costs, including the time spent, the experience of counsel, the results achieved, the complexity of the matter, the conduct of the parties and the amount the unsuccessful party could reasonably expect to pay. I find that the hourly rates and the number of hours claimed by the plaintiff are reasonable having regard to the complexity of the issues and the result achieved.

[21] In its Bill of Costs, the plaintiffs claim their actual fees are $7,295.25 (exclusive of HST and disbursements). The plaintiffs claim that its partial indemnity fees are $2,698.20 (or 37% of its full indemnity fees) and its substantial indemnity fees are $3,848.50 (or 53% of its full indemnity fees).

[22] Cost awards are not intended to reflect a precise measure or percentage of the actual costs incurred by the successful litigant: Zesta Engineering Ltd. v. Cloutier, 2002 CanLII 25577 (ON CA), [2002] O.J. No. 4495 (C.A.) at para. 4. Nonetheless, partial indemnity costs are typically fixed at approximately 60% of the actual fees: Chandra v. CBC, 2015 ONSC 6519 at para. 62. The Court can fix an amount that is higher or lower than 60% of the actual costs if appropriate. In my view, there is no reason to depart from the norm of calculating partial indemnity fees at 60% of the full indemnity fees notwithstanding the plaintiff’s calculations. Having regard to all the circumstances, the defendants are ordered to pay the plaintiff $6,500 in costs, inclusive of HST and disbursements.

F. Conclusion

[23] The plaintiff’s motion for default judgment is granted. The defendants are in breach of the trust provisions of the Construction Act and are jointly and severally liable to the plaintiff for $72,669.83 plus prejudgment interest at a rate of 24% as provided for in the credit agreement plus post-judgment interest at a rate of 3%.

[24] The defendants are also ordered to pay $6,500 in costs, inclusive of HST and disbursements.

[25] Counsel for the plaintiff is to prepare a draft judgment in accordance with these reasons for my consideration.

Davies J.

Date: March 10, 2021