Court File and Parties

COURT FILE NO.: CV-20-28408

DATE: 2021-11-18

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Soo Mill & Lumber Company Ltd., Plaintiff

AND:

Frank Pozzebon, Trisha-Ann Pozzebon, Nick Pozzebon, FP Contracting (GP), P.R.G. Builders Inc., R & J Holdings Inc., Ronald Archibald Champagne and Judy Ann Champagne, Defendants

BEFORE: The Honourable Mr. Justice R.D. Gordon

COUNSEL: Michael Mazzuca and Broghan Masters, Counsel for the Plaintiffs Marc Huneault, Counsel for the Defendants Frank Pozzebon, Trisha-Ann Possebon, Nick Pozzebon and FP Contracting (GP) Gordon Acton and Mia Carella, Counsel for the Defendants R & J. Holdings Inc., Ronald Archibald Champagne and Judy Ann Champagne, Defendants No one appearing for the Defendant P.R.G. Builders Inc.

HEARD: October 20 and 21, 2021

ENDORSEMENT

[1] The plaintiff extended credit to FP Contracting (GP) (“FP”) for the purchase of building materials for use on several construction sites. One of those sites was sold with net proceeds in excess of $420,000. At issue is whether the plaintiff is entitled to have those funds held in court pending the outcome of the plaintiff’s action against FP.

The Applicable Law

[2] The plaintiff’s motion is brought under r. 45.02: Where the right of a party to a specific fund is in question, the court may order the fund to be paid into court or otherwise secured on such terms as are just.

[3] The leading case on the application of this rule is Sadie Moranis Realty Corp. v. 1667038 Ontario Inc., 2012 ONCA 475 which held that for a plaintiff to obtain relief it must establish: (1) That it claims a right to a specific fund; (2) There is a serious issue to be tried regarding its claim to that fund; and (3) The balance of convenience favours granting the relief sought.

[4] The plaintiff claims that the proceeds of sale constitute a trust fund under s. 8 of the Construction Act:

8(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.

(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 us 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.

[5] “Contractor” is defined in s. 1(1) of the Act as a person contracting with or employed directly by the owner or an agent of the owner to supply services or materials to an improvement and includes a joint venture entered into for the purposes of an improvement or improvements.

Background Facts

[6] R & J Holdings Inc. (“R & J”) developed certain lands in Sault Ste. Marie into a residential subdivision (the “Sherbrook lots”) ready for the construction of detached dwellings. FP is a contractor who builds, among other things, residential dwellings. Although there was no written agreement between them, R & J and FP had an understanding that FP could market the Sherbrook lots as available to it for construction of homes. When FP found a buyer for a lot it would enter into an agreement with the buyer to build a house on the lot and to transfer it to the buyer on completion.

[7] FP would then enter into a contract with R & J to purchase the lot in question. R & J would sell the lot to FP and take a mortgage back for the purchase price. It would also typically enter into a construction mortgage with FP providing for two advances of $30,000 each based upon construction progress. When a house was completed and the sale to the buyer consummated, R & J would be paid its mortgage(s).

[8] Soo Mill & Lumber Company Ltd. (“Soo Mill”) is a supplier of building materials. On January 26, 2016 FP signed a commercial credit application to Soo Mill. The application is not particularly detailed however there was provision added to it by Soo Mill that it would require the location of all job sites for which materials were to be provided. No subsequent commercial credit agreement was signed however FP’s application must have been granted as Soo Mill began allowing FP to order building materials from it on credit shortly thereafter. Over the ensuing years, FP would order materials from Soo Mill for use on its various construction projects, including the homes it was hired to build on the Sherbrook lots.

[9] Soo Mill established a separate credit account for each of FP’s construction projects and identified each account by a particular municipal address and distinct account number. Soo Mill delivered to FP separate invoices for materials supplied on each account and provided monthly account statements specific to each project. Soo Mill has identified more than twelve separate projects for which materials were supplied, including seven of the Sherbrook lots. It says it is owed money on many of these accounts, including on six of the Sherbook lots. With interest, it claims the debt owing to it by FP to be in excess of $600,000.

[10] This motion pertains to the proceeds of sale of the lot located at 3 Sherbrook Street. Unlike the other homes built by FP on the Sherbrook lots, 3 Sherbrook was not built on contract with a buyer. Rather, it was built as a model home. FP purchased the property on May 29, 2018 for $71,500. R & J took a mortgage back for $131,489.17, representing the purchase price and a $60,000 construction loan. That mortgage was paid in full and discharged from title on July 15, 2019. Frank Pozzebon and his wife moved into the property at about that same time. On August 16, 2019 R & J advanced FP $250,000 secured by a first mortgage on the property.

[11] 3 Sherbrook was sold on October 2, 2020 for $458,000. The proceeds of sale ($446,065.82) were paid into court in accordance with the interim interim order of Gareau J. made October 1, 2020. By way of consent order made October 15, 2020 the realty commissions, property taxes and legal fees related to the sale were released. There remains in court approximately $423,661.

[12] There are several disagreements between the parties. One is with respect to the state of accounts between Soo Mill and FP generally. Soo Mill is of the view that it is entitled to interest on the money owed to it at the rate of 2.4% per month or 28.8% per annum. FP says the agreement between them was that no interest was to be charged. FP says it has not been credited with all payments it has made to Soo Mill. Soo Mill says all amounts paid have been properly credited. FP questions the reliability of the invoices and accounts provided by Soo Mill. Soo Mill says all invoices and accounts are accurate. If Soo Mill is entirely successful in establishing its state of accounts, FP owes in excess of $600,000. If FP is entirely successful, the number is between $175,000 and $225,000. FP has also asserted a counter claim against Soo Mill.

[13] A second disagreement relates to the state of accounts between Soo Mill and FP as it pertains to 3 Sherbrook Street specifically. Including interest, Soo Mill says it is owed in excess of $25,000 on account of materials supplied to this property plus interest. FP says the amount of unpaid materials related to this property are less than $10,000.

The Issues

[14] The central issue in this motion is whether Soo Mill can assert a trust claim against all of the sale proceeds of 3 Sherbrook even though it is owed much less for materials supplied to that particular property.

[15] In support of its argument that it can, Soo Mill relies on the Ontario Court of Appeal case of Sunview Doors Limited v. Academy Doors & Windows Ltd., 2010 ONCA 198. The issue in that case was whether Sunview, a supplier of custom-made doors to a sub-contractor Academy Doors, was entitled to the benefit of a statutory trust under s. 8(1) of the Construction Lien Act so as to render the principals of Academy Doors personally liable on the debt.

[16] Sunview was a manufacturer of custom sliding glass doors. It supplied several doors to Academy Doors on credit. It did not know where those doors were eventually installed. When Academy Doors ceased business Sunview had not been paid for eight of the doors it had supplied. It brought action against Academy Doors and its directors for breach of trust contrary to sections 8 and 13 of the Construction Lien Act. Academy Doors did not respond to the action or to a request to admit and accordingly, it was deemed to have admitted that it had been paid for all of the doors provided to it by Sunview. The defendants also conceded their inability to establish that the proceeds of the sales had been used to pay suppliers.

[17] The particular issue addressed in Sunview was whether, to establish a trust under s. 8, the supplier must have intended that its materials be incorporated into a specific and identifiable improvement. The court held that it did not. It held that for Sunview to establish that it was the beneficiary of a trust under s. 8(1) it must prove that: (1) Academy was a contractor or subcontractor; (2) That it supplied materials to projects on which Academy was a contractor or subcontractor; (3) Academy received or was owed moneys on account of its contract price for those projects; and (4) Academy owed Sunview for the materials supplied to the projects.

[18] What is at issue in the case before me is quite different. The issue before me is whether Soo Mill’s trust claim to the funds from the sale of 3 Sherbrook is limited to the value of the materials supplied to that property or can be extended to monies owing to Soo Mill for materials supplied elsewhere.

[19] Sunview provides the test for whether a supplier is the beneficiary of a trust. It does not establish the extent of the supplier’s interest in the trust as a beneficiary.

[20] Section 8 (1) of the Construction Act provides that all amounts owing to a contractor on account of the contract price of an improvement constitute a trust fund for the benefit of persons who have supplied materials to the improvement who are owed amounts by the contractor.

[21] Informing the interpretation of s. 8(1) is s. 8(2), which outlines the obligations of the contractor as trustee. It provides that the contractor shall not appropriate or convert any of the trust fund to its own use or any use inconsistent with the trust until all persons who supply materials to the improvement are paid all amounts related to the improvement owed to them by the contractor.

[22] It has been held that a contractor is in violation of these trust provisions if trust funds held in respect of one project are used to pay suppliers on a different project [See St. Mary’s Cement Corp. v. Construc Ltd. 1997 CanLII 12114 (ON SC), [1997] O.J. No. 1318]. And yet this is effectively what the plaintiff seeks to have done in this case. It asks that trust funds held in respect of 3 Sherbrook be imposed with a trust and used to pay for materials supplied to different projects.

[23] In Sunview the court held that where a contractor does not allocate the supplier’s materials toa particular piece of land or improvement within a project, but it is clear that the contractor has received money on account of the contract price for the project and that the contractor owes to the supplier, a link to the contractor’s contract for the project will be sufficient to establish a s. 8 statutory trust. However, in the case before me FP was not under a single contract for the construction of multiple dwellings that might be regarded as a single project. FP was under separate and discreet contracts for each of the properties upon which it did work. Soo Mill knew this and provided its accounting on this basis.

[24] The argument advanced by Soo Mill is convenient to it in the circumstances of this case but the broader application of what is suggested could be very problematic. An unpaid supplier of materials to a project could find its claim to trust funds related to that project largely subordinated to the claim of another supplier who has supplied nothing to that project but who is unpaid for materials supplied to the same contractor on completely unrelated projects. Surely that is not the intention of the legislation.

[25] It has been held in other cases that the legislation intended there to be a separate and distinct trust for each contract. As pointed out by Salhany J. in Emco Supply, A Division of Emco Ltd. v. Gueguen (1987), 25 C.L.R. 229, “section 8 speaks in terms of amounts received by a contractor “on account of the contract or subcontract price of an improvement …” and not all contracts with respect to all projects carried out by the contractor.” Similarly, Molloy J. in St. Mary’s Cement determined that the Act contemplates a separate trust fund for every project in which the contract is involved and a separate account for every trust fund.

[26] I agree with the analysis in these cases. In my view, the starting point for this motion is that Soo Mill’s claim to the proceeds of sale of 3 Sherbrook as a trust fund under s. 8 is limited to the amount it is owed with respect to its contract to supply materials to or for that property.

[27] Applying the test in Sadie Moranis, I am satisfied that the plaintiff claims a right to a specific fund, that is, the proceeds of sale of 3 Sherbrook, a fund potentially impressed with a trust under s. 8 of the Act. I am satisfied that to the extent the plaintiff says it is owed money for materials supplied to 3 Sherbrook, there is a serious issue to be tried regarding its claim to that fund. Finally, I am satisfied that the balance of convenience lies with the plaintiff; ensuring that trust funds are maintained for the benefit of a supplier is consistent with the remedial purpose of the Act. Given the significant amount owing to the plaintiff for contracts other than that pertaining to 3 Sherbrook there is some reason to doubt FP’s bona fide desire to retire its debt. Lastly, FP has provided no compelling reason for its release.

[28] The affidavit of Mr. Rowswell filed on behalf of the plaintiff quantifies the claim of Soo Mill related to 3 Sherbrook at $25,607.30, inclusive of interest, as of September 29, 2020. However, the supporting documentation shows that the account related to 3 Sherbrook was paid down to $56.39 as of August 2019 (as confirmed by Mr. Rowswell in his cross-examination) and the only invoices for materials supplied to the site after that date were in September of 2019 and amount to just $4,159.30 for total of $4,215.69 owing as of the end of September, 2019. As interest payable on a contract is properly included in a trust claim under s. 8 of the Act [see Great Northern Insulation Services Ltd. v. King Road Paving and Landscaping Inc., 2021 ONCA 367], and there is a serious issue as to the plaintiff’s claim for interest, it is reasonable to include interest in the amount of the fund to be retained in court. This action should be determined within about two years, so I would add four years of interest to the account balance at the rate claimed by the plaintiff. This would amount to $4,855.68. The total amount to be retained in court is therefore $9,072. Any amount in excess of $9,072 shall be paid first to R & J to satisfy the balance owing on its mortgage and secondly to the registered owners of 3 Sherbrook immediately prior to the sale.

[29] Given my finding of the limited trust claim of the plaintiff to the sale proceeds, it is unnecessary to determine whether R & J is also bound by those trust provisions as a joint venturer. There are sufficient funds in trust to satisfy both the mortgage owing to R & J and to retain $9,072 in court.

[30] FP asked that the motion be dismissed in its entirety because it was initially made essentially ex parte and the plaintiff failed to make full and frank disclosure contrary to its obligation to do so. In my view, although the defendants were not given sufficient notice to allow them a full opportunity to respond to the motion when it was first before the court, the plaintiff cannot be said to have proceeded ex parte; and in any event, although the materials in the first instance did not include many documents that reveal legitimate accounting issues between the parties, FP candidly acknowledges that even on its own documents, there is between $175,000 and $225,000 owing to Soo Mill (subject to counterclaim). Any failure to disclose did not appreciably affect what was at issue for the court at that time.

Conclusion

[31] The plaintiff’s motion is granted in part. The sum of $9,072 shall be retained in court from the proceeds of sale of 3 Sherbrook. The balance of the funds currently paid into court shall be paid out of court first in satisfaction of the mortgage of R & J, and secondly to the registered owners of the property immediately prior to its sale. If the parties are unable to agree on the wording of the order, they may request a conference with me to settle the order.

[32] If the parties area unable to agree on costs, they may make written submissions to me, not to exceed 5 pages plus attachments each, within 45 days.

The Honourable Mr. Justice R.D. Gordon

Date: November 18, 2021